Global BC and the moment of truth

Global BC News Hour

If you caught last night’s Global BC News Hour, you may have witnessed a turning point in mainstream media coverage of Vancouver real estate.

If you missed it, allow me to treat you to an excerpt from the reporter’s script. Ladies and gentlemen, what you are about to read is real:

The hot housing market has cooled off… According to the Real Estate Board of Greater Vancouver, condo sales have dropped by 30 per cent since last May. Nervous investors who bought pre-sales recently hoping to turn a huge profit are now trying to get rid of them. Dozens of properties that have not even completed yet are selling on Craigslist and BuildingDigger.com.

A cooling market. Sales off 30 per cent. Nervous investors.

Think about these words. They are not the usual terms to describe the Vancouver market, at least not where the mainstream media is concerned. Yet here they are, spewed from the mouth of a reporter broadcast on the most watched newscast in British Columbia.

Of course, things can only change so quickly. Leave it to Deborra Hope to put it into context:

Does that mean we’re headed for a foreclosure disaster like in the U.S.? Most experts here say no; Canadian banks are much more conservative than American banks when it comes to lending and fewer Canadians are at risk of being buried at a rise in interest rates.

The more things change, the more they stay the same.

I think I’ll be writing for some time longer.

31 Responses to “Global BC and the moment of truth”

  1. JK Says:

    If you missed it, the news hour can be viewed here:
    [video src="http://feeds.feedburner.com/~r/GlobalBc-NewsHourVideoPodcast/~3/304974680/GBCNH080604.mp4" /]
    (Warning: 100 MB download)

    The segment starts around 16:00 in.

  2. jesse Says:

    TV has a way of instilling greater fear than written articles ever can. Global doesn’t have that much advertising with developers. I Global ran an interview with the 15 real estate myths guy and the look on the weather girl’s face after the interview was “WTF?” Hilarious. I think the Global reporters must get out more. Except for Deborah “Hope Now” that is, apparently!

  3. MJ Says:

    I think it was someone back on the old VHB site that referred to Deb as being “jiggy”. I didn’t quite get that comment until I really watched her talk about RE. And yeah, she got all giddy and goofy and breathless talking about the high cost of housing. Broadcasting Journalism at its finest.

  4. Larry Yatkowsky Says:

    That report might melt the wax in some ears.

  5. Dave Says:

    I don’t think she was off the mark in stating that Canadians are not as at risk for a subprime mortgage meltdown a la the US, because Canadian banks have been more conservative in lending and we haven’t been able to dig ourselves as deeply into holes as American homebuyers. That doesn’t mean the market won’t cool off or even “crash” but I don’t think many reputable experts would predict a meltdown as extreme as what happened in the states.

  6. Tony Danza Says:

    Canadian banks have been more conservative in lending and we haven’t been able to dig ourselves as deeply into holes as American homebuyers.

    Dave I would love to see you back up this claim with some hard numbers. I know you can’t, our banks don’t disclose information like those in the US so you just have to take their word at face value, but why would a bank not disclose their crappy underwriting? I like how you just pull this out of your ass though, very journalist chiq.

  7. Paul Says:

    Hold Me Closer Tony Danza:

    What’s with the bitterness? This is not the editorial section at the Tyee.

    Actually, do the research and you’ll see that Dave (and Global) are both right. There is no sub-prime equivalent in Canada, even the 40yr Am is not available to bad-credit, the rates don’t reset, and it’s not based on projected appreciation of the home. Other issues will drive our market down. Send me an e-mail to schweet 11 at hotmail dawt calm and I can send you a funny little slideshow that explains the sub-prime melt-down in the US.

    P.

  8. Bubble Lad Says:

    There was something on the news about auctioning unsold condos in Ladysmith – US style “everything must be sold at the end of the auction” – regardless of price? I thought we didn’t do that here (though the auction person assured us it was perfectly normal in Australia…WTF that means I’m not really sure). Did anybody see the newscast?

  9. Bubble Lad Says:

    got it:

    http://www.rbauction.com/property/2008198_vancouver_bc/index.jsp

  10. Ultraman Says:

    Repeat after me everybody: We do not have sub-prime lending in Canada. Anybody that thinks otherwise doesn’t know or understand the mtg lending environment in Canada or US.

    As much as I appreciate Garth “Greater Fool” Turner view on RE he’s definitively on the alarmist side and way off on sub-prime. While it’s financially unwise to amortize over 40 years, the fact of the matter is that you’re less likely to default than if you had chosen the 25 years amortization. Yes, it will cost you a bundle in interest but it doesn’t make you more vulnerable to foreclosure.

    Further to what Paul said, anybody with less than 20% down will need to have their mtg insured. Wether it’s with CMHC or GE the standards are consistent among all financial institutions. We don’t have anything like NINJA lending and a good credit score is a must. You won’t hear any story of people making sandwiches at Subway and taking $400k mortgages like you do in the States.

    Nevertheless, the market will crash but we won’t see the foreclosures syndrome that they have south of the border.

  11. Bubble Lad Says:

    I hope you’re right, Ultraman. Cool name, by the way!

  12. phil Says:

    Don’t forget however that in Canada you can’t just “walk away” like you can in the US. That means that a huge chunk of our future housing demand is gone in people who are tied up (owing more than worth) in their condos for 40 years, whereas in the US those same people who walked will be trying to get back into the market again at the bottom.

    Subprime? no. Just as devastating to the future real estate market? yes.

  13. Brittanny Spears Says:

    Subprime USA, Canada is different? I don’t think so. I recently had an unstated income mortgage ( available to the self employed). It is called a”liar” loan. There are plenty of self employed people in Canada. It was very easy to get. And yes you can walk away, it is called bankruptcy and does not carry the stigma that it used to. When you wind up with $200k or $300k in negative equity, bankruptcy will certainly become an option for many.

  14. yeah right Says:

    Dave,
    I think we are in for a very similar fate as the U.S. If you look at earlier posts on this blog you’ll see an ad for ” Stella ” In it the ad says “Buy it for $5000 down, move in this summer.” Then it goes on to say “starting under $400,000”. This has to tell us something. To be honest I didn’t visit or inquire into the financing but I’ve heard you can get a place with little to nothing down. Am I wrong?

  15. jesse Says:

    “Repeat after me everybody: We do not have sub-prime lending in Canada. Anybody that thinks otherwise doesn’t know or understand the mtg lending environment in Canada or US.”

    Canada has stated income mortgages as BS posted above. I don’t know if you listen to local Vancouver radio but Alpine Credits and others are advertising. If they aren’t subprime lenders I don’t know who is. Anyways “subprime” isn’t the problem. It is the canary in the coal mine of eventual widespread credit tightening. Just because Canada doesn’t have what you call “subprime” doesn’t mean Canada won’t follow the rest of the world into credit contraction mode. It just won’t take the same path.

  16. dingus Says:

    Actually, our situation long term may be worse, as we have “resets” typically on 5 year terms (with longer amortizations), where the U.S. uses 30 year terms. Also, affordability here is far worse, particularly when you factor in the tax deductibility in the U.S.

    How many recent buyers do you think stretched to buy then immediately got a HELOC for improvements and expenses? How many do you think failed to disclose loans for the downpayment? How many are having HBP payments tacked on after 2 years? The problem isn’t subprime, the problem is falling behind on the treadmill and running out of money.

  17. Tony Danza Says:

    Paul thanks for the offer of the educational subprime slideshow, but I’ve spent many an hour researching our real estate market and the US gong show. I laugh when you say we don’t have subprime, don’t you know that in the US they’re all subprime now?

  18. Ultraman Says:

    Sorry to be late responding on the topic of subprime. I was busy running from Deep Cove to Horseshoe Bay and back by the Baden Powell trail. Almost 25 hrs.

    For the most part I agree that it will get ugly and that we will see our share of insolvency and people making the wise/immoral decision to walk away for financial consideration. What I can’t see happening is the scale of what we see in the US, with entire neighborhood going to the dogs and the depressing effect on RE.

    The core of the sub-prime business plan is to lend money at rising interest rate/payment to a bunch of fools that may or may not be aware of what they are getting into with the innocent idea that rising home value will take care of their very limited ability to pay by being able to refinance therefore being much vulnerable to change in interest rate, home value and availability of credit.

    That my dear friend of the Blogosphere is the philosophy of sub-prime lending. Our lending practices are such that if everything else remains constant, interest rate, job and other personal circumstances, it should become easier and easier to meet your financial obligation overtime. And that’s how it is for most people discounting the reckless credit card user.

    Credit tightening will affect demand and RE price but it won’t affect someone’s ability to make their mtg payment. Yes, our typical term mtg is 5 years so one can see a delayed effect but only if interest rates rise substantially which is not the view of most Bond Manager.

    Sub-prime or not I believe our RE market will crash so hard that it really is a wild card to predict how different aspect of the business will be affected. Interesting time for sure, nice distraction from the trail during those long runs.

  19. jesse Says:

    “Our lending practices are such that if everything else remains constant, interest rate, job and other personal circumstances, it should become easier and easier to meet your financial obligation overtime.”

    You make it sound like taking on a mortgage is a free lunch. It’s not. You are borrowing money from someone who is making money off your payments. The US had many more nefarious mortgage contracts for sure and the result was that some neighborhoods crashed hard and fast. Other neighborhoods have not seen much decline yet because they didn’t have “subprime” but they must see drops, either in nominal or real terms. Ultimately it’s the prices in relation to incomes and rents that matters and these are still way out of whack with what is sustainable. Vancouver’s path will be different than cities in the US but we know where they are eventually headed.

    You can continue to say that Canada is different, which it is, but it is not different in many ways too, ways I believe to be more relevant. Debt is debt and it needs to be repaid and the average debtload required to enter Vancouver’s market is way too high to be carried, on average. We are likely seeing people unable to make payments even now but they have the luxury of selling at ever increasing prices to recoup any losses.

  20. watching the market Says:

    okay, here is a scenario for you:

    I got a 4.75% 5yr term fixed mortgage (at 40 yr amortization), for zero down (and roll the transactions fees and CMHC insurance into the mortgage total)……I bought a $500K place in Yaletown in Aug 2007. What does the back do with me, when I need to renew, and market comps are now showing my shoebox condo is now “worth” only $375K, and my new interest rate is 7.5%……..assume I am still employed and my salary inflates along with general prices…..I am thinking they will not finance me on the still approx $500K I owe, because the underlying asset has devalued so much…..?

    What do you guys think happens? I do not know, but I think things are looking pretty grim for me…….

  21. jesse Says:

    Further to that, everything cannot remain constant. As an example, a disproportionate number of jobs created in the past 8 years have been in construction and real estate. Most of these jobs would qualify for “stated income” mortgages. While they may not be “liar loans” they are likely overstating income on average due to the construction and real estate boom jobs being used as their “normal” stated income. On average RE agents’ commissions are now down about 30% YOY. Ouch! If enough agents start falling behind on their stated income payments I am sure lenders will tighten future lending and this type of loan will crimp available credit. The construction boom is still going on but we have good evidence these jobs will at best move away from Lower Mainland to other regions of the province and at worst disappear entirely after projects complete.

    It’s hard to argue that Canada has as bad a “subprime” problem as parts of the US. Though I have been astounded at how fast inventory is coming online with not that much visibly changing in the local economy. Same as San Diego about 1-2 years ago.

  22. watching the market Says:

    sorry that should say: what does the BANK do with me, when I need to renew…?

  23. Ultraman Says:

    Watching the market,

    Nothing will happen as long as you have been making your payments. Regardless of your home value or job situation. Your mortgage will be renewed most likely by a simple phone conversation and confirmation letter. At that point your banker could care less if you are picking up empty cans for a living. As far as today’s practice goes anyway.

    Jesse,

    The only free lunch is living with your mamma otherwise you will be renting a home or money to buy one. I say that Canada is different only in it’s lending practices more specially in regards to sub-prime lending. I totally agree with the rest of your post and I think that the delusion of our RE market will hurt in more ways than one.

  24. jesse Says:

    “What do you guys think happens?”

    wtm, a good question to answer. Check out Tanta’s posts on http://www.calculatedrisk.blogspot.com for a good understanding of how lenders think. It is geared to the US but has relevance to Canada. In the end the bank will try to maximize its return. For many it will mean a workout (reducing loan amount) or possibly bankruptcy. It’s also worth considering how it will be to shop around for mortgage rates if you’re in a negative equity position. Hint: it won’t be easy. Going through the workout and foreclosure process is messy and I often wonder how many banks have people left that know how to do it.

  25. foo Says:

    Bigger problem for the bank – what’s the likelihood you’ll continue paying your $500k mortgage when the place is worth $375k, and there’s no hope of selling it and/or getting out from under the mortgage?

    Sure the bank can come after you for the $125k you’re short, but if you took a mortgage on those terms, what’s the likelihood you have $125k? And when it’s 10000 people the bank has to go after, there’s a bit of a problem with the court system backing up…

    Sub-prime is not about $1m liar-loans to McDonald’s employees. It’s about reckless lending practices based on the nonsensical idea that house prices will continue to go up 10%/year forever.

  26. jesse Says:

    wtm, if what you say happens and your recast rate is higher than what you can carry you have the option of selling, defaulting, or working out a lower loan amount or interest rate that is affordable for you. The bank will do what it makes sense for itself. A workout is effectively them taking a monthly loss so it may be in their interests to foreclose instead if they think you’re at a high risk of defaulting even with the lower payment or if they can recoup a better return from a sale. Ironically the latter is especially true if they acquired mortgage insurance from CMHC/Genworth.

    Ultraman, you make some good points.

  27. jesse Says:

    wtm, it’s also worth considering how hard it’s going to be to “shop around” for competitive mortgage rates in a negative equity position.

  28. watching the market Says:

    ..hmmm, seems to me the bank has some pretty nasty exposure in a depreciating market….I find it hard to believe they will automatically renew me, when the underlying asset has deriorated by that amount….?

    I was thinking more along the lines of new mortgage on the current market value and a second mortgage on the rest (at a higher rate of course)…then again, if I maxxed out to “afford” the condo in the first place that won’t work either….

  29. Ultraman Says:

    Don’t worry WTM, they will renew your mtg.

    You do bring a good point on bank exposure to RE market. As far as their mortgage investment portfolio is concerned the big banks are pretty well diversified geographically and by economic regions. Local Credit Unions on the other hand…They could be in serious trouble and they don’t have anywhere the financial foundation of the big boys.

  30. Tony Danza Says:

    Don’t worry WTM, they will renew your mtg.

    Ultraman wasn’t around in the early 1980’s, if you’ve got significant negative equity in the home that secures your mortgage, you’re most likely out of luck. I laugh when people think some friendly neighbourhood bank manager will bail you out by giving you a work out. These decisions are made by an analyst’s model in Toronto, especially in uncertain times. The bank will collect their principal from CMHC, if you’ve made less than a 20% down payment and your condo is added to the foreclosure rolls.

    The bank’s are not in business to keep a roof over your head, they’re in business to manage risk and protect capital. Nice try Ultraman!

  31. Ultraman Says:

    Ultraman was 26 years old in 1981 and the mortgage on his significant negative equity home was renewed at an interest rate of 17.5%. May be the bank, Caisse Populaire actually, figured that at that rate they were well compensated for the risk.

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