Chart Below CMHC 3Q 2018: Housing Market Assessment
Chart Below CMHC 3Q 2018: Housing Market Assessment
Meanwhile 'just right' depends on who you are:
Look for headlines soon to come out of Toronto documenting their experience of renovictions. Everyone has to pay more for housing now because of 9 years of ZIRP & NIRP
Hat tip to @BenRabidoux for the chart below
FROM Alberto Gallo, Bloomberg, August 2017
Capitalism Doesn't Work at 0%
"It would pay to travel to Mars because the returns here on Earth are very very low."
Liabilities were an unimportant consideration because in a few days, a similar property would sell for even more and your balance sheet then became even more credit worthy; check and check.
On the way down, guessing the price that a vendor will agree to is still a requirement; is the vendor holding a property with too little of his own equity and perhaps reluctant to take a loss at this time, or is the property being offered for the first time in let's say the last decade? A single family detached house in Vancouver has increased in price by over 120% in the last 10 years (over 160% in Toronto). The vendor's equity position is an important clue in the guessing game.
Is the vendor attempting to sell in order to repurchase in the same market? That would suggest an end price is required similar to the current snapshot of market comparable sales if trading sideways is the objective. Is the vendor an estate looking to settle accounts for multiple parties? That implies that the end price is not as "sticky" because VALUE can be defined outside the parameters of "comps".
At some point definitions of value might again include an appraiser's use of the "income" approach. Investment real estate cap rates in a city like Vancouver are among the lowest in Canada and so a buyer must determine if there is value in the price. Potential investment capital can dry up and move very rapidly out of a declining market and seek out better (lower risk) returns elsewhere. Low cap rates are tolerated in a rising market but not so much when price momentum shifts to the down side. Vancouver prices peaked July 2016
A declining market requires more work on the buy side and exposes the potential purchaser with risk not seen on the way up.
The CBRE in their 2016 Report list cap rates for "A" class apartment buildings in Vancouver at 2.5-3% (in Toronto 3.25-3.75%, in Calgary 4.5-5%). This week the Bank of Canada benchmark 10 year yield is 1.76% similar to the full month of February plot on my yield curve chart.
What we don't see in the CBRE report is what expense items are used in the developing a theoretical cap rate (Net Income / Asset Purchase Price). I suspect that only the minimum data of property tax, insurance, maintenance and actual expenses paid out are used for a given year in these surveys. Is a vacancy allowance included? Not all tenancies are reliable. Is a management fee included? Someone has to spend time taking care of the asset. Is the asset subject to sudden strata fee spikes or revelations of past due maintenance? These are important questions that any real estate investor who has been playing the game for at least one cycle trend change will ask.
In my 2013 case study, I had to lower the purchase price by 25% to get a return that piqued my interest because I included vacancy and management.
With a 25% drop in sale price, the GRM has dropped nearly 6 points (lower is better) and the CAP Rate has gone up 40 basis points (higher is better) which not a huge move but the yield on investment (ROI) has increased to more than twice the 10 year bond return and that provides an investor the incentive in a ZIRP environment to buy and hold and allow other people's money (the tenant's) to turn debt into equity.
Owning real estate has risk attached both at the individual ownership level and in the broader market place. It's 2017, if anything, real estate as an investment is even more fraught with unknown risk.
Thanks to Steve Saretsky, Realtor for his
Dan Loney's February 19, 2017 blog post details an update from Harry Dent about Dent's view on a probable correction low for Vancouver housing prices. I have mashed up Dent's retracement projection with my Plunge-O-Meter fantasy.
A few months ago I spent three days with world renown economist Harry Dent. We had a conversation regarding the state of Vancouver area real estate. He stated that he expected the real estate market to correct 43% in Vancouver from it’s high. This week his office sent me this chart which shows a projected crash of -64%. (FEB 19, 2017)
The classic Fibonacci retracements are 23.6%, 38.2%, 50%, 61.8% and 100%.
But there are just too many interference inputs that could either reinforce or cancel any potential arc of change. The most basic influence I point to is the ability to turn debt into equity. If one is highly leveraged against a real estate holding, it's not a problem as long as there is sufficient cash flow to service the debt. But this can be a very fragile relationship because of the risk from unaccounted inputs that began their historical arcs decades ago (Technology, Emerging Markets, Governance, Demographics etc).
The Bank of Canada estimated that more than 20 percent of all insured mortgages were contracted by households that have loan-to-income ratios of more than 450 percent. Hilliard MacBeth for MACLEANS October 12, 2016
Dent figures the Vancouver bubble began in 2003. I suggest it began in 2005. Dent projects another 14 years (2032) before we reach the price lows; the Plunge-O-Meter currently targets the fall of 2021, or 4.75 years from now. Could it happen? Maybe.
On the price chart in the spring of 2005 there was a 4-6 month plateau period while buyers and sellers twitched like a herd. When the credit spreads narrowed and the yield curve began its journey towards inversion, the commodity stampede began. Plunge-O-Meter
I suggest that there would probably need some very dramatic inputs to change the current sentiment of buyers in Vancouver who, although they have been thinning out according to sales volumes, are still willing to short cash at what appears to be the top of the market that has been in place since July 2016 and a clear divergence from the ebullience of today's Trumpian stock and bond markets.
I think the input drama that changes the Vancouver housing price regime has to come from these very liquid, fast moving stock and bond markets.
Whatever the sentiment shock is, that causes another extreme selloff (Wikipedia list of stock market crashes and bear markets), the need for speed to turn debt into equity will expose the weak hands very quickly, they need to act fast and get ahead of the competition.
Only deep pocketed knife jugglers will prevail until we approach the final lows and then new buyers will be rewarded without any technical market timing analysis. Long before that, we may see a rebirth of interest in the income approach fundamental.
Charles Nenner Interview February 21, 2017
Market Crash Recession
by the 5th of November, 2017
Yellen Will Raise Rates in March
FEB 15, 2017 BNN Interview of Jim Rickards
March 15, 2017 is the Date to Watch
Everything Will Grind to a Halt
David Stockman FEB 27, 2017
Moderated by Prof. Sebastian Edwards, a former chief economist of the World Bank; this discussion reveals the surprising insights of UCLA Anderson Forecast economists Prof. Ed Leamer and Prof. Jerry Nickelsburg, FEB 16, 2017
David Frum on Trump
"This is the most phoney baloney administration ever"
The election of Donald Trump could mean a gradual shift in the nature of the American political system. The much vaunted checks and balances might be unable to stop a slide into a new kind of authoritarianism. This is how David Frum, senior editor of The Atlantic and a former speech writer, imagines one of the possible futures that await the U.S. He joins The Agenda to talk about political implications under Donald Trump. Published on Youtube Feb 9, 2017
The Rolling Stones - Doom and Gloom
50 Shades of Real Estate
Facing staggering debt loads, hundreds of Alberta post-secondary students are logging on to seekingarrangement.com connecting them to "sugar daddies" who can provide them a monthly allowance and gifts in exchange for negotiated relationships. Calgary Sun January 14, 2017
The red notations show the latest Demographia unaffordability rank of each University location. It's not surprising to see Toronto, the biggest metro in Canada as a destination for pussy grabbers. If we had the data, I would imagine Vancouver, the most unaffordable city in Canada and the 3rd most unaffordable out of 404 global cities, would also incent young men and women into prostitution. In 2011, the Vancouver city council estimated there were +/- 10,000 sex workers in the city. (Vancouver Sun, Sept 30, 2016). Note that Victoria BC is listed on the chart above; you know, that nice little tourist town and retirement village that promotes itself as "a little bit of Britain". The study chart claims 361 Victorians use SeekingArrangement.com which amounts to 0.5% of Victoria's 2006 census. Tea, crumpet, hair pie anyone?
"Students from 20 British universities are joining dating Web sites matching young women with older men, in an attempt to raise money to pay off student loans and other debts." IBTimes.co.uk 2012.
Meanwhile new generations of young inheritors of our social contract enter the culture as a rank commodity to be exploited by daddy.
Canada could use an overhaul of its collective aspirations.
Vancouver Named Sugar Daddy Capital of Canada 2013
Here’s a look at the top 10 Sugar Daddy destinations:
- Paris, France
- Puerto Vallarta, Mexico
- Palm Springs, California
- San Juan, Puerto Rico
- Chicago, Illinois
- Seattle, Washington
- Punta Cana, Dominican Republic
- *Vancouver, Canada
- Las Vegas, Nevada
- Barcelona, Spain
*Vancouver Sugar Daddies spent $4,307 monthly on their younger counterparts on average, more than anywhere else in the country.
Vancouver Sugar Daddies are 40 years old and make $292,506 annually, on average. CTV NEWS 2014
In 1986 Bill Vander Zalm promised to lower the price of beer (page 3, 2nd bullet point, The Ubyssey October 24, 1986). It never happened but Bill caught 50% of the popular vote in that election with his "Fresh Start" campaign against the NDP.
Thirty years later the average price of a detached house in Vancouver has risen more than tenfold while average earnings have only gone up 2.5 to 3 times and the government plan now is to stoke a consumption mania with zero interest and principal 2nd mortgage money for 5 years as well as beer in your barbershop. The next BC provincial election is in May 2017 and the credit tap is wide open. Place your bets.
Changes to B.C. liquor rules allow barbershops, salons and other retail outlets to serve alcohol.
January 23, 2017, is when barbershops, salons, spas, cooking schools, art galleries, bookstores and other B.C. businesses that do not have bars and restaurants on their premises can apply for a liquor-primary licence so that liquor can be served to customers in these non-traditional establishments. All sorts of businesses will be able to apply for a liquor-primary licence as long as they do not operate from a motor vehicle, or target minors. And this may be of great interest to many small retail businesses that would like to provide, as a courtesy, a glass of wine, champagne or other alcoholic beverage to their customers without fear of breaking the law. Globe and Mail November 19, 2016
This "1st-time" homebuyers grant only serves the 'privileged,' says Nathanael Lauster UBC Associate Professor in Sociology
Inside 'House of Debt' with Amir Sufi
Canadian household debt levels continue to peak.
The Premier of BC Christy Clark is in the news again with her pre-election enticement of no interest loans for 60 months of up to $37,500 to wannabe buyers who need a bigger cash down payment to qualify for a mortgage to purchase real estate in BC's absurd housing market that has been on ice since the summer. BNN Dec 16, 2016
The chart mashup above was prompted by an observation from a reader (S.B.) that the technical structure of the Vancouver housing market is now within momentum levels for a trend change to the downside as soon as the next retest and failure of the recent highs completes; the setup being the "anti-trade". S.B. made earlier observations here "3 Vancouver Views" Sept 2016 and "Simple as ABCD" May 2016; thanks SB.
The evidence of serious downward repricing has this provincial government attempting to goose the demand side of the market with free ZIRP money provided by you and me dear tax payer. Not only will we tax payers supply the down payments to people who don't qualify under the already sub prime CHMC lending standards, but we are additionally collectively subsidizing the banking and mortgage industry that has little or no lending risk and we are continuing to feed the provincial government tax collector via the property transfer tax. "In total the property transfer tax brought in $1.53 billion for the government, $605 million more than budgeted" said BC Finance Minister Mike de Jong CBC NEWS July 2016.
Ontario and Toronto are also implelled to goose the fence sitters into buying into the market:
Ontario land transfer tax rebate doubled to $4K for first-time homebuyers. City News November 2016.
Ontario’s land transfer tax rises from 0.5 per cent on the first $55,000 of a purchase price to two per cent for everything above $400,000. Toronto’s land transfer tax is one per cent on the first $55,000 and two per cent on the rest. Toronto offers rebates of up to $3,725 for first-time homebuyers.
Sousa also announced a freeze in the property tax on apartment buildings while the government reviews how the tax burden affects rental market affordability. (Will landlords pass this along to tenants?)
Political ideology at all levels of government since the post war "invention" of CMHC has destroyed any possibility of a social contract that includes affordable housing as a basic right of tax payers. It appears to me that governments at all levels in Canada will continue to promote and urge Canadians to add even more household debt to their balance sheets that are already at historic levels nationally and globally. Although the Federal Government appears on the surface to be more rational than the provincial governments by warning Canadians who already have high levels of debt, they are not concerned with Canadian Banks who continue to be sheltered by tax revenue from the private sector. What they are concerned with is a RECESSION and THEIR OWN FEDERAL CASH FLOW. Is it irony or finger wagging and buck passing? The government is hooked on the commodification of real estate; it's a cash cow with a golden udder of debt that we are all attached to.
Here is the Federal Government at work:
CHMC Promotions Oct 2016 by the Globe and Mail
- 1992 Allow RRSP withdrawals for home purchase.
- 1999 Allow purchase with only 5% down payment.
- 2003 Remove house price ceiling on insured mortgages.
- 2003 "Green" mortgage insurance premium reduction and environmental incentives.
- 2005 Self Employed can self declare a 15% gross up of income and access all mortgage insurance products.
- 2005 Amortization increased to 30 years on insured mortgages.
- 2006 Amortization increased to 35 and 40 years on insured mortgages.
Warning from the Bank of Canada:
Risk of household financial stress and a sharp correction in house prices.
Some notes from the Satyajit Das videos below:
- Real growth was produced from the Industrial Revolution.
- But since the 1980's, growth has been fuelled by debt.
- An asset's income should pay for its debt.
- In the 1950's $1 to $2 of debt paid for $1 of GDP.
- By 2007-2008, $4 to $5 of debt paid for $1 of GDP.
- China in 2016 needs $6 to $8 of debt to pay for $1 of GDP.
- In the 20th century, population doubled and was an organic driver of growth. Now population does not drive growth.
- Innovation contributes to growth but productivity is falling.
- Now we have a service economy not a productive one.
- Innovation rates are falling dues to lack of R&D funding.
- We cannot repay debt without growth.
Property is an illusion by Satyajit Das
The End of growth as we know it by Satyajit Das - Key themes of his new book "A Banquet of Consequences"
Meanwhile as the photos above indicate, vendors are repricing lower, and buyers are bidding below assessment. The only flipping that buyers are doing now is in their point of view. Hat tip to FIVRE604
Zombie real estate in Vancouver BC is a problem. The owners have placed a high value on keeping them empty when vacancy rates are at historical lows. See the Beautiful Empty Homes Vancouver archive. In March 2016, theGeorgia Straight reported some 10,000 condos were vacant. The city now wants to tax the owners between a ½% and 2% of the assessed value; CBC News Sept 14, 2016.
As it is now with the state playing monkey business with interest rates (ZIRP and NIRP) and removing credit risk from a lender's balance sheet (CMHC) and reacting with "supra" taxes layered upon individuals deemed to be distorting the market, we end up with more complexity, uncertainty and unproductive investment.
Land management should not be in the hands of short term profiteers. There are alternatives. Land in the Fiji Islands is managed through three complementary systems. Leased land covers 90% of their territory (83% "Native Land", 7% "Crown Land") and 10% of the land is "Freehold". Source
If land costs were built on productivity incentives and protected from the boom and bust of demographic pressure, urban planning departments could create longer term strategies and developers could be more productive on the improvement side of land development. But with very high land costs, the market forces us to build to the minimum of efficiency standards and the maximum of financial rewards.
The crappy little toaster that you call an electric baseboard heater inside an inefficient envelope is indeed just a heat transferring conduit. The condo boom is a commodity arbitrage not an affordable housing plan. (The Condo Game, CBC Doc Zone, January 2015)
The Democratization of Production
Be lazy like a fox. WikiHouse
Tesla's Powerwall 2 and Solar Roof Launch
The sun provides more than enough energy in just one hour to supply our planet’s energy needs for an entire year. Your home can capture this free, abundant energy source through rooftop solar tiles, turning sunlight into electricity for immediate use or storage in a Powerwall battery. Tesla, October 28, 2016
3 Charts of Vancouver Housing Prices to August 31, 2016
Monthly HPI & Average vs Inflation Adjusted Projection
See also this reader supplied prescient
Elliot Wave Chart from May 13, 2016
I think the source author is YVR Housing
If you can confirm, please do.
The Forces that Cause the Bubble to Burst
The bubble bursts when excessive risk-taking becomes pervasive throughout the housing system. This happens while the supply of housing is still increasing. In other words, demand decreases while supply increases, resulting in a fall in prices.
This pervasiveness of risk throughout the system is triggered by losses suffered by homeowners, mortgage lenders, mortgage investors and property investors. Those losses could be triggered by a number of things, including:
1. An increase in interest rates that puts homeownership out of reach for some buyers and, in some instances, makes the home a person currently owns unaffordable, leading to default and foreclosure, which eventually adds to supply.
2. A downturn in general economic activity that leads to less disposable income, job loss and/or fewer available jobs, which decreases the demand for housing.
3. Demand is exhausted, bringing supply and demand into equilibrium and slowing the rapid pace of home price appreciation that some homeowners, particularly speculators, count on to make their purchases affordable or profitable. When rapid price appreciation stagnates, those who count on it to afford their homes long term might lose their homes, bringing more supply to the market.
The bottom line is that when loses mount, credit standards are tightened, easy mortgage borrowing is no longer available, demand decreases, supply increases, speculators leave the market and prices fall.
A simple and important principle of finance is mean reversion. While housing markets are not as subject to bubbles as some markets, housing bubbles do exist. Long-term averages provide a good indication of where housing prices will eventually end up during periods of rapid appreciation followed by stagnant or falling prices. The same is true for periods of below average price appreciation.
SOURCE Investopedia by Barry Nielsen, September 13, 2014
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense
Balance Of Trade
Rent Or Buy