Monday, May 30, 2011

The thorny issue of Vancouver's civic taxes

Intrepid civic reporter Frances Bula wrote an article on the City of Richmond's plan to reduce property taxes for certain commercial properties whose land prices have increased due to nearby residential rezoning and speculation.
Commercial property owners near Richmond’s Canada Line who got caught in a “hot zone” of frenetic land speculation will be getting a new tax break.

But the same tax break won’t be coming for Vancouver landowners caught in the same situation.

The province is proposing new legislation that will only allow Richmond – not other municipalities – to give full or partial exemptions of city taxes to dozens of businesses whose land values soared in a once-commercial area that Richmond has designated as a future downtown residential zone...

Councillor Raymond Louie said he doesn’t believe Vancouver needs to give the kind of tax relief that Richmond petitioned the provincial government for.

He said the city helps keep commercial taxes reasonable by averaging land values over three years and by discouraging speculation with its system of making developers give back the city some of their profits from land-value increases that are created through rezonings.
Richmond, and the City of Vancouver among others, face the problem of high price distortions due to land speculation. In Richmond this is becoming acute due to a flurry of commercial to residential and mixed-use rezoning application approvals, leading to once-safe commercial-only lots being bid up in anticipation of future rezoning to residential/mixed-use when presale condo developments are going for high prices.

According to the article, Vancouver has experienced similar issues around the new Canada Line stations where re-zoning applications have bid up low-rise commercial land values. But there is another problem "bubbling" under the surface...

Residential property prices in parts of the Vancouver area, notably in parts of Richmond, West Vancouver, and the west side of Vancouver, have been bid up significantly in the past 6 months. As the assessment values for 2011 approach (they typically use sales in mid-year months to ascertain assessment values for the purposes of tax allocation) there will be a stark increase for certain residents with a relatively flat increase for others. When setting the property tax rate in early 2012, the City, and its newly-elected council, will undoubtedly face awe-inspiring sticker shock outcries from those residents in areas where prices have skyrocketed.

Here are the latest benchmark year-over-year changes:
Vancouver West detached : 17.6%
Vancouver East detached : 8.2%
Vancouver West apartment: 2.9%
Vancouver East apartment: 3.6%

So how will the 2011 property tax assessment go down? Well people with detached properties in Dunbar, Kits, Marpole, and pretty much anywhere west of Ontario St. will face a stark increase in assessed values. Condo owners, by all accounts, have not experienced much in the way of increases. Owners of detached properties on the east side of the city will likely see mixed assessments. The long and short is that recent run-ups will produce stark winners and losers in the property tax division race, more so than past years.

Unless the City understands this impending distortion, there will be significant outcry by west side detached residents, and probably a few sad stories of long-time-resident grandmothers who will face significant pain to their bottom lines.* The City can, of course, allow dispensation for the recent pockets of price run-ups but all residents of Vancouver should understand that ameliorating such residents' ironic misfortune due to recent assessed fortunes will be at their expense.

You heard it here first.

*Edit: a commenter "Everyman" on Frances's blog reminded me of the property tax deferment program available to homeowners over the age of 55 and those with children under the age of 18. That will help ease the burden but most west-side denizens are likely to explicitly carry deferments on their books.

Friday, May 27, 2011

Another One Bites the Dust

Bubble Blogger "Tim" from Seattle just bought the detached house pictured above. I would recommend not looking at the price. Remember: Vancouver is different. It has to be or a great many people will be in for some major hurt.

Wednesday, May 25, 2011

Teranet Index - March 2011

MAY 2011

Home prices up 0.6% in March

Canadian home prices in March were up 0.6% from the previous month, according to the Teranet-National Bank National Composite House Price Index™. It was the fourth consecutive monthly rise, after three consecutive monthly declines. In March, prices rose in five of the six metropolitan markets surveyed. The largest monthly advance was in the Montreal market, 1.2%. The rise was 0.6% in Toronto and Vancouver, 0.4% in Ottawa and 0.3% in Halifax. Calgary trailed for a third consecutive month, though its 0.1% decline was the smallest of the seven decreases reported in the last eight months.

Teranet – National Bank National Composite House Price Index™

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For the composite index, the 12-month gain in March was 4.1%, an acceleration - the first in 9 months - from 3.8% in February. The largest 12-month rise was 7.5% in Montreal, followed by 7.2% in Ottawa, 6.4% in Halifax, 4.7% in Vancouver and 3.9% in Toronto. Though Toronto's 12-month inflation was the smallest, it was up from February, as were Montreal's and Ottawa's. Twelve-month inflation decelerated for a tenth consecutive month in Vancouver and a third consecutive month in Halifax. Calgary prices were down 3.3% from a year earlier, for a sixth consecutive month of 12-month deflation.
Seasonally adjusted data from the Canadian Real Estate Association show April home sales down from March in the major urban markets. However, market conditions were little changed - balanced for the country as a whole, a little tight in Toronto and Vancouver.

Teranet – National Bank House Price Index™

The historical data of the Teranet – National Bank House Price Index™ is available at
Metropolitan areaIndex level
% change m/m% change y/y
Calgary151.94-0.1 %-3.3 %
Halifax133.040.3 %6.4 %
Montreal138.961.2 %7.5 %
Ottawa130.860.4 %7.2 %
Toronto125.690.6 %3.9 %
Vancouver159.360.6 %4.7 %
National Composite138.940.6 %4.1 %
The Teranet–National Bank House Price Index™ is estimated by tracking observed or registered home prices over time using data collected from public land registries. All dwellings that have been sold at least twice are considered in the calculation of the index. This is known as the repeat sales method; a complete description of the method is given at

The Teranet–National Bank House Price Index™ is an independently developed representation of average home price changes in six metropolitan areas: Ottawa, Toronto, Calgary, Vancouver, Montreal and Halifax. The national composite index is the weighted average of the six metropolitan areas. The weights are based on aggregate value of dwellings as retrieved from the 2006 Statistics Canada Census. According to that census1, the aggregate value of occupied dwellings in the metropolitan areas covered by the indices was $1.168 trillion, or 53% of the Canadian aggregate value of $2.207 trillion.

All indices have a base value of 100 in June 2005. For example, an index value of 130 means that home prices have increased 30% since June 2005.
Marc Pinsonneault
Senior Economist
Economy & Strategy Group
National Bank Financial Group
Teranet - National Bank House Price Index™ thanks the author for their special collaboration on this report.
1 Value of Dwelling for the Owner-occupied Non-farm, Non-reserve Private Dwellings of Canada.

Tuesday, May 24, 2011

Vancouver is affordable long as you ignore the parts that are unaffordable, at least according to condo marketeer and dark-rimmed rose-coloured-glasses-wearing Bob Rennie (emphasis mine):
Mr. Rennie, who commissions research on real-estate trends for an annual talk to the industry, said that once the skewed prices paid by a small group of mostly mainland Chinese buyers in Richmond and the west side of Vancouver are removed, housing prices are comparatively reasonable.

As well, the numbers indicate that only about 1 per cent of those high-end buyers are non-resident investors.

“When you’re looking at the numbers, you have to build a fence around the west side, where there are external forces operating that have nothing to do with local forces,” Mr. Rennie said.

Yes, he said, the sale prices on those houses have increased dramatically in the past year.

But that top one-fifth of the market operates in its own world and has almost nothing to do with what is happening with real estate in the rest of the region that is connected to the local-buyer market, he said.
Well no. Indeed if we do take out the top-tiered sales from Vancouver's real estate market, the rest of the region is not-so-hot, though still hot. Contrary to the supposed fenced-offedness of certain "prime" areas of the city, what's hot in Vancouver West et al must be leaking into other areas because, well, rich residents (and 1% non-residents...) pricing out the rest of the locals tends to make locals look elsewhere for accommodations because -- go figure -- locals want to live locally. And the "top one fifth" is 20% of, or 1 in 5, purchases. Yeah...

Now why oh why would Mr. Rennie be speaking about foreign ownership and affordability now? Did someone ask him for his opinion? The fellow doth protest too much, methinks. Look for more explicit calls for foreign ownership restrictions or other similar curbs in the coming months.

Friday, May 20, 2011

Talk Vancouver: Have your say

The City of Vancouver has taken Peter Ladner's advice to heart, sort of, and opened up a discussion on affordable housing, albeit for low to modest income individuals only:

Go on over and have a perusal of the comments. One complaint I do have is that it isn't just low and modest income households who are facing problems, companies in the City are having trouble attracting highly-skilled workers who balk at the house prices.

You can see my response in the comments, and fellow blogger vreaa has made a good comment there too. In my view, the problem is high prices, and yes it's that simple.

Wednesday, May 18, 2011

The dangers of scapegoating

An unfortunate side effect of unsustainable speculative bubbles is the short-term distortions it produces between the balance sheets of the bold and the timid. As distortions continue and late-comers realise they missed the boat (or simply weren't old enough to board it), there will be feelings of unfairness and an innate desire to look for palatable root causes.

vreaa has written on this:
The speculative mania in Vancouver RE had its roots in the early part of last decade. Vancouver housing was already pricey by Canadian standards, the good-weather premium was baked in. Things really took off after 2003, when very low interest rates allowed home prices to divorce themselves from fundamentals such as local incomes. This effect occurred in all major Canadian centres, it was a monetary and not a local effect. Through 2004, 2005, 2006, 2007, local Vancouver speculators threw themselves onto the fire, borrowing large amounts to buy primary-residences and ‘investment’ properties at prices that were only justifiable if you thought that prices would continue up forever...

...Canada’s policies of multiculturalism encourage people to celebrate their differences. This is hunky-dory when everybody is rich and has adequate resources; it is easy to celebrate your neighbour’s good fortune when you are experiencing similar luck. But, if you put the economic screws on a society that has been encouraged to emphasize difference, it is probably more prone to developing ethnic fault-lines than a society that puts more effort into celebrating similarities.

There has been more and more media prominence given to foreign buyers recently. Local politicians such as Peter Ladner are pointing to this group as the cause of our lofty prices. We are concerned that many are going to be getting their wires crossed by associating foreign buyers with the existence of the bubble. There is a very real subsequent risk that many of those who suffer the consequences of the imploding Vancouver RE bubble will mistakenly blame foreign buyers and, by extension, specific ethnic groups, for the whole phenomenon, and for the inevitably devastating outcome.
A wonderful post by vreaa. A derivative danger to capital inflows piled on top of an already frothy market is to find scapegoats for what is primarily a locally-driven problem, as occurred in 1994.

Nonetheless there are signs that foreign capital flows are causing asset price distortions, and not just in Vancouver. As mentioned in a previous post, the Bank of Canada understands that foreign capital investment within Canada must be weighed against the underlying business case. On this front Vancouver seems prime as a case study of ignoring this guideline.

I share with vreaa the concern that some individuals will inevitably look to incorrectly attribute the problems of high prices to actors in abstract -- oft distant groups -- and not to the underlying issue, namely pouring into poorly-yielding investments, whether funded from foreign or local capital sources, the proverbial elephant in the room.

Monday, May 16, 2011

Carney says a four letter word

Vancouver's aspirations to become like New York took a big step up today with a feature article in bloomberg: China Buyers Make Vancouver Pricier Than NYC
Buyers from mainland China are leading a wave of Asian investment in Vancouver real estate as China tries to damp property speculation at home. Good schools, a marine climate and the large, established Asian community as a result of Canada’s liberal immigration policy make Vancouver attractive, said Cathy Gong, who moved from Shanghai to the Shaughnessy neighborhood on Vancouver’s Westside about three years ago.

“The schools here are the best and there are a lot of Chinese people here,” said Gong, whose son is in sixth grade at Shaughnessy Elementary School. Eastern Canada wasn’t an option because “I cannot bear cold weather,” Gong said. Vancouver has the second-largest immigrant Chinese population in Canada after Toronto.
The usual arguments of Vancouver's attractiveness, good schools, temperate climate, large Chinese community, and favourable immigration policies are cited as reasons for the high level of investment in Vancouver real estate. Of course the article fails to mention how, even after the multiple "waves" of Chinese immigrants over the years, the majority of homeowners and homebuyers are still local.

Anyways, the Bloomberg story is fun for discussion but not to be outdone, Bank of Canada Mark Carney gave a speech today on the shifting sands of the global economy. Although drier than Bloomberg, I tend to pay more attention to what Carney says, given the power and influence the Bank possesses over Canada's economy. Of particular interest to Vancouver housing market enthusiasts are the following quotes, first on capital flows (emphasis mine):
While emerging economies are having difficulties absorbing large private flows, advanced economies have often misallocated surges in yield-insensitive gross claims. In Canada, as elsewhere, large capital inflows will require vigilance from public authorities and private financial institutions. Financial history, particularly during times of large power shifts, is rife with examples of booms stoked by dumb money that turn good situations to bad.
And then on inflation risks:
The possibility of greater momentum in household borrowing and spending in Canada represents an upside risk to inflation in Canada. The persistent strength of the Canadian dollar could create even greater headwinds for our economy, putting additional downward pressure on inflation in Canada.
How does these statements segue with the Bloomberg article? Well it's hard to completely understand the context of Carney's statements regarding capital flows. If, for argument's sake, we were to look at the investment in Vancouver real estate in the past 5 years due to immigrants and nationals from Asia, we might start thinking that, on a cumulative basis so as to make it into a tangible and sizeable economic entity, Vancouver real estate might actually be drawing the attention of policy makers. Based on that inference alone it seems like articles like the one from Bloomberg are not going unread in the halls of Ottawa.

As I mentioned in a previous post, it looks unlikely that nation-wide action to further subdue household credit through CMHC policy changes is likely, with much of the country apparently cutting back debt growth. Two regions -- Vancouver and Toronto -- seem to be showing an immunity to debt curbs as prices continue to increase in the face of low yields -- i.e. "dumb money". Though it's wild speculation (as it were), I would not be surprised to see some targeted efforts to reverse price increases in both Vancouver and Toronto, markets that are annoyingly distorting the nation's house price figures.

Saturday, May 14, 2011

Buy vs Rent Pet Peeve

News out of the US is showing prices are falling again but, on a positive inflationary note, rents look poised to rise, meaning the price-rent ratio is looking rather average. The combination of these two factors has caused the blogosphere to dust of the old rent-vs-buy calculators and show that, wonder of wonders, buying might not be such a bad financial move after all, in certain conditions, though there are still some doubters.

According to Ben Rabidoux's analysis of the data, Canada is still a ways off on this front. (Courtesy theeconomicanalyst)

There are a bunch of calculators out there, one of the more famous ones is the New York Times calculator that includes opportunity costs and other fees often glossed over by conventional buy-vs-rent calculators I've seen around. The calculator is well done, showing the number of years until owning will exceed renting from a strict financial perspective. In New York, of course, only around 55% of residents own, so there is some indication the consumer surplus (or ownership premium) is close to zero. As an investor at heart, with no ownership premium to speak of, I would recommend a more numbers-focused approach I outlined here that looks at real estate as an investment without financing costs (i.e. looking at the business case) first, then worrying about the financing later. But anyways.

I'm all for calculators -- I use one bought 20 years ago to do my day job -- but in the case of using one to calculate buy-vs-rent, one of the major pet peeves of mine is ignoring the "low probability high severity" risks in the calculations. Owning an expensive, complex and unique capital asset carries risks that are difficult to quantify on a spreadsheet. I put these low probability high severity risks into two categories: expense risk, and revenue risk.

Expense Risk

Since, for most, investing in property concentrates one's capital into a handful of assets, there is risk of some large un-hedged event occurring. For example water damage, plumbing, or other structural flaws may not be covered under insurance and many tens of thousands of dollars may need to be spent to correct them. These events will be rare but do happen from time to time.

Revenue Risk

Yes, people do get sick, die, lose their jobs, or get divorced. "It" will happen to other people until it doesn't, but we know statistically "it" will. Some of these events can be hedged against through insurance while others cannot. (Ask your spouse about buying divorce insurance if you like sleeping on the couch.) These risks are of course not unique to home owners and they can be mitigated by moving in case the expenses are too onerous. Owners face the challenge of not only moving but also selling, and this could be during a bout of market weakness; that is, the additional risk for owners is not being able to "ride out the dip" if prices fall.

Liquidity Risk

There are also risks with future "liquidity events". Housing market recessions are often accompanied by illiquid marketplaces where houses take significantly longer to sell than in normal times. If the above risks occur and cash is needed, or the house needs to be sold due to relocation or other life events, it may not be possible without selling at a steep discount. 

What can be done

Many of these items, as mentioned, can be hedged through insurance or, in the case of larger operations, diversification of holdings (which is what insurance companies do... normally). Diversification is not practical for a homeowner so he or she must absorb some of these difficult-to-hedge risks. Governments realise this to a degree, which is why they attempt to make housing more affordable for owner-occupiers through various (and often catastrophic) schemes like preferential mortgage rates, tax treatments, et cetera.

So after considering the factors in even the best buy-vs-rent calculators, there are risks that they do not account for. The nature of the risks means they are not meted out evenly and are difficult to quantify; how does one put a number on the probability of prolonged illness? The nature of low probability risks and their inability to be easily quantified means they are often simply ignored, even if they're real and potentially severe. That's a big mistake, in my opinion.

The ignoring of low probability risks is akin to a "reverse lottery". Since few will experience the fallout due to these risks, it will appear that the majority of people will have come out ahead by owning, which is true, but not necessarily in aggregate. If we sum all experiences, including the many "winners" and the few "losers", the buy-vs-rent gap narrows and may even turn negative.

The best method of mitigating low-probability high-severity risks is to demand a discount in home ownership over renting and diversify your investments. This may mean buying less primary residence and more other assets. The online calculators can only provide part of the information required to make a proper financial buy-vs-rent decision and should be used with caution.

Thursday, May 12, 2011

Mr. Flaherty Replies to My Concerns

In January of this year I sent a letter to Jim Flaherty and my MP concerning Canada's debt load. A copy of the letter I sent is below

Hon. Jim Flaherty
Your MP's name here

I am writing you supporting potential changes to mortgage financing rules in the upcoming year. As you are undoubtedly aware, the average Canadian household debt to household income ratio has increased significantly in the past number of years and has now exceeded that of the United States. This was made possible by historically, and unsustainably, low interest rates on mortgages. As has been shown in other OECD countries, there is some evidence to suggest that households are primarily concerned with their short-term financial health -- the ability to service today's debt with low interest rates -- and less concerned with their long-term financial health -- the inability to service service tomorrow's debt with high interest rates. I have not seen any data or arguments to suggest that household debt will start decreasing in the coming year as long as interest rates remain low. My concern is that without further tightening of mortgage financing rules, Canadians will continue to take on debts that are unsustainable in the long-term.

While I am a believer in free markets, the growth in household debt is not sustainable when interest rates rise and I am not confident households will start saving while debt is so "cheap". If measures are not taken sooner rather than later, the resulting overhang of debt will put Canada at a distinct disadvantage relative to its trading partners, whose households have started to rebuild their balance sheets and will be in a much better position to weather the inevitable interest rate rises in the coming years.

Your Name
Your Address

In response, Mr. Flaherty sent me this response via Canada Post:

Dear (redacted):

Thank you for the correspondence of January 6, 2011 regarding Canada's housing market. Please excuse the delay in replying.

The economy remains our Government's top priority. Although Canada is still recovering from the impact of the global economic recession, we have emerged stronger than most other countries. We are helping to support both economic growth and job creation through Canada's Economic Action Plan and through important tax relief for Canadians. Furthermore, we are encouraging responsible home ownership through measures to help first-time home buyers.

Canada's strong housing sector, especially our traditionally prudent mortgage market and responsible lending practices, has also been important to our economic recovery. Unlike the citizens of other countries, such as the United States, Canadians did not face mass foreclosures on their homes, and our banks did not require taxpayer bailouts due to turmoil in the housing market.

A home is a family's most important investment, and a stable and secure housing market keeps our economy strong. That is why our Government continually monitors the housing market, ready to take careful steps to ensure its ongoing stability.

In 2008, and again in 2010, our Government took proactive steps to protect and strengthen the Canadian housing market. In 2008, we announced measures reducing the maximum amortization period for new government-backed mortgages to 35 years, requiring a 5-percent minimum down payment, bringing in new loan documentation standards, and requiring a consistent minimum credit score. In 2010, we introduced additional adjustments requiring buyers to meet a five-year, fixed-rate mortgage standard, lowering the home refinancing amount that financial institutions can offer from 95 percent to 90 percent, and requiring a 20-percent down payment to non-owner-occupied properties purchased for speculation.

Recently, we announced further important and prudent measures to encourage Canadian families to make sound investments in their homes. First, we reduced the maximum mortgage amortization period from 35 years to 30 years for new government-backed insured mortgage (that is, for mortgages with loan-to-value ratios of more than 80 percent). This measure will significantly reduce the total interest paid by Canadian families over the lifetime of their mortgages. It will also allow Canadians to build up equity in their homes more quickly and helps them pay off their mortgages before retirement.

Second, we lowered the maximum amount lenders can provide when refinancing insured mortgages from 90 percent to 85 percent of the value of the property. For example, for a home valued at $300,000, refinancing at 90 percent would allow the homeowner to access up to $270,000 whereas refinancing at 85 percent would provide the homeowner access up to $255,000. The lower refinancing limit means homeowners will keep an additional $15,000 in equity in their homes and limit the repackaging of consumer debt into mortgages guaranteed by taxpayers.

Third, we withdrew government insurance backing on home equity lines of credit (HELOCSs). Taxpayers should not bear any risk associated with such consumer credit products. These risks should be managed by the financial institutions that offer these products.

These measures underline our Government's continued action to protect the stability of the economy by ensuring lenders' practices are sustainable and the investments of Canadian families in their homes are secure. This will decrease the interest payments of Canadian families by tens of thousands of dollars over the life of a mortgage, helping to improve the financial well-being of Canadian households.

Our Government's ongoing monitoring and sound supervisory regime, along with the traditionally prudent approach taken by Canadian financial institutions to mortgage lending, has allowed Canada to maintain a strong and secure housing market.

Thank you for communicating your concerns.

James M. Flaherty

First, I thank the Honourable Minister for his long and detailed response. The views expressed below are my own and not necessarily those of other authors on this blog.

There are many things about Canada's housing market for which the government can take some credit, namely that mortgages are generally more conservative than the filth that was promoted in the United States last decade. It should be stated, however, that the rule changes Mr. Flaherty cites as indication of his government's willingness to reduce debt loads are retrenchment of very rules his government brought in earlier last decade.

The government's "Economic Action Plan" -- "backfilling" spending when private demand was lacking -- was generally a reasonable response given the severity of the economic slowdown that started in late 2007 and continued into 2009. My concern with the implementation of this action plan, which involved heavy lending through CMHC-insured vehicles, is that it involved increasing debt loads on assets that were already showing signs of over-valuation before the recession. Unlike government debts that can be reduced through higher future taxation, consumer debts linger.

I am somewhat disappointed that the government sees "housing market stability" as a primary concern, yet certain regions of the country are, and have been, experiencing rapid house-price appreciation. Stability should not solely mean preventing price drops. The government does have at its disposal the ability to control prices on a region-by-region basis by changing CMHC policies, something it hasn't yet done (to my knowledge) for whatever reasons.

In any case, I am not expecting further changes to CMHC policy for the remainder of 2011, though I leave the door open to certain region-based measures aimed at cooling down credit hot spots more swiftly. There are a few ways by which this goal can be accomplished, including targeted capital flow restrictions, informal MOUs with big banks, and internal CMHC policy directives.

Tuesday, May 10, 2011

Busting the Buyers' Strike

So much for the owner-renter class struggle, according to the Sydney Morning Herald: House buyers' strike a no-go, says GetUp!
The buyers' strike of Australian property sought by a tax reform group last month has proven to be a fizzer, precisely because some people don't like the idea of lower house prices.

Online activist group GetUp! decided not to pursue a strike of home purchases to protest at the lack of affordability in the housing market because its own members did not like the idea.

"While the issue of housing affordability is clearly an issue that resonates with plenty of people, GetUp! members don't support a boycott campaign," wrote Kelsey Cooke, online community co-ordinator for GetUp! late last week.

"Over the course of the last couple of weeks, we surveyed a random segment of our membership to gauge support - only 10 per cent strongly support the campaign, and more than half the surveyed members opposed this campaign altogether."
Canada, and specifically Vancouver, can expect similar introspective strains in the coming years, between the realisation that high housing prices are the root of the problem and the unwillingness to face the personal consequences if prices drop significantly. The housing market is not going to go down without a fight.

Hat tip CanuckDownUnder at

Saturday, May 07, 2011

Something's Happening Here

Last week was the 25th anniversary of Expo 86, the world's fair held in Vancouver in 1986, lasting from May until October. From a housing perspective 1986 is important because it corresponds to the lowest point of real prices since the mid-70s. Since then, for the past 25 years, prices have been rising and average detached houses now stand at close to ten times the nominal price of those heady days of 1986. (Graph courtesy yattermatters)
So just for fun, how many people were around before 1986 who still live in Vancouver? It's an interesting question -- how many people are old enough to remember the carnage of the second-largest bubble in Vancouver's history that occurred in the early 1980s? (Graph courtesy UBC Sauder School of Business.)
So running a few numbers we arrive at the following:
  • There were 3 million people in BC in 1986.
  • 676,000 people died in BC since 1986.
  • Approximately 1 million people out-migrated from BC since 1986.
  • The population of BC now stands at around 4.5 million
We assume that most of the people dying in BC were living in BC in the early '80s, say 80%. We then assume that 50% of the 1 million out-migrants have since returned to, and are currently residing in, BC (and were residents before 1986). From these estimates of the 3 million people who resided in the province in 1986, only about 2 million remain in the province. Therefore, only about 43% of BC's population would have any chance of experiencing the fallout of house prices in the early '80s. Practically it is even less, since many counted in that population weren't old enough to be interested in housing prices in the early '80s anyway.

Given that most people residing in BC would not have remembered Vancouver in 1986, with its bargain-basement housing prices still shivering from the sell-off earlier in the decade, it should not be surprising in the least that the majority of people view BC's, and particularly Vancouver's, real estate as a can't-lose bet. We haven't even begun to include people who rode the early '80s bust but think this time is different.

I have high confidence that most of readers here will not remember Expo 86, not least the younger demographic of people likely to be reading this post. But in the off chance you do remember Expo Ernie, monorails, and what the heck that other platform at Stadium Skytrain Station is for, here's some nostalgia, from simpler times when a house was simply a place to live:

Friday, May 06, 2011

A Tale of Two Vancities

The old adage is that markets are built on disagreement and in financial markets this is most certainly true when leverage is involved. Witness the latest "disagreement" between two mortgage lenders:

Mortgage rates are near all-time lows but for the best deal, move to British Columbia.

The province has Canada's most expensive housing but its residents are getting rockbottom rates thanks to a ferocious battle between B.C.'s credit unions and the banks.

B.C. home prices, Vancouver in particular, have long outpaced the rest of the country. The Canadian Real Estate Association said nationally home prices were up 8.9% in March from a year ago, but take out B.C. and the percentage shrinks to 4.3%.

The credit unions are another factor behind the higher prices in the province -loans from credit unions are as low as 3.64% on a five-year fixed rate closed mortgage. Canadians in other provinces, even hard negotiators, are lucky to get 4.19% from big banks...

But bond yields have dropped 30 basis points since April 11 and the banks have been slow to compensate for the situation, waiting to see if rates go back up. Mr. McLister says the banks raise rates more quickly than they lower them.

"We just have retail deposits and that's what we use for funding," says Norman Krannitz, vice-president of treasury of Coast Capital. "We looked at our deposits rates and they weren't going up so we decided to ride it out. We love the business we are getting."

Wow. Vancity is pulling out all the stops to get market share of BC's piping hot real estate market (well parts of BC's real estate market are hot, others not so much but that's a different story). How, then, does one square this with this announcement?

Home Capital Group made a strong return to uninsured mortgage lending in the first quarter, after scaling back considerably over the last year to avoid excessive losses from risky loans...

[CEO Gerald Soloway] said the company is being cautious when considering loans that will go toward properties in Vancouver or downtown Toronto, because the markets are showing signs of overheating. The company would rather lend in a stable market, than one that is posting swings in either direction.
So here we have two seemingly divergent assessments of Vancouver's housing market. On one hand, Vancity is aggressively offering mortgages, even fixed rate ones, to the mortgage market including those in Vancouver proper (one assumes). At the same time HCG is backing away from markets that they feel are in asset price bubbles. What's going on?

First we should point out that 5 year rates were on their way down -- yet again -- so we should expect a dropping of prime rates in the next month or so from the big 5 banks, barring any significant shift in debt markets. Nonetheless Vancity is financing 5 year rates from its deposits, not exclusively securitizing or duration-matching them as other lenders often do. HCG does something similar to Vancity in part but with a catch, that it is rated as investment grade BBB and not regionally-focused.

So on one side we have publicly-traded HCG with national exposure to mortgage assets and has its debts regularly rated and reviewed, so it seems reasonable there is some outside pressure to look more critically at certain regions of the country to assess default risk: bond analysts would certainly raise their eyebrows from behind those thick glasses if they didn't. Vancity, on the other hand, is primarily financed through BC-based deposits and is member-owned; it has more correlated exposure to mortgage default risk and deposit withdrawals, and by all accounts seems relatively unworried with the state of Vancouver's real estate market. Why would they? Is anyone even asking uncomfortable questions in the boardroom?

Does Vancity have some special insight into aggressively lending into Vancouver's real estate market, one where price-income ratios are among the highest in the English-speaking world, or is HCG raising a big red flag avoiding the "miracle" of Vancouver's housing market? We shall see!

Monday, May 02, 2011

Who to listen to

I don't know. But I do know that Paul Krugman was recently rated as the "top prognosticator" by a recent Hamilton University analytical survey (PDF).
The Hamilton students sampled the predictions of 26 individuals who wrote columns in major print media and who appeared on the three major Sunday news shows – Face the Nation, Meet the Press, and This Week – and evaluated the accuracy of 472 predictions made during the 16-month period. They used a scale of 1 to 5 (1 being “will not happen, 5 being “will absolutely happen”) to rate the accuracy of each, and then divided them into three categories: The Good, The Bad, and The Ugly...

The top prognosticators – led by New York Times columnist Paul Krugman – scored above five points and were labeled “Good,” while those scoring between zero and five were “Bad.” Anyone scoring less than zero (which was possible because prognosticators lost points for inaccurate predictions) were put into “The Ugly” category. Syndicated columnist Cal Thomas came up short and scored the lowest of the 26.
Take the survey for what it's worth, but Krugman recently highlighted the dangers of over-leverage, namely it being a harbinger of subsequent financial problems:
When I wrote the first edition of The Return of Depression Economics, I was reacting in large part to the Asian financial crisis, which I thought could presage similarly difficult crises here in America. Sadly, I was right.

But what made Asia so vulnerable then but not so vulnerable now? Even then, the best available stories ... focused on issues of balance sheets and leverage. And it’s now standard to focus on household leverage as a key part of what went wrong in 2008:
[end quote]
Now if we put this measure beside the equivalent Canadian measure it looks all the more interesting (courtesy

Looking at disposable income isn't quite an apples-apples comparison due to Canada's greater contribution to social services like education and health care. Also the normalization of the scales can add in some debate over the relative peaks. Insofar as the debt-to-disposable-income ratio was brought forward before the GFC by Krugman, a pundit with a proven track record, and comparing the order of magnitude of debts Canadian households are currently carrying, irrespective of some tax policy differences, it should give policymakers some food for thought in the coming year.