OT: Moving Out West

[Passthedonuts]

As for the US - yes, people did move. Detroit's a good example - check out their population trend over the last decade. Phoenix and Vegas were examples of overbuilding - a problem that Vancouver can't have, due to geographic constraints. BTW, are you aware that mortgage rules in the US allow that homeowners can walk away from their mortgages, at any time, without penalty? This is the critical rule that does not exist in Canada, and it's why so many Americans just decided to walk away from their homes when they dropped in value and suddenly they owed more than what they were "worth" (an ever-changing figure). In Canada, that can't happen. Obviously, this makes our RE market exceedingly more stable.

1. Geographical constraints. Geographical constraints are only part of the equation in driving house prices. This tends to impact raw land prices more than finished real estate product, like condos. As Vancouver has chosen the high density model, and now that over 50% of new housing starts are multi-family units - there are no geographical constraints if you build into the sky. Japan has faced a decades long price correction despite much more serious geographical constraints than Vancouver.

2. Mortgages - You've oversimplified the explanation of US vs. Canadian mortgage law. Every jurisdiction (province and state) has different rules regarding recourse vs. non-recourse mortgages. A recourse loan allows the lender to sue the debtor in the event that the sale price of a foreclosed home is not sufficient to cover the amount of an outstanding mortgage. However, a debtor can still file bankruptcy and this debt would be included and discharged.

Some recourse jurisdictions: BC, Ontario, Florida, Georgia.

A non-recourse loan allows a debtor to walk away from the debt entirely if the home is sold via foreclosure.

Non-recourse jurisdictions include: Arizona, California, Alberta

Recourse loans did not prevent certain states like Florida from having complete real estate meltdowns.

I'm not saying Vancouver is due for a cataclysmic real estate meltdown (I generally avoid making predictions) - but mortgage law and geographical restraints are not exactly pillars for a strong argument.

 

[ginner classic]

1. Geographical constraints. Geographical constraints are only part of the equation in driving house prices. This tends to impact raw land prices more than finished real estate product, like condos. As Vancouver has chosen the high density model, and now that over 50% of new housing starts are multi-family units - there are no geographical constraints if you build into the sky. Japan has faced a decades long price correction despite much more serious geographical constraints than Vancouver.

2. Mortgages - You've oversimplified the explanation of US vs. Canadian mortgage law. Every jurisdiction (province and state) has different rules regarding recourse vs. non-recourse mortgages. A recourse loan allows the lender to sue the debtor in the event that the sale price of a foreclosed home is not sufficient to cover the amount of an outstanding mortgage. However, a debtor can still file bankruptcy and this debt would be included and discharged.

Some recourse jurisdictions: BC, Ontario, Florida, Georgia.

A non-recourse loan allows a debtor to walk away from the debt entirely if the home is sold via foreclosure.

Non-recourse jurisdictions include: Arizona, California, Alberta

Recourse loans did not prevent certain states like Florida from having complete real estate meltdowns.

I'm not saying Vancouver is due for a cataclysmic real estate meltdown (I generally avoid making predictions) - but mortgage law and geographical restraints are not exactly pillars for a strong argument.

Georgia was also hammered, and strangely also had the greatest number of bank failures at over 80 in the past five years.

 

[Snatcher Demko]

Population growth arguments are a flawed concept, as it has grown at a rate of 2% annually (or less) over the past 20 years. Compare that with about a 160% price appreciation in the past 10 years.

In fact, BC has been losing population (seeing continued net interprovincial emigration) to other Provinces for several quarters. Click on the link below to BC Stats and a PDF to answer all your population questions:

http://www.bcstats.gov.bc.ca/Files/753a5017-b6ce-4d69-9259-caa1c838aa9f/PopulationHighlights2012Q4.pdf

Furthermore, only a small percentage of immigrants are "investor-class" or otherwise have the wealth to purchase property within a short time-frame of landing in BC. In short, population is not the driving force behind the price surge in the last bull market. It is and was always the flood of credit caused by unprecedented low lending rates.

The other flawed concept that that you need a flood of sellers to cause a sharp drop in prices. That's not really correct. As it happened in the USA (and as it is happening here right now), the supply of credit is shrinking, caused by several important factors:

- lenders reducing risk and tightening standards
- insurers (like the CMHC) reducing risk
- buyers tapped out (fewer borrowers available and
- other external factors (like the Chinese government cracking down on astronaut families - those leaving with substantial capital). Or the CDN government putting a freeze on certain immigration types.

So what happens? Listings appear to surge over the course of time as sellers can't unload properties. And prices fall because some sellers will always break rank due to unavoidable circumstances (unemployment, death, divorce etc) and will set a lower price for the market.

At some point, fear does take hold and sellers do capitulate. That hasn't happened yet.

If you hold a property for 20+ years, you're likely to see nominal gains at the least, although this bull market is unprecedented, so it could take even longer. But prices will almost assuredly be significantly lower in 5 years, so why not wait it out? FYI, I am not predicting that houses become worthless, only that prices will fall 25-50% from the 2012 peak, depending on location (local factors and prices vary so much).

 

[Snatcher Demko]

I would just like to add, the one thing citizens should be up in arms about is the CMHC - the Canadian Mortgage & Housing Corp.

They've been feeding nitro into the bubble fire for a decade, as they've backstopped over half a trillion dollars of debt. The CMHC is a crown corporation that was first created to help WW2 vets buy homes, but now is a debt facilitator which has encouraged speculation. They used to have a cap on the amount lended out per home, but this ceiling was removed by Flaherty in 2003 (a very foolish, foolish blunder).

So, basically, YOU, the Canadian taxpayer have been insuring all the debt the banks have been lending out (and profiting from).

Banks have encouraged lenders to put down less than 20% and have mortgages insured by YOU (via the CMHC), which has effectively allowed them to lend more. And the more that is lended out, the more capital is out there to fuel prices. So the taxpayer subsidizes bank profit while bearing the risk. If the bank bore the risk (like they should), they'd have never lent as much as they have.

This is the ultimate moral hazard. It's why the CMHC has gained the moniker of "Canadian Moral Hazard Corporation".

The CMHC is more than likely to go the way of the FNMA (Fannie Mae) and GNMA (Ginnie Mae) - default. My prediction is that ultimately the Canadian taxpayer will be forced to bail out the CMHC to the toll of untold billions.

This is a pretty good piece from October:

http://www2.macleans.ca/2012/10/31/canadas-housing-market-is-it-a-cooling-is-it-a-crash/

And from Rabidoux:

http://www.theeconomicanalyst.com/content/credit-tightening-and-end-canadian-housing-bubble.


Sorry to derail the thread into a talk about housing and credit, but this will have a big impact on the Canadian economy moving forward.

 

[King of the ES*]

The other flawed concept that that you need a flood of sellers to cause a sharp drop in prices. That's not really correct. As it happened in the USA (and as it is happening here right now), the supply of credit is shrinking, caused by several important factors:

- lenders reducing risk and tightening standards
- insurers (like the CMHC) reducing risk
- buyers tapped out (fewer borrowers available and
- other external factors (like the Chinese government cracking down on astronaut families - those leaving with substantial capital). Or the CDN government putting a freeze on certain immigration types.

So what happens? Listings appear to surge over the course of time as sellers can't unload properties. And prices fall because some sellers will always break rank due to unavoidable circumstances (unemployment, death, divorce etc) and will set a lower price for the market.

At some point, fear does take hold and sellers do capitulate. That hasn't happened yet.

I've bolded the parts where you've blatantly contradicted yourself. First, you don't need a flood of sellers, but if X, Y, and Z happens, listings surge and prices fall. "Listings surge" = flood of sellers.

You're correct that a flood of sellers will likely lead to a price decline. But the key point in all of this is flood of sellers, not the other stuff like credit tightening up. Credit tightening up doesn't affect those with pre-existing mortgages, who will only be pressured to sell if they lose their jobs or if they're exposed to some other negative Black Swan event.

 

[Snatcher Demko]

I've bolded the parts where you've blatantly contradicted yourself. First, you don't need a flood of sellers, but if X, Y, and Z happens, listings surge and prices fall. "Listings surge" = flood of sellers.

You're correct that a flood of sellers will likely lead to a price decline. But the key point in all of this is flood of sellers, not the other stuff like credit tightening up. Credit tightening up doesn't affect those with pre-existing mortgages, who will only be pressured to sell if they lose their jobs or if they're exposed to some other negative Black Swan event.

No contradiction at all. You state that the flood of sellers is what precipitates a price decline. I'm telling you the flood doesn't have to come first - in fact, it typically doesn't. The first thing you see is credit hit a wall. That starts prices falling. It's what we're seeing right now.

By the time sellers make for the exits en masse, it's far too late. If I were buying, that's when I'd start lowballing. Because this is where you see the fastest declines.

The key point is still credit, though. It's demand, not supply that leads the market. Always was and is in this case as well.

Those who have paid their mortgages, or have pre-existing mortgages (and don't want to sell), or even those who take listings off the market - they don't affect the market. Real estate prices are set by what happens on the margins - ie where buyers and sellers meet.

 

[King of the ES*]

Those who have paid their mortgages, or have pre-existing mortgages (and don't want to sell), or even those who take listings off the market - they don't affect the market.

Right, which is what I said earlier, that those who are already in the market aren't concerned at all with the availability of credit and/or other things that only the buyers need to concern themselves with.

So for a material decline to happen, you'd essentially need to have a whole flood of over-extended, fearful, get-me-out-of-this-asset type of sellers to enter the market at once, who would then compete aggressively against eachother through price drops for buyers. Of course, there would also need to be very few buyers, possibly due to credit availability.

And I would think that really the only way for supply to outstrip demand, in this way, is widespread job losses and/or moving out of the city. Both are unlikely.

 

[Passthedonuts]

Right, which is what I said earlier, that those who are already in the market aren't concerned at all with the availability of credit and/or other things that only the buyers need to concern themselves with.

So for a material decline to happen, you'd essentially need to have a whole flood of over-extended, fearful, get-me-out-of-this-asset type of sellers to enter the market at once, who would then compete aggressively against eachother through price drops for buyers. Of course, there would also need to be very few buyers, possibly due to credit availability.

And I would think that really the only way for supply to outstrip demand, in this way, is widespread job losses and/or moving out of the city. Both are unlikely.

Those who are already in the market need to concern themselves with interest rates. If rates return to normal market levels (and they will), homeowners renewing their mortgages will face significant increases to their monthly payments. For those who overextended themselves to enter the market in the first place, this could be very problematic.

 

[King of the ES*]

Those who are already in the market need to concern themselves with interest rates. If rates return to normal market levels (and they will), homeowners renewing their mortgages will face significant increases to their monthly payments. For those who overextended themselves to enter the market in the first place, this could be very problematic.

You're right, but I don't think the government would let that happen. Public outcry would be too big.

And let's not also forget that at the end of a standard 5-year mortgage term, most people have paid down 17 - 25% of their mortgage liability, so while the rate might be higher, the liability from which the payment is calculated is significantly lower, so basically the rates would need to have spiked up a ton for there to be an effect.

IE

You buy a $500,000 house, putting down $100,000, with a 25-year mortgage of $400,000 at 3.0% interest today. Monthly payment = $1,896.85.

At renewal time, your new balance is $343,061.10. At 4.5% - a 50% increase from your last rate - the new payment becomes $1,906.85. Practically the same. At 6.0% - double your last rate - the monthly payment becomes $2,210.35, which sounds like a lot, but it's actually only a 3.1% annually compounded increase from your last payment over the 5 years. Stated otherwise, roughly the amount of inflation, and at least an amount by which your wages should increase.

 

[PhilMick]

Wow S got real in this thread!

 

[Snatcher Demko]

Right, which is what I said earlier, that those who are already in the market aren't concerned at all with the availability of credit and/or other things that only the buyers need to concern themselves with.

So for a material decline to happen, you'd essentially need to have a whole flood of over-extended, fearful, get-me-out-of-this-asset type of sellers to enter the market at once, who would then compete aggressively against eachother through price drops for buyers. Of course, there would also need to be very few buyers, possibly due to credit availability.

And I would think that really the only way for supply to outstrip demand, in this way, is widespread job losses and/or moving out of the city. Both are unlikely.

King - this is where we disagree, and the data supports what I'm saying.

Credit contracts first, which stalls demand. Listings rise as a result. Just normal sellers, no panic. Prices fall materially. Then, about 12-24 months later, after prices have fallen 10-15% Year-over-year, some panic sells in and there is some rush to the exits.

We don't need half the people in VCR to get up and sell. It could be only 1%. But if the buyers aren't there, prices will fall. It's about demand, not supply.

 

[Mr. Canucklehead]

Given that the original topic is no longer being discussed, I'm shutting this down.

Closed.