Wednesday, October 03, 2007

Generous financing and plenty of choice keeps housing market moving

BY JOANNE LEE-YOUNG- Vancouver Sun -Tuesday, October 02, 2007

A wide range of housing and financing options are fueling home sales in the Vancouver area even as prices continue to rise. People are overpaying more than ever before with even more risky financing options that will enslave themselves and their family to the bank for the rest of their lives. Apparently lenders are being 'generous' now so they are just giving away money. No need to repay, just ask for the money and - poof - there you go - pick it off the money tree.

The sale price of a typical single-family home in Vancouver hit $726,268 in September, a 12-per-cent increase from the same month a year earlier (family not included - and who could afford to have a family at these prices).

At the same time, 2,776 sales were recorded on the Multiple Listing Service, a 10.2-per-cent increase from sales in September 2006. Un-freakin-believable - who is buying at these prices?

"There is still very strong consumer demand due to the economy. Rising wages mean that buyers are confident and this is underpinning the market," said Cameron Muir, chief economist at the B.C. Real Estate Association. "There is also a strong mix of housing stock. This variety is helping buyers at the lower end get into the market." If by "lower end" you mean households that make in excess of $100,000 per year then yes Cameron you are right. Cameron, could you please send me some data that clearly shows how BC residents have gotten 50% raises over the last 4 years? I'd really appreciate it, thanks.

"Six out of 10 sales are multiple-family dwellings [such as attached houses and apartments]. There are also more financing options. Down payments are down to five percent, which can be put on a credit card," said Muir. I can't believe I just read that. YES, CAMERON MUIR (cheif economist of the BC Real Estate Association) IS ADVOCATING PUTTING YOUR DOWNPAYMENT ON YOUR CREDIT CARD - Pay 22% Interest. Cameron, please stop by my office for a little lesson in financial math as you obviously missed some basic math instruction while you were getting your economics degree.



Attached house and apartment sales accounted for some of the brightest spots in the September figures.

Blah, blah, blah, . . . insert cherry-picked sunny data points here . . .

Across the region, benchmark prices for typical attached and detached properties increased at about the same rate this September compared to last, clocking 10 per cent and 12 per cent respectively. However, while the number of attached property sales jumped 27 per cent in September, the number of detached property sales rose a more modest six per cent. I'm calling the adverb police for the use of the word "clocking" when referencing price gains in anything. It isn't a NASCAR race folks.

"There is a great deal of choice in the market for a range of consumers today," president of the Real Estate Board of Greater Vancouver, Brian Naphtali, said in a statement.
Eighteen per cent of residential listings are above $1 million; and 37 per cent are between $500,000 and $1 million; and 45 per cent of residential units for sale remain priced below $500,000, he added. Is $500,000 to be viewed as 'inexpensive' Brian? My view of inexpensive and yours greatly differ. Since I'd have to make well in excess of $100,000 / year to stretch myself into the bottom quartile of homes in the area I don't really think that 1/2 A MILLION DOLLARS is a tiny bit of money - for a bloody townhouse mind you.

Prices of detached homes in Port Moody led all regions in the Real Estate Board of Greater Vancouver. The percentage increase in the benchmark price of a typical home there jumped 33 per cent to $778,423 in September compared to the same month last year. "This is no surprise. There is a larger proportion of houses in Port Moody that are newer. There are more recent additions to the housing stock there and many are fairly luxurious and well appointed. When these get sold back into the market, it can skew the numbers and be a bit of an anomaly," said Muir. Just like those anamolous credit card payments Cameron?

Meanwhile, in the Fraser Valley, the average price of a typical family home reached the highest level ever in September, even as buying and selling activity tapered off after a busy summer (typical family not included). September's record-setting average price for a detached home, at $535,572, was 8.5 per cent higher than the same month last year. Take your basic family income, add two suites, a foreign homestay student, and lots of overtime for the wife and VOILA, we can afford a house. Unsustainable anyone?

The number of Multiple Listing Service-recorded sales for the Fraser Valley in September decreased by 25 per cent from August. Meanwhile, the average townhouse price saw a more moderate increase of 2.8 per cent compared to last year. Hmmm. . . . that wasn't too rosy now was it?! The average apartment price increased by 12 per cent.

"In September, the communities of Surrey, Langley and Mission reached their highest average prices on record for a single family home and in August that happened in North Delta and Abbotsford," said president-elect of the Fraser Valley Real Estate Board Kelvin Neufeld in a statement.

Rant off. More to come later.

30 comments:

HADENOUGH said...

Do they not know what is happening in the U.S. Do they think we are stupid.

To answer my question - no they probably don't really see what is happening in the US and probably do think the Canadian consumer is stupid.

Gianni33 said...

The insanity never ceases to amaze me. What's going to happen in 30 years when these people who stretched to buy a home finally pay off their mortgages and it's about time for them to retire. OOPS... no savings, everything they earned went into their mortgage.

I just don't get it... stretch yourself to buy your first home, some 500 sq foot condo for $300,000 and what happens in 5 years when you're sick of living in a shoebox and still owe some $200k? Upgrade to a bigger shoebox and go deeper into debt? What are these people smoking? Unless you want to live in that shoebox for the next 10-15 years, or your income miraculously doubles in that time, you're going to be living like a bum eating instant noodles and kraft dinners for a long time so you can be a "proud owner" of this tiny shithole. And 10 years down the road, I wouldn't be surprised if the place starts leaking and then what? All the money went into the mortgage and no "rainy day" fund to pay the assessment.

With people's savings rate well into the negative #'s, makes you wonder what the hell makes these people so darn optimistic. Do they believe there's no chance they'll ever be unemployed for a few months in the next 20-30 years? I wouldn't be surprised if some Vancouver city workers had to sell their homes in the past month or so to avoid foreclosure.

You'd think people would use some common sense while making probably the biggest financial decision of their lives, something that will affect the next 25-30 or even 40 years of their lives. So WHEN things go south, a lot of people will get screwed. But I won't be able to sympathize with their struggles, because I've been screwed the past 3 years waiting this boom out in an effort to avoid the situation they're going to be in.

jesse said...

"what happens in 5 years when you're sick of living in a shoebox and still owe some $200k? Upgrade to a bigger shoebox and go deeper into debt?"

Actually, yes. 25 year old dude is looking into the future and sees much better than 3% wage gains as he climbs the corporate ladder. Over time his wage gains (that will likely beat inflation) make the $200K burden more tenable. And yes, he will up his mortgage amount with his now higher salary when he moves to a larger place.

You can do the math showing how much you pay in interest versus principle over the loan's life and it's better to reduce your mortgage as quick as possible blah blah blah. But in the end you can never do better than leveraging to the gills an asset that is continually appreciating in value.

As long as you know the risks.

HADENOUGH said...

Great Article: I posted it on other blogs.

Titled: Jump off the Deranged Bull Now.

http://blogs.telegraph.co.uk/business/ambrosevanspritchard/september07/derangedbull.htm

freako said...

1. As I mentioned earlier, I like this new feisty Mohican.

2. Why do they only quote industry hacks such as the realtor and builder "economists"?

3. "This is no surprise. There is a larger proportion of houses in Port Moody that are newer. There are more recent additions to the housing stock there and many are fairly luxurious and well appointed

No. These are benchmarked prices. Nice try though.

Clarke said...

I really like the "gloves off" version of Mohican.

I would love to do a satire of people like Cameron, but it would be hard to do satire, because he already is satire incarnate.

"an asset that is continually appreciating in value"

That's right, just keep sipping the Kool Aid.....

Gianni33 said...

"Over time his wage gains (that will likely beat inflation) make the $200K burden more tenable."

Hrmm... I don't know too many people whose wage gains in the past 3 years have beat inflation combined with the increased cost of living in this city. As mohican said...

"please send me some data that clearly shows how BC residents have gotten 50% raises over the last 4 years? I'd really appreciate it, thanks."

Onto point #2...

"But in the end you can never do better than leveraging to the gills an asset that is continually appreciating in value."

REAL ESTATE ALWAYS GOES UP!! Tell that to people who bought in Edmonton in the past year.

streel said...

I sure do love a good rant, great work. This whole thing is one of the most perplexing and interesting things that I have ever watched, sheer madness. It has also been a great exercise in patience.

jesse said...

"please send me some data that clearly shows how BC residents have gotten 50% raises over the last 4 years? I'd really appreciate it, thanks"

I agree prices have risen faster than wages and in the long term this is impossible. But right now people generally don't think like that when trying to decide whether to buy or rent. I think it's the expectation of future wage gains that keeps people buying along with the expectation of flat to rising house prices over the long run (not necessarily rising house prices).

I argue this is partly due to the encouragement of the older generation who, using their own experiences as evidence, will show how a seemingly disastrous mortgage payment will become easier and easier as you start getting raises.

"REAL ESTATE ALWAYS GOES UP!!"

You mis-interpret. If someone thinks an asset always goes up in value, they will leverage as this is by far the best return around (ignoring risk!). Right now there is not much stopping people from leveraging themselves like crazy. I think there will need to be some risks that come to fruition, like has happened in the US, for people to change their minds.

In my mind, triggers are the usual suspects: rising unemployment, rising inventory, rising mortgage rates, etc. None have significantly materialized yet.

beta said...

In my mind, triggers are the usual suspects: rising unemployment, rising inventory, rising mortgage rates, etc. None have significantly materialized yet.

The crash in the US began without any of those triggers, so no need to expect them here, either. Affordability limits are sufficient.

beta said...

25 year old dude is looking into the future and sees much better than 3% wage gains as he climbs the corporate ladder.

Ideally, but life is often less than ideal.

Aleks said...

"The crash in the US began without any of those triggers, so no need to expect them here, either. Affordability limits are sufficient."

Interest rates had risen, and on top of that you had teaser-rate "resets" which compounded the problem. Some people saw their monthly payments double. It may not have been the sole trigger, but I think it was a big part. Affordability wasn't much of a factor, I don't think, since houses were already unaffordable when people were buying houses that they could only make the reduced teaser payments.

beta said...

Interest rates had risen, and on top of that you had teaser-rate "resets"

Interest rates are still historically low, and rate resets were only a problem because already stagnant markets precluded a quick sale, resulting in defaults and eventually foreclosures.

Houses had become unaffordable even *with* teaser loans, and the market had already turned before mass foreclosures began.

beta said...

You'll see the same thing here soon enough, as even 100% 40-yr mortgages are increasingly insufficient to put average FTB's into condos.

freako said...

But in the end you can never do better than leveraging to the gills an asset that is continually appreciating in value.

Gross oversimplification IMHO. Appreciation above borrowing costs come with risk. Risk and leverage can be a bad combination. No free lunch there.


I think it's the expectation of future wage gains that keeps people buying along with the expectation of flat to rising house prices over the long run (not necessarily rising house prices).

I argue this is partly due to the encouragement of the older generation who, using their own experiences as evidence, will show how a seemingly disastrous mortgage payment will become easier and easier as you start getting raises.

No doubt this advice is based on 1970's style inflation. We don't have it, and if we did, you wouldn't see the rates that we currently have. Extremely poor affordability in a low rate, low inflation environment can only end one way: Badly.

In my mind, triggers are the usual suspects: rising unemployment, rising inventory, rising mortgage rates, etc.

Prices went up far far in excess of anything justifed by improvements in these, so they can easily go down in absence of a deteriation.





Wage gains come with a catch. Nominal wage gains generally come with inflation, which will raise rates. Real wages haven't gone up much the last few decades.

jesse said...

"the market had already turned before mass foreclosures began."

The market in the US turned when sales started significantly lagging inventory buildup. I don't know what precipitated the drop in sales -- it could have easily been a random walk that added enough competition to cause bidding wars to stop. The same will happen here somehow, though looking at the numbers I don't see it happening yet.

I agree with you that the market can turn (marked by slower sales and rising inventory) absent of any massive shock.

Unemployment is a lagging indicator as to some degree are mortgage rates and how easy it is to get approved (banks can and will raise standards with a single keystroke if they smell poo in the wind).

Warren said...

People have no financial "street smarts" or common sense. Its as simple as that. The people buying these small places for ridiculous prices are the same ones that max out their credit cards and have no real concept of the crushing interest they are paying.

Who's to blame? The government? The media? The education system? I think they all share the blame. People are too stupid for their own good sometimes. In Canada, I think our government's general philosophy is to protect people from themselves (think gun control) vs. the US where it is more everyone for themselves. You can see how that is working out on a number of issues, housing being only one of them.

jesse said...

"Gross oversimplification IMHO. Appreciation above borrowing costs come with risk. Risk and leverage can be a bad combination. No free lunch there."

Yes but risk is imaginary until it happens. The past 7+ years and looking at the long-term price appreciation graphs make real estate look like it will always go up in the long term. People will underestimate carrying costs and risks which is part of the problem. No free lunch for defo: in this case you start eating before you pay.

"Prices went up far far in excess of anything justifed by improvements in these, so they can easily go down in absence of a deteriation."

Yes you and beta are right. Lagging indicators.

"Real wages haven't gone up much the last few decades."

Not when you're 25. Sorry to say it but wage gains are steeper at the beginning of a career and taper off after that. 10% in the first year after uni is not uncommon even in a bad job environment. That said, wage gains are pretty negative if you're unemployed.

Warren said...

Not when you're 25. Sorry to say it but wage gains are steeper at the beginning of a career and taper off after that. 10% in the first year after uni is not uncommon even in a bad job environment. That said, wage gains are pretty negative if you're unemployed.

Being 30 I have to agree with you regarding the last 5 years of my employment, or even the last 9 going back to my first and only RE purchase.

I tend to think of unemployment as more personal. The rate of 5% or 10% doesn't seem to make a whole lot of difference to the average person. Its more like 0% or 100% if you're the one who's unemployed.

freako said...

Not when you're 25. Sorry to say it but wage gains are steeper at the beginning of a career and taper off after that.

Sorry, I was referring to general wage gains across the spectrum.

You were referring to increase in earnings power that comes with experience. Yes, a younger person would likely bank on those type of wage increases. But in the aggregate is a bit of a wash. For every young whippersnapper moving up in the ranks, another older person peaks or retires.

patriotz said...

I don't know what precipitated the drop in sales (in the US) -- it could have easily been a random walk that added enough competition to cause bidding wars to stop

It's a lot simpler than that. They just ran out of buyers. Everyone who had the will and means to buy, and plenty more who didn't have the latter, had already bought. All greater fool games end this way.

freako said...

September stats are out, published in full at realtylink, earlier than usual.

The madness continues. Nutting futs I tell you. As I posted on RETalks,

1. The rate of appreciation for the GV median benchmark detached is 12%+ on an annualized basis.

2. The downpayment with 20% down is $147,585.40

3. The monthly payments with 5 year fixed (ING), 25 year terms is $3,703.67 before taxes, repairs or maintenance. That is a nice and round $44,444 smackaroos of after tax dollars annually.

4. Does anybody know the plain vanilla median? We are heading straight towards most expensive in North America if not already there. If San Fran/Oakland/San Jose has reversed at all, I think we hold the title. With our incomes and mediocre population growth, that is simply incomprehensible.

Too bad that REsteven left town, because I was really looking forward to tracking FV and GV inventory over the next few months. Somebody step up!

Clarke said...

"People are too stupid for their own good sometimes. In Canada, I think our government's general philosophy is to protect people from themselves (think gun control) vs. the US where it is more everyone for themselves."

Well, the educational system does not devote much time to financial matters, even at the post secondary level, and the media has operated as shills for the RE industry, who are the ones who buy the ad space after all, and the bulk of one's peers likely are convinced that "RE only goes up."

So, there are a lot of interested parties in keeping people stupid.

As far as the US goes, while in theory, everyone is on their own, in reality the government tends to help those who already have the means to help themselves. Interestingly, when Robert Schiller was recently in front of a senate committee on the sub prime mess, he made the argument that the situation underscored the need for more government regulation and more consumer protection in the financial sector.

craigpbbrett said...

"Well, the educational system does not devote much time to financial matters, even at the post secondary level."

Shocking, isn't it?

The economy is usually the top issue at election time, everyone pays taxes, business is the engine of modern development; yet a student will spend 8 years learning something useless like French and not a month studying the most important subject he/she will have to deal with in life.

jesse said...

"So, there are a lot of interested parties in keeping people stupid."

A bit cynical. The government bureaucracy has an interest in improving productivity and quality of life for constituents, in the long run. One way to do this is with a highly adaptive and educated workforce that, when faced with job loss, can find another job quickly and pay taxes again.

Sam said...

"The government bureaucracy has an interest in improving productivity and quality of life for constituents, in the long run."

I'd rephrase the above to say "certain, intelligent individuals in government" have the good judgement to see that it would be to their advantage to improve productivity and quality of life for constituents in the long term. Most people anywhere, including government and the civil service, are too focused on short-term self-interest to bother thinking about this.

I'd have to disagree with the gratuitous statement that French is useless (sounds like someone who rarely leaves North America speaking), but agree with the inadequacy of teaching economics and finance to students. The main reason, IMHO? The teachers themselves are not intelligent enough to teach it. Most people in education I know, bless their hearts, couldn't hack regular university courses and defaulted to education.

In short, I don't even think it takes "interested parties" or any kind of conspiracy to keep the masses stupid. They do it voluntarily, in large part by spending most of their leisure time watching TV.

Clarke said...

"A bit cynical. The government bureaucracy has an interest in improving productivity and quality of life for constituents...."

Generally, governments have an interest in staying in power, and bureacracies have an interest in keeping themselves in place. A well informed and politically active citizenry can interfere with the above.

Technically, the object is to maintain peace, order and good government, with the aim of improving people's lives. However, there are lots of different interpretations on how this is best accomplished.

Interestingly, Education and economic productivity have not been big election issues in a while.

craigpbbrett said...

"I'd have to disagree with the gratuitous statement that French is useless (sounds like someone who rarely leaves North America speaking)"

I was born in Europe, lived in Canada for 13 years and then spent the next 15 years working throughout Europe and Asia. It is BECAUSE I left North America that I understand how unimportant French is.

My own children are studying Mandarin. Any bets on who will better prepared for the world 20 years hence: my kids or the thousands of young Canadians in French immersion?

sidelines said...

Frankly, the process of learning a second language, ANY LANGUAGE, is a good one with many positive benefits. Mandarin, Japanese, German, Cree, and, yep, even French. So very far from useless, regardless of apparent overseas epiphanies.

Don't much care for the thinly disguised, knee-jerk, why-is-that-language-on-my-cereal-box, anti-French sentiment. In contrast to worldly travels, it seems awfully small-minded.

By the way, craigpbbrett, how many languages are you fluent in?

patriotz said...

a student will spend 8 years learning something useless like French and not a month studying the most important subject he/she will have to deal with in life.

Financial responsibility is a life skill, and like other life skills it used to be taught by people called "parents". In our grandparents' time they didn't teach financial skills at school either. They didn't have to - life did.