Wednesday, April 28, 2010

NBR | Behavioral Finance Basics | Your Mind and Your Money |

Yes, it is true. Our brains aren't always purely rational.

For example, paying more than the equivalent cost of rent to purchase a primary residence.

Or perhaps buying an 'investment' property that has a capital yield of a government bond, with a risk profile like a stock and the potential to bankrupt the owner because of the leverage involved.

Wednesday, April 21, 2010

House Price Comparisons

Just sayin'...

Over at is a constant stream of listings and sales data from commenters for the Greater Vancouver area. The listings growth is robust, as is the level of sales. We are on track to bust records for April listings and sales in recent memory. What will happen to prices, specifically the benchmark and house price index?

According to mohican's months of inventory to price change correlation analysis, the benchmark price will not start substantially falling until sales slow or active listings continue to increase at breakneck speed. Below is the half-over-half prices changes and 3 month moving average of months of inventory (i.e. active listings at month-end divided by sales from the month) on a time and scatter plot. (I extrapolated expected April MOI on the time plot.) This series provides the best correlation of the data. I've also included the scatter plot on semilog which allows the low MOI data to be better resolved.

Although not immediately obvious from the graphs, assuming the rate of sales does slow, a meaningful price drop from current levels is unlikely to materialize until sometime in the summer. If sales remain robust it is unlikely prices will drop unless active listings significantly increase. It's worth asking who is selling, or trying to sell. That listings are increasing fast may be a harbinger for lower sales going forward.

Given there appears to be an integral component to listings growth, it is unlikely listings growth will slow until sometime in the summer. Hat tip to PaulB for the hourly numbers. This one's for you and the inventory junkies. Subliminal message at 1:05.

Monday, April 19, 2010

You are here--updated

I have seen a few requests for an update to the 'you are here' graph. Well, here it is. Data are from Royal Lepage here.

Here are all the caveats. All prices are adjusted for inflation, using Q1 2010 prices. The graph looks pretty much the same with a log scale or if you put the y-axis to zero. This is for Vancouver West condos--not because they are representative of the broader market but because this is ground zero for the bubble.

How far down to you expect this to go? How long? Why?

Saturday, April 17, 2010

Canada's brewing debt storm - - Globe and Mail

For every $1 of disposable income, Canadians owe a record $1.47. How did it come to this?

By Paul Waldie and Steve Ladurantaye

Canadian borrowers are fast approaching a day of reckoning.

Lured by cheap money to buy up, buy in, expand and make over, families have pushed credit levels to a record high.

Now, mortgage rates are beginning to creep up and the Bank of Canada is poised to retreat from the record-low interest rates it adopted to fight the recession and spur recovery.

The end of the free-money era has left consumers more vulnerable than ever, and those who threw caution to the wind could soon face costs they can't handle.

Household debt has surged three time faster than income in recent years and now stands at a record high of more than $1-trillion. Put another way, Canadians owe about $1.47 for every dollar of disposable income. Even more remarkably, they took on more debt during the slump - a first for a recession - because borrowing was so cheap.

With debt levels this high, even a small hike in interest rates will be ugly for those whose incomes aren't rising fast enough to meet their day-to-day expenses.Their woes could have a snowball effect: As debt-strapped consumers pull back, their credit woes spill over into the broader economy and risk putting a damper on the recovery.

For some, the trouble has already begun. John Silver, who runs Community Financial Counselling Services in Winnipeg, has seen his caseload increase 20 per cent from last year. "We re seeing more people coming in with more stress with regard to their debt," he said.

Much of the recent rise in debt in Canada has been due to low interest rates, generally easier credit terms and fierce competition among lenders. Even when the recession hit in late 2008, Canadians remained far more confident than Americans in part because of a better housing market and stronger financial institutions. Consumer confidence in Canada is only about 20 per cent below where it was in 2007 whereas it's 60 per cent lower in the U.S.

The higher confidence level and stronger banks meant Canadians were far more eager to borrow during the recession than Americans, said Benjamin Tal, senior economist at CIBC World Markets."I can offer you a very low mortgage in the United States and you won't take it," he said. "In Canada you jump on it, because confidence is high."

Now though, "what I'm seeing is a consumer that is more sensitive to higher interest rates," he added.

Most of the increased debt, roughly 70 per cent, has been in mortgages, reflecting the still hot housing market in much of the country. That has left many households struggling to meet monthly payments on hefty mortgages and more susceptible to rising rates. Families in Vancouver, for example, spend about 68 per cent of their disposable income on the cost of maintaining their house, compared to less than 40 per cent 10 years ago.

"There's been a real frenzy just to get in [to a house] at all cost, because if you don't get in you may never get in," said Scott Hanah chief executive of the Credit Counselling Society, a non-profit group based in Vancouver that helps people sort out their debts.His organization is fielding about 4,000 calls a month and has seen a 10-per-cent increase this year in the number of people seeking help."Last year we saw an increase in activity of over 50 per cent. So to have a further 10 per cent increase on top of that is significant," he added.

There are many people in the same position as James Laidlaw and his young family, who borrowed to build onto their Toronto home, adding construction costs on to a mortgage to help finance $250,000 in renovations and an expansion of 600 square feet.

Even a jump in mortgage rates of just half a percentage point will mean an extra $1,700 a year for Mr. Laidlaw, his wife and two children."Every dollar counts and I'm already thinking about the other things that may suffer," he said. "Maybe we'll have to lose the vacation, or scale back Christmas.

"Canadians used to be big savers and cautious borrowers. In 1982, Canadians socked away 20 per cent of their disposable income and per capita debt stood at about $5,500, according to Statistics Canada. By contrast, Americans were saving just 7.5 per cent of their disposable income at that time and borrowed $6,500 per capita.

Savings and borrowing soon went in opposite directions in both countries and by 2002 debt levels surpassed disposable income for the first time. In 2005, the savings rate in Canada fell to 1.2 per cent, about the same as in the U.S. Meanwhile, per capital borrowing jumped to $28,390 in Canada and $48,700 in the U.S.Consumers are feeling the pinch. A survey last year by the Certified General Accountants Association of Canada showed 21 per cent of respondents could barely meet the interest payments on their loans. The group is about to release a similar survey this year and, said the group's chief executive Anthony Ariganello, the level of those struggling to cope has climbed to about 23 per cent.

"We may be back into a recession [next year] because, remember, part of what has helped us get out of this recession was spending and consumer spending at that, and if people don't have money to spend we could be rapidly back in to where we started," he added.And while consumer spending and confidence have increased recently, both may be short lived, said CIBC's Mr. Tal.

"There is a gap between confidence and ability," he said. "It's a gap between what's in your head and what's in your pocket. And this gap is, of course, a matter of concern because consumer confidence is high due to the fact that interest rates have been extremely low and people are able to finance those mortgages and those loans.

"In a recent report, Mr. Tal concluded that "Canadian consumer fundamentals are weaker than they have been in almost 15 years."That's something that concerns officials at the Bank of Canada. If consumers run into trouble with their mortgage payments, that in turn can lead to "wider problems with other consumer loans, such as credit card debt," David Wolf, a Bank of Canada economist, said in a speech in January. "Consumers may also have to curtail other spending to cope with their debt burdens, creating adverse spillovers to the real economy.

"Michael Hammond has already scaled back his plans. The Ottawa resident has a pre-approved mortgage of $220,000 and has been looking for a house. He nearly bought a $214,000 townhouse last week, but backed off because he's still considering the effect of eventual higher rates."I am mulling over mortgage scenarios in my head like crazy right now," he says. "It's a scary time to be looking for a house. I'm looking at three cheaper homes today because I am so worried about overextending myself and getting caught five years from now.

"Neil Bigelow and his partner Tina Boudreau are also running over financial calculations as they prepare to buy their first home. The couple has been planning to buy a piece of land in Halifax and build their own home. But the prospect of rising rates has them worried about how much to borrow.

"Right now I could probably get $200,000 mortgage," said Mr. Bigelow. "But what's going to happen down the road because interest rates are not going to stay where they are at."

By the numbers
68%: Average amount of disposable income households in Vancouver spend on the cost of a home
44%: Average in Toronto
35%: Average in Calgary
36%: Average in Montreal
30%: Average in Ottawa
21%: Percentage of Canadians who say they can't manage their debt load
147%: Debt-to-income ratio in Canada, a record high
157%: Debt-to-income ratio in the United States
70%: Percentage of debt held in mortgages in Canada

Certified General Accountants Association of Canada, CIBC Economics, National Bank economics and Statistics Canada

Wednesday, April 14, 2010

RBC, Scotiabank lift benchmark mortgage rate to 6.1%


Many homeowners face increased costs as interest rates have begun what is expected to be a series of hikes.Photograph by: Archive, Calgary HeraldRoyal Bank of Canada and Bank of Nova Scotia have hiked residential mortgage rates for the second time in as many months, likely sparking another round of increases from other banks at the onset of what is expected to be one of the busiest homebuying seasons in recent years.

As of today, RBC and Scotiabank's five-year closed fixed-rate home loans will carry an interest rate of 6.1 per cent, the highest since November. Those same mortgage products carried a rate of 5.25 per cent a little more than two weeks ago.The 25-basis-point hike, announced by RBC and Scotiabank on Tuesday, comes fast on the heels of a 65-basis-point hike by the big banks late last month. It also comes as expectations rise the Bank of Canada will raise its key interest rate earlier than previously thought.Eric Lascelles, chief economics and rates strategist at Toronto-Dominion Bank's TD Securities unit, said investors are now factoring in a 50 per cent probability that central bank governor Mark Carney will raise interest rates on June 1. Carney has pledged to keep the central bank's benchmark rate unchanged through June, "conditional" on the outlook for inflation.The first round of mortgage rate hikes kicked off on March 29, as RBC, TD and Laurentian Bank announced the cost of their mortgage offerings would rise between 40 and 60 basis points.

RBC was the first to announce on that day as well.A day later, Scotiabank, Canadian Imperial Bank of Commerce and National Bank of Canada did the same.The banks say they are raising their rates because their own cost of funding is going up as investors demand higher yields.Canada's real estate market has been booming since the economy emerged from recession last year as consumers take advantage of some of the most favourable mortgage rates in decades.

Homebuyers are facing hurdles on other fronts as well, with more stringent mortgage lending rules set to take effect on April 19 and the looming introduction of the harmonized sales tax in Ontario and British Columbia.Many homebuyers are expected to try to rush to make their purchases ahead of the changes to keep their costs down.

"Mortgages are tied to the bank's funding costs, which change from day to day," said Gillian McArdle, a spokeswoman for RBC."Our long-term funding costs have gone up considerably since mid-December and it is now necessary for us to increase . . . fixed-rate mortgages."

© Copyright (c) The Calgary Herald

Thursday, April 08, 2010

Royal LePage warns of real estate 'irrationality'

Prices up more than 10% across Canada in 1st quarter: survey

Last Updated: Thursday, April 8, 2010 9:25 AM ET Comments109Recommend72

The Canadian Press

There are signs that some of Canada's major house markets have become overheated, although most other markets have shown a more healthy rate of moderate growth, according to a national real-estate sales organization.Across Canada, the price of a standard two-storey home rose 10.3 per cent, to about $365,000 during the first quarter of 2010, Royal LePage said Thursday.

Prices for all key housing types were up more than 10 per cent across Canada in the first quarter on a national basis, according to the Royal LePage survey released Thursday.
But Vancouver and Toronto prices rose much more dramatically — about 20 per cent in some cases — and the head of Royal LePage Real Estate Services suggested they may have risen too far in those local markets.

"House sale data from the past two-year period shows tremendous variances in terms of how different cities reacted to the recession," said Phil Soper, president and chief executive, Royal LePage Real Estate Service. "In Vancouver and Toronto, for instance, the dramatic unit sales fluctuations exhibit a significant degree of market irrationality: inordinately fearful when faced with poorer markets; and overly enthusiastic when the tables turned."

The Royal LePage survey found the average price of detached bungalows in Toronto climbed to $459,107 in the first quarter, up 13.3 per cent from a year ago. Standard two-storey homes in Toronto were up 13.2 per cent, rising to $562,150 while condo prices rose a more moderate 10 per cent to $317,579.

In the Vancouver area, detached bungalows climbed an eye-popping 21.8 per cent to $906,045 while two-storey homes were up 19.2 per cent to $987,500 and standard condos were up 15.7 per cent from early 2009, rising to $470,000.

In contrast, Soper described Montreal as "an example of a city where the market has been much more stable and homeowners there seem quite happy with the relatively slow pace of change."
The average price of a bungalow in Montreal climbed by 7.2 per cent to $249,172, the price of a standard two-storey house increased by 7.6 per cent year over year to reach $355,109, while the average price of a condominium increased by 7.6 per cent, to $222,244, Royal LePage said.

The survey found that on a national basis, the average price of a detached bungalow in Canada rose to just over $329,000 in the first three months of this year — up 11 per cent from the first quarter of 2009. Standard two-storey homes rose 10.3 per cent, to about $365,000, while condominium units increased by 10.9 per cent to just under $229,000.

Avg. two-storey house price
Canada - $365,000
Vancouver - $987,500
Toronto - $562,150
Montreal - $355,109

© The Canadian Press, 2010
Read more:

Tuesday, April 06, 2010

From the Globe and Mail

Boyd Erman

Pity the publicans, restaurateurs, haberdashers and booksellers, for they are the victims of Canada's increasingly house-poor economy.

The stories are all too common. There's the couple down the street who haven't dined out in years and the kids wearing hand-me-downs, all to make the mortgage payment and cover the interest on the line ofcredit that paid for their home's renovation.

The tales are not apocryphal. The shifting spending patterns are clearly evident in retail sales data.

Canadians are funnelling more disposable income to homes at the expense of most anything that isn't housing related. The government is aiding and abetting this with policies designed to support housing, such as tax credits for renovations and mortgages backed by the Canada Mortgage and Housing Corp.

These policies are often pitched as fuel for an engine of economic growth, one that has the side benefit of providing shelter for Canadians. They get votes, and they work, if the result is measured simply by rising home prices and housing-related spending.

Once most people have adequate housing, as they do in Canada, does it make sense to continue to focus policies on the sector to drive growth by providing what amounts to more luxury in our homes?

But at what cost? A different way to view housing-promotion policies is as stimulus for a growing black hole that sucks light and oxygen from other areas of the economy. Those that don't sell appliances, tools, or something else Canadians can use to make their homes look more like those on HGTV, are losing out.

This is more than a personal finance issue or a monetary policy question about bubbles, it is philosophical.

Once most people have adequate housing, as they do in Canada, does it make sense to continue to focus policies on the sector to drive growth by providing what amounts to more luxury in our homes?

Does housing deserve such emphasis if the effect is to encourage Canada's economy to become more dependant on the home sector, and by extension, on the banks that finance those homes? Is it prudent to encourage the average household to tie so much of its assets up in the house, leaving little for fun or saving?

The biggest policy tool is the CMHC. Through it, the government uses its triple-A credit rating to hold down interest rates for less creditworthy people who want to take out really big mortgages with low down payments. That appears to make homes more affordable but in fact leads to bigger interest charges over the years, leaving less cash for RRSP contributions or university tuition, or just a stress-relieving night on the town.

The theory is we feel richer, so we spend more, supporting the rest of the economy. Except the figures show the rest of the economy isn't getting as much benefit, and besides, there's a good argument that such thinking doesn't make much sense for a house.

Another such tool is the home renovation tax credit, last year's attempt to restart the economy by goosing housing. Yet it's questionable whether housing-related spending needed any help.

Canadian retail sales rose 23 per cent from 2004 to 2008, while most sales related to furnishing and fixing houses have jumped at a much faster pace. Indoor furniture and home furnishings rose 26 per cent, appliances 31 per cent, and hardware and renovation goods 28 per cent, according to the latest detailed figures on Statistics Canada's website. At the same time, sales of clothing, books, sporting goods, drinks at bars and restaurant meals increased at a slower pace than overall spending.

For those Canadians with floating-rate mortgages, that spending skew is going to get more pronounced as interest rates climb.

Getting away from house-first economic thinking also means taking a skeptical look at the idea that the co-called wealth effect from rising housing prices is a significant benefit to the economy at large.

The theory is we feel richer, so we spend more, supporting the rest of the economy. Except the figures show the rest of the economy isn't getting as much benefit, and besides, there's a good argument that such thinking doesn't make much sense for a house.

The result of this so-called wealth created by a more valuable house is often, paradoxically, less disposable income.

As a home's value goes up, taxes generally do too. What's more, short of selling the place and getting out of the housing market altogether, it's tough to get at that so-called wealth to fuel spending.

The main method is refinancing, which the CMHC makes easy. Realtors may argue that taking out home equity to redo the kitchen is a good investment in higher resale value, but the reality is there are upfront costs in the form of interest payments.

The result of Canada's obsession with spending the value in our homes may be less a wealth effect than a variation on the Diderot effect.

That's the unfortunate affliction named for French philosopher Denis Diderot after he found himself caught in a vortex of spending he couldn't afford. His misery was sparked by a beautiful new dressing gown that was so fine, he wrote, that it made everything else in his home look dowdy. So out went his household goods, to be replaced by expensive new stuff.

Such spending leads only to "nothing left in the family strongbox" for things such as education. "The same fatal taste for luxury has ruined great nations," he warned back in 1769.

Substitute granite countertops for a fancy robe, and his words feel awfully apt today.