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The Most Splendid Housing Bubbles in Canada Deflate Further

The Most Splendid Housing Bubbles in Canada Deflate Further

Vancouver prices drop. Toronto down 3.7% from peak, flat for 10 months. Winnipeg plunges most since at least 1990. Quebec City flat for 6 years.

In Greater Vancouver, BC, Canada, house prices fell 0.4% in April from March, the ninth month in a row of month-to-month declines, according to the Teranet-National Bank House Price Index. The index is down 4.7% from the peak in July 2018, the sharpest nine-month decline since July 2009. And it’s down 2.8% from April last year. One of the most splendid housing bubbles in the world is now deflating before our very eyes, after prices had skyrocketed 316% from January 2002 to the peak in July 2018 – meaning prices had more than quadrupled in 16 years:

The Teranet-National Bank House Price Index tracks single-family house prices, based on “sales pairs,” comparing the sales price of a house in the current month to the last sale of the same house years earlier (methodology). Using “sales pairs” eliminates the issues that affect median and average price indices but has its own limitations. These median and average house prices, which are much more volatile, are now showing much sharper price declines for Vancouver.

Because the Teranet index uses a similar methodology of “sales pairs” as the S&P CoreLogic Case Shiller index for US housing markets, the indices produce comparable metrics. So let’s compare Vancouver’s housing bubble to the also deflating housing bubble in the San Francisco Bay Area. Splendid v. Splendid. The chart below shows the data of Vancouver (black columns) and San Francisco (red columns), with both indices converted into “percent change from January 2002.”

As the chart above shows, Vancouver’s housing market dipped briefly during the Financial Crisis while San Francisco’s market went into a hard four-year downturn, as the US housing bust morphed into the Mortgage Crisis that contributed to the Financial Crisis.

 …click on the above link to read the rest of the article…

A “Cancer On Our Economy”: Report Finds Over $7 Billion Laundered Through British Columbia In 2018

A “Cancer On Our Economy”: Report Finds Over $7 Billion Laundered Through British Columbia In 2018

It may have taken a while, but now that housing prices are starting to crash in Vancouver, BC legislators are finally starting to get wise to the fact that the province has been a hot bed for money laundering. It was an easy problem to ignore with prices on the way up, but on the way down – not so much.

And so an independent report released on Thursday concluded that an astounding $7.4 billion was laundered in British Columbia in 2018, out of a total of $46.7 billion laundered across Canada throughout the same period. The report was published by an expert panel led by former B.C. deputy attorney general Maureen Maloney.

Attorney General David Eby told a news conference Thursday:

Wealthy criminals and those attempting to evade taxes have had the run of our province for too long,to the point that they are now distorting our economy, hurting families looking for housing, and impacting those who have lost loved ones due to the opioid overdose (crisis).” 

The reports come after the government commissioned them to try and shed light on laundering by organized crime in BC’s real estate market. This follows last June’s report on dirty money in casinos, which we also wrote about just days ago. 

RCMP commissioner Peter German was commissioned to write the report on real estate, and he concluded that illicit money is what led to “a frenzy of buying” that caused housing prices to spike around Metro Vancouver. The report concludes that there are thousands of properties worth billions at high risk for money laundering. 

 …click on the above link to read the rest of the article…

“Ghastly” Vancouver Home Sales Crash By 33%, Lowest Since 1985

“Ghastly” Vancouver Home Sales Crash By 33%, Lowest Since 1985

On Monday, the Real Estate Board of Greater Vancouver reported February results that could be classified as ghastly, with residential home sales plummeting 32.8% year-over-year to 1,484 units. That’s the lowest February sales total since 1985 and 42.5% below the 10-year average. 

Prices have also broken lower, with the composite index sinking by 6.1% year-over-year.  In addition, inventories have jumped, with total listings in metro Vancouver up to 11,590 homes at month end. That’s up 48.2% from February 2018.

Toronto, Canada’s largest city, has held up better, with February prices rising 1.6% year-over-year, while new listings dropped 6.2% to outpace the 2.4% decline in sales. Nevertheless, TREB president Gurcharan Bhaura asked for regulatory relief from the mortgage stress test mandated by the Office of the Superintendent of Financial Institutions. These subject borrowers to the greater of the five-year benchmark rate or the contracted mortgage rate plus 200 basis points (Almost Daily Grant’s, May 31):

The OSFI mandated mortgage stress test has left some buyers on the sidelines who have struggled to qualify for the type of home they want to buy. The stress test should be reviewed and consideration should be given to bringing back 30 year amortizations for federally insured mortgages. There is a federal budget and election on the horizon. It will be interesting to see what policy measures are announced to help with home ownership affordability.

On the score of home affordability, there is certainly room for improvement. According to Demographia’s International Affordability Survey for 2019, Toronto ranked 294th out of 309 metropolitan housing markets, with a median house price of 8.3 times median annual gross pre-tax household income, up from 7.9 times year-over-year.  For context, the United States national median multiple registers at 3.5 times, while the organization designates anything beyond 5.1 times to be “severely unaffordable.” Vancouver puts Toronto in the shade, ranked second to last by Demographia (only Hong Kong is more expensive) with a median multiple of 12.6 times.

…click on the above link to read the rest of the article…

Vancouver Home Prices Turn Negative, First Time Since 2013

The sudden shift in the Vancouver housing market has been well documented. In November, home sales across all property types sank to a ten year low for the month. The drop is rather unprecedented considering the current economic backdrop suggests unemployment across Canada has plunged to a 42 year low. And while unemployment may be a lagging indicator, the housing market is certainly not. Of the components of GDP, residential investment offers by far the best early warning sign of an oncoming recession.

So too does the yield curve, which continues to flatten. Earlier this week the Canada 2 and 5 year bond yields inverted, the first time since 2007. A flat or inverted yield curve is when short term rates exceed long-term rates. This is often taken as a signal that investors are more optimistic about short-term prospects versus the long term, suggesting a lack of confidence in continued economic growth. This can also impact bank profitability, as banks pay short-term rates on deposits and take in long-term rates on loans. A flat or inverted yield curve, therefore, could lead to negative net interest margins.

In simpler terms, this can cause bank lending to further tighter, leaving borrowers high and dry when market liquidity is most needed.

Canada 2/5 yield spread.

While the resulting slowdown from bank lending can most easily be seen in the decline of sales volumes, it is now more noticeably reflecting in home prices.

The detached home price has now dipped 8.5% from last year, the largest decline since late 2009.

detached prices Vancouver
Year-Over-Year price change in the Vancouver detached MLS benchmark price.

Meanwhile, the resilient condo market has finally dipped into negative territory as well, dropping 1.8% year-over-year in November, the first negative reading since October 2013.

…click on the above link to read the rest of the article…

Anatomy of the Housing Downturn in Vancouver, Canada

Anatomy of the Housing Downturn in Vancouver, Canada

It’s not pretty.

In 2018, “each month has brought weaker than normal sales, rising inventory, and continued downward pressure on prices” in Vancouver, British Columbia, writes Steve Saretsky, a Vancouver Realtor and publisher of real-estate blog, Vancity Condo Guide. The market faces another headwind: “With the Bank of Canada determined to reach a neutral rate of interest of between 2.5-3.5%, borrowing power continues to erode.”

The single-family price spike unwinds.

The hardest hit segment are single-family houses (“detached houses”). Sales volume in the city of Vancouver has dropped to 27-year lows for most months of the year. In October, sales plunged 32% year-over-year to 146 houses, the third worst October on record. The plunge in sales was first triggered by the imposition of a tax in August 2016 on nonresident foreign buyers – mostly investors living in China. This chart from The Saretsky Report shows sales volume in every October going back to 1991 (click to enlarge):

Inventory for sale of all types of homes combined – single-family, townhouse, and condo – in the city of Vancouver surged 24% year-over-year, “pushing prices lower across all property segments,” he writes. Within that group, townhouse inventory jumped 34% and condo inventory soared 74%.

But inventory of single-family houses edged down by 4%, to 1,556 listings, “primarily a result of sellers taking their house off the market and trying to wait out current conditions,” Saretsky writes. Given the decline in sales, months’ supply surged 35% to 10.7 months. “This has paved the way for buyers to negotiate steep discounts”:

We have now been in a weak detached housing market for over two years and as a result, price declines are becoming more noticeable and more significant. There is strong evidence from previous housing booms that volumes tend to lead prices by about two years, and for the most part that has been the case here in Vancouver.

…click on the above link to read the rest of the article…

Vancouver Housing Starts Flash Red As Chart Rolls Over

Canadian housing construction starts slowed in August, coming in at a seasonally adjusted annual rate of 200,986 vs. 205,751 in July – missing expectations of 210,300, according to CBC

The decrease came as the annual pace of urban starts fell 2.5 per cent to 184,925 units. Starts of urban multiple-unit projects such as condos, apartments and townhouses fell 2.4 per cent to 132,700 units in August while single-detached urban starts fell 2.6 per cent to 52,225 units. –CBC

“The national trend in housing starts continued to decline in August from the historical peak that was recorded in March 2018,” said Bob Dugan, CMHC chief economist. “This moderation brings total starts closer to historical averages, largely reflecting recent declines in the trend of multi-unit starts from historically elevated levels earlier in the year.”

Of note, housing starts are in Metro Vancouver are slowing to a greater extent, falling 4% from its March 2018 peak, according to Steve Saretsky of the VanCity Condo Guide.

A slowdown in housing starts suggests homebuilders perceive risks ahead or simply can’t make new projects feasible due to elevated land prices and construction costs, which is typical at this stage of the cycle. This does not bode well for future economic growth considering housing and the consumption that goes along with it (renovations, furniture, etc) are a big driver of the economy. In Canada, household consumption and residential investment as a percentage of real GDP is nearly 65%. –VanCity Condo Guide

Saretsky notes that a rebound in housing starts seems unlikely “given how extended this current expansion is,” while the labor market is at capacity and rising interest rates should cause investors to reduce exposure considering that Vancouver home sales are at a 17-year low.

Instead, the construction industry is working at a frantic pace to complete existing units. Housing under construction in Metro Vancouver ticked upwards to a new record high in August- hitting a staggering 43,684 units. well above annual population growth of 30,000. –VanCity Condo Guide

…click on the above link to read the rest of the article…

CMHC Finds Irrational Exuberance in Vancouver & Toronto

There is much to learn from financial mania’s. In particular, the role of human behaviour responsible for inflating asset prices to previously unimaginable heights. Economist Robert Schiller has done some excellent work on this topic in his book Irrational Exuberance.

In essence, Schiller highlights a few key themes. Mainly that real estate booms seem just as mysterious and hard to understand as the stock market booms when they happen, there are always popular explanations for them- explanations that are not necessarily correct, but people love a good story. Meanwhile, higher prices tend to drive a positive feedback loop where initial price increases lead to more price increases as the effects of the initial price increases feedback into yet higher prices through increased investor demand. This second round of price increases feeds back again into a third and then a fourth round, and so on.

A recent publication from CMHC highlights strong human behaviour dynamics have been playing out in the Vancouver & Toronto Real Estate markets. After surveying 30,000 recent homebuyers, CMHC found evidence of euphoric and perhaps irrational behaviour.

For instance, respondents were asked about whether how much they paid was aligned with their plan budget. Respondents were also asked about a series of choices regarding location, size and timing of purchase. Choices all potential homebuyers must consider before buying a home in both Vancouver and Toronto, 48% of homebuyers respectively spent more than they budgeted.

CMHC believes home buyers may have experienced a fear of missing out, citing that homebuyers measure the value of a home through rule of thumb mechanisms like, “it’s a hot market, I can’t miss out, it’s really tight right now-will have to revise our budget if we want to get in”  all of which are phrases pushing homebuyers to overvalue an investment.

…click on the above link to read the rest of the article…

CMHC: 55% Of Toronto And Vancouver Real Estate Buyers Were In A Bidding War

CMHC: 55% Of Toronto And Vancouver Real Estate Buyers Were In A Bidding War

Have you ever woke up after a night of drinking, and only had a vague recollection of what happened? Then your responsible friend sets off a chain of text messages, trying to figure out where you went wrong? Well that’s what the Canadian real estate industry just did, and man-o-man did people screw up. The Canada Mortgage and Housing Corporation (CMHC), the Crown corporation in charge of mortgage liquidity, conducted a massive survey of recent buyers in Toronto, Vancouver, and Montreal. After getting drunk on exuberance, buyers indulged in a little too much borrowing, blaming everything from land scarcity to foreign buyers for the street fights bidding wars they entered.

About The Survey

The CMHC designed a massive survey to try and figure out where buyer exuberance started. Buyers in Toronto and Vancouver saw a quick rise in home prices, and adopted “excessive” expectations of price growth. To determine where the disconnect between fundamentals and price growth started, they took a novel approach – they asked the buyers. 30,000 recent buyers were sent surveys, asking questions ranging from what their budgets were, to why they didn’t stick to their budget.

The majority of price movements were driven by exuberance in Toronto and Vancouver. Yes, fundamentals played a part – but a small part. Instead, the survey focuses on finding out which data points buyers felt drove their FOMO. The fear of being “locked out” is always a powerful motivator, which tends to amplify the read on fundamentals.

Now, issues like foreign buyers are important, and need to be tracked and dealt with. However, no one forced anyone to buy in the small window of exuberance. The homeowner life didn’t choose these buyers, buyers chose the homeowner life.

…click on the above link to read the rest of the article…

Canada Home Prices Fall from Year Ago for First Time since 2009

Canada Home Prices Fall from Year Ago for First Time since 2009

The magnificent house price bubble wheezes.

With 2017 mortgage pre-approvals having now expired, the first wave of buyers facing OSFI’s ground breaking mortgage regulations are being put to the test. The regulations, also known as B-20, require all borrowers to pass a stress test at an interest rate 2% higher than the qualifying rate.

Early symptoms appear rather obvious. National home sales slid for the month of March, falling 23% year over year, and pushing the average sales price down 10%. Overall, it was a bearish quarter for Canadian housing, first quarter sales fell 16% year over year.

Much of the declines were felt in the single family housing market in Vancouver & Toronto, with many buyers unable to qualify at the recently inflated prices. The average sales price of a single family home in Greater Vancouver now sits at C$1.6 million and C$1 million in the Greater Toronto Area (GTA).

Chief economist of the Canadian Real Estate Association, Gregory Klump, noted the squeeze as “tighter mortgage lending rules, which make it harder for home buyers to qualify for uninsured mortgages, are also shrinking the pool of qualified buyers for higher-priced homes.”

To little surprise this reflected in the national home prices across Canada. The Q1 2018 average sales price declined by 6.27% from Q1 2017. It was the first year-over-year percentage decline since Q1 2009.

The impact of the mortgage stress could become more apparent moving forward, particularly if borrowing rates continue to rise. As of today, a homebuyer hoping to purchase the typical home in Greater Vancouver (as per the MLS benchmark price of C$1.084M) would require a minimum down-payment of C$216,800 and a verified income of C$175,000, assuming a 5-year mortgage at a generous 2.99% interest rate.

…click on the above link to read the rest of the article…

 

Rate Squeeze in Vancouver & Toronto Housing Bubbles

Rate Squeeze in Vancouver & Toronto Housing Bubbles

Variable-rate mortgages, the HELOC phenomenon, and new stress tests meet higher rates.

The Bank of Canada raised interest rates another 25 basis points last week. It was the third time in the past six months. Rates have more than doubled in that time, going from 0.50% to 1.25%. This hike was baked into the economic data, and now it’s getting baked into the debt loads of Canadian households.

Following the announcement, Canadian banks hiked their prime lending rateby an equivalent 25 basis points. The prime lending rate is the annual interest rate Canada’s major banks use to set interest rates on variable-rate loans, lines of credit, variable-rate mortgages, and HELOCs (Home Equity Lines of credit).

This means nearly instantly higher interest payments for borrowers carrying variable-rate mortgages, HELOCs, and lines of credit.

This is critically important, considering the context of the current situation. Interest rates have been at historically low emergency levels since the Financial Crisis. This has allowed households to absorb elevated house prices and a record amount of debt. Each rate hike reduces the ability to service that debt.

Given the current size of the mortgages, for Vancouver households, a 1% rate increase in their variable mortgage rate would require an additional 9.2% of their income to make the payment, according to Better Dwelling, and for households in Toronto, it would require an additional 8.3% of their household income. In Montreal, it would require an additional 3.2% of their household income:

Further, the newly required stress tests for variable-rate mortgages require that applicants qualify at the minimum specified rate of the stress test, which just jumped from 4.99% to 5.14%, or at the actual rate they’re borrowing at PLUS 2%, whichever is greater.

…click on the above link to read the rest of the article…

Behind Vancouver’s Housing Bubble: How Canadian Casinos Are Use To Launder Millions In Chinese Drug Money

Behind Vancouver’s Housing Bubble: How Canadian Casinos Are Use To Launder Millions In Chinese Drug Money

Nearly two years after we first observed that Vancouver‘s soaring real estate market is nothing but a bubbling melange of criminal Chinese oligarch “hot money”, desperate to get parked offshore in any piece of real estate, but mostly in British Columbia regardless of price, a new multi-year investigation has uncovered extensive links – including money laundering and underground banking – between China’s criminal underworld and British Columbia drug and casino cash and VIPs, and their connections to China, Macau and the norotious triads.

Here is Postmedia’s real estate reporter Sam Cooper reporting on and explaining how British Columbia casinos are used to launder millions in drug cash.

* * *

On Oct. 15, 2015, a Mountie burst through the front door of an office in Richmond, carrying a battering ram and with a rifle slung on his back. The door swung shut behind him, locking him inside. He was in the lobby of Silver International Investment, a high-end money transfer business, surrounded by bulletproof glass. Behind a second glass door, a woman rushed to make a call while hiding several cellphones. Under her desk was a safe stuffed with bundles of cash. The Mountie, a large man, counted seconds anxiously, wondering if the woman would unlock the interior door.

It was one of 10 police raids in Richmond that day — part of a major investigation that has uncovered massive money laundering and underground banking networks with links to Mainland China, Macau and B.C. casinos, allege the RCMP’s federal organized crime unit and China’s national police service.

Postmedia has spent six months looking into the case, involving freedom of information requests for thousands of documents and dozens of interviews with government and law enforcement sources that were not authorized to be identified.

…click on the above link to read the rest of the article…

What slowdown? Vancouver and Toronto real estate markets still hot and unaffordable for many

What slowdown? Vancouver and Toronto real estate markets still hot and unaffordable for many

Housing prices are once again climbing in Vancouver and Toronto may soon follow

Emelia Symington Fedy with her partner, Christie Watson, and two children in Vancouver — the city the family is leaving because they can't afford to live there.

Emelia Symington Fedy with her partner, Christie Watson, and two children in Vancouver — the city the family is leaving because they can’t afford to live there. (Emelia Symington Fedy)

With recent price declines in Canada’s hot real estate markets, there’s been talk of a slowdown. But, so far, it’s hardly something for prospective buyers to get excited about.

While prices did drop after the introduction of a foreign homebuyers tax in Vancouver last year, they’re once again surging to new highs.

In Toronto, both prices and sales have taken a dive since the same type of tax came into effect in April.

Some had hoped a combination of recent government rule changes making it harder to get a mortgage, higher mortgage rates and the foreign buyers tax might have a lasting effect in cooling the market.

However, Toronto home prices are still up compared to last year and some industry experts predict that, as in Vancouver, the city’s recent dip will simply be a blip.

And as long as Toronto and Vancouver’s real estate markets continue to sizzle, many people will continue to find home ownership out of reach in these cities.

‘I just don’t get to live here,” says Emelia Symington Fedy, who’s moving her family from Vancouver to Halifax because she can’t afford the high cost of housing in her beloved city. “It feels like my lover has jilted me. I’m heartbroken.”

Vancouver downturn dashed

In August 2016, the B.C. government implemented a 15 per cent tax on foreign nationals buying property in Metro Vancouver to help cool skyrocketing house prices. For a time, the tax appeared to be working.

…click on the above link to read the rest of the article…

Canadian Home Sales Crash In June

Canadian Home Sales Crash In June

The Canadian Real Estate Association says home sales in June posted their largest monthly drop since 2010, with the Greater Toronto market leading the decline.

This is the third monthly decline in a row…

Under the covers, it’s Toronto that is suffering the most…

Toronto existing home sales drop 37.7% y/y

  • Average Toronto existing home price fell 5.8% m/m
  • Average Toronto existing home price up 6.3% y/y

Vancouver existing home sales drop 12.2% y/y

  • Average Vancouver existing home price fell 3.2% m/m
  • Average Vancouver existing home price up 2.7% y/y

And as a reminder, there appears to be plenty of room for this to fall further…

China’s “Ghost Collateral” Arrives In Canada, “Heralding A Crisis”

China’s “Ghost Collateral” Arrives In Canada, “Heralding A Crisis”

Two weeks ago, a key China-linked concern that made headlines back in 2013 and 2014 reemerged after an extensive analysis by Reuters reporter Engen Tham found that China’s “ghost collateral” problem, or collateral that was either rehypothecated between two or more loans, or simply did not exist, had not only not gone away but was still as prevalent as ever if not worse.

The report, a continuation of extensive reporting conducted on this site, said that 60% of all loans issued in China’s system are backed by property, and that China’s property values are “wildly misleading, which is part of the reason that China’s credit rating was recently downgraded.” Reuters reported that Chinese lenders are prone to fraud with loan officers turning a blind eye to the quality of collateral and knowingly accepting dubious and even fraudulent documents.

Now, in a follow up by the Vancouver Sun’s Sam Cooper, the real estate reporter explains that China’s “ghost collateral” problem has jumped across the Pacific and is threatening the Canadian banking system.

As Cooper notes, “as a result of the flood of money pouring from Mainland China into Vancouver real estate in recent years, some financial experts say they believe Canadian banks are directly exposed to shadow lending in China and the risks of so-called “ghost collateral”, collateral that may not exist or is used continuously to secure loans for multiple borrowers.”

And the stunner: “Postmedia confirmed that Canadian banks are allowed by the federal regulator, the Office of the Superintendent of Financial Institutions, to accept collateral from China to secure real estate mortgages in B.C.

“OSFI does not dictate what type of collateral (federally regulated banks) can accept,” spokeswoman Annik Faucher said. “Whether the borrower is foreign or domestic, OSFI (allows) financial institutions to compete effectively and take reasonable risks.”

…click on the above link to read the rest of the article…

Sorry Vancouver, But Toronto Is The King Of Risky Mortgage Debt

Sorry Vancouver, But Toronto Is The King Of Risky Mortgage Debt

Sorry Vancouver, But Toronto Is The King of Risky Mortgage Debt

Canadian real estate values continue to soar, and a record number of buyers are piling into risky loans. According to the Bank of Canada (BoC), and the Ministry of Finance (MoF), high ratio mortgage borrowers are extending themselves to the limit. While we covered how concerning this trend has become in Toronto, it’s not just isolated to that city. It’s a trend that’s growing across all Canadian urban centers.

High Risk Mortgages

People taking out high-ratio mortgages combined with incomes too low for the property value, is spreading across Canada. A high-ratio mortgage is defined as a mortgage where the buyer leaves less than a 20% downpayment. The BoC and MoF have both expressed concern when high-ratio mortgages are paired with high income-to-loan ratios. The amount of high risk buyers is increasing as markets reach dizzying heights, especially in urban areas.

Vulnerability isn’t just the buyer’s ability to keep devoting a high percentage of their income to carrying payments. Since the number of these buyers are accelerating as prices get higher, they’re at a greater risk during a correction (not even a crash). Something as small as a 5% drop in value and many of these mortgages would be underwater. Underwater is industry slang for the buyer has 0, or less than 0, equity in their home. If this happens it would mean already broke homeowners would have to pay to get rid of their home. Combine that with a higher interest rate at renewal, and you can imagine the mayhem that can unfold.

Toronto And Vancouver Have The Highest Totals

High-ratio mortgages with low income levels is a growing trend in Canada, but Toronto and Vancouver take it to the next level. Across Canada, 18% of high risk mortgages have extremely low incomes for the homes they’re in, an increase of 38% over two years.

…click on the above link to read the rest of the article…

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