CMHC Insurance and Tragedies

There is nothing worse than watching a tragedy in real life, better it be left to the theatre. Nonetheless I couldn't help but notice the site http://www.cmhc-class-action.com in which a person facing personal bankruptcy comes face to face with what a mortgage, and mortgage insurance, actually is:

I started this blog in the hope of hearing from people who are being raked into bankruptcy or poverty by the concealed  tactics of CMHC when a foreclosure takes place. 

I believe that when a contract is entered into, ALL the terms and conditions should be laid out so that both parties know exactly what is being offered and what the risks are. CMHC does not, and has never revealed to would be home buyers exactly what they do in the event of a foreclosure. this is in fact, a withholding of a material fact, a very important material fact that, I believe should void any contract with CMHC.

And it so continues. In a bout of my own moral weakness I decided, in my curmudgeon-like interests of batting a hornet's nest, I might respond. What follows is my response.

It’s a tragedy, perhaps, that you were allowed to make significant financial decisions with what I can only assume is pages upon pages of paperwork and contracts without obtaining better guidance; in most corporate environments a contract for a multi-hundred-thousand-dollar transaction would be scrutinized for days, the terms and conditions fully understood, and lawyers reviewing the contract for days to ensure there are no gaps. This is all done, most of the time, by people seasoned in the industry and understanding the implications of getting a single clause of a contract wrong. Not so with mortgages. 

Perhaps it is a tragedy that, when asked to sign a document that you did not fully understand, you deferred much of the due diligence to a lawyer who has to second-guess your level of knowledge of mortgage contracts. If you hadn’t any experience with them, perhaps spending a few more hours with him would have cleared up some misunderstandings. 

Perhaps it is a tragedy that friends and family did not countenance caution signing a complicated contract without understanding the obligations it places on you should unforeseen events occur. To that I hope they can all do some navel gazing of the sometimes harsh realities Canada, a free market economy, can mete on those who sign things they don’t understand. 

But above all else perhaps it’s a tragedy that it is considered acceptable for us to borrow vast sums of money multiples of our annual incomes without so much a thought for the “what ifs” if things should sour and asking those who have drafted and understand these contracts the difficult questions, like “So what happens if I miss a payment?”. 

This is other people’s money — not yours — and you should expect to be beheld to their prudent management of their assets, which in this case is a fraction of your earnings every month and superior rights on your other assets should you renege on your obligations. 

I hope your experience can be a lesson to others to understand not everyone — not least the government — is after your best interests, and more importantly not all those close to you are capable of offering you the proper and uncomfortable advice you so desperately needed in retrospect. 

jesse on Twitter

I comment on the local Vancouver housing blogosphere as "jesse", and thanks to mohican I post on this blog, and now on Twitter I use the account @YVRHousing. I usually cross-post items I pick up on blogs and newsfeeds on Twitter and reiterate my thoughts on the general state of the housing market, mostly on Vancouver but also, occasionally, on the North American, Asian, European and Australian housing markets, as these markets provide wonderful lessons and parallels to the local Vancouver market worthy of study and consideration.

Disclosure: I have no direct ties to any financial institution (indeed all data used for my analysis is in the public domain), am not remunerated for any of my online forays into housing analysis (as it were), and I am generally bearish on Vancouver housing. My views are my own; please value them for no more than you're paying for them (at least not without some critical thought)!

Please also check out who I follow on Twitter, more than a few great tweeters there who also follow Vancouver housing a bit closer than the average bear!

BC Population Projections and Cohorts

Something to consider is the projected increase in population of BC in the coming decades and what types of housing will be required. Caveats abound, not least from the projectors (BC Stats), nonetheless I have graphed their projections below by age category. I have included the "implied migration minus deaths" in the first graph, it can be seen that migration patterns do not look out of line, and note that over the next 25 years the mode will shift markedly lower due to in-migration of members of the 20-45 year old cohort, then start trending higher again.

For the purposes of housing mix discussion, for discussion only, I have included five cohorts below:

• 20-65 working age
• 35-75 family with child dependents
• 0-20 dependents
• 25-35
• 75+ downsizing

There can be debate about whether these cohorts are appropriate for their designations. I am assuming

• Family with child dependents will be seeking, and remaining in, family style housing from ages 35-75. A contention, perhaps, here is that I have extended this age to 75, if only to question how many households will indeed downsize upon retirement and how many will remain in their houses until required to move. This age could be lowered if it turns out households downsize sooner. It is unclear to me this downsizing will occur en masse as some pundits have claimed so I'll take the other tack for argument's sake. 
• The 25-35 cohort will be primarily childless, or with young children in which smaller accommodations are suitable. This cohort will demand smaller dwellings, either suites or apartments.
• There will be a baseline of families who, due to economic, family size, or lifestyle reasons, choose smaller accommodations than the standard 20th century Canadian pattern. Nonetheless these will be a baseline subset of housing mix and I am assuming there will still be significant traditional demand for dwelling size as before.

Here are the cohorts:

A few observations:

• The working age population as a percentage of total population will decrease but not substantially due primarily to immigration.
• The 35-75 cohort will continue to increase in percentage until 2020 at which point it will plateau and then start to decrease.
• The 25-35 cohort will increase until mid-decade and will decrease as a percentage of total population.
• The 75+ cohort will start increasing faster starting about 2020

These data are missing some pieces to draw any conclusions regarding future housing mix, not least the actual need for family-style housing embedded within the 35-75 cohort (eg not all people in this age range will have children), nonetheless there are some starts on the road to understanding what housing types BC will require over the coming decades, and, perhaps more importantly, what housing types it won't.

March 2012 CMHC Data - Vancouver CMA

Here are mohican/VHB's charts for housing starts, completions, and under construction for Vancouver Census Metropolitan Area (CMA). Note starts include April 2012 preliminary data.

The last few months have seen a continued dearth of completions and an increasing amount of starts and under construction volume. That said, the level of starts in April was nothing significant, only about 1300.  Completions, as expected, are trending upwards, the recent uptick a product of very low completions in March 2011 dropping off the end of the 12-month moving-average filter. As 2012 progresses we should anticipate an eventual increase in completions, though it may not show up until the later months of the year given the high mix of multi-unit construction that tend to have longer build times.

Here is a breakdown of the new persons per bedroom start and completion, assuming 4 bedrooms per detached and 1.6 bedrooms per multi. The higher the number the more population growth there is per start/completion and this would tend to lead to higher unit absorption. In contrast a lower value would mean less absorption. As we can see Vancouver new persons per bedroom-start is trending lower once again.

Below we can see a continued high level of multi-unit construction compared to detached construction.

Greater Vancouver Market Snapshot April 2012

Below are updated sales, inventory and months of inventory graphs for Greater Vancouver to April 2012.

Commentary:

April, as January through March, continued with relative weakness compared to not only 2011 -- which was borderline insane -- but also past years from 2005 (except the residual emerging from the recession of 2008-2009). April sales are the lowest since the early part of the turn of the century.

This April was a weak report; not surprising perhaps, given benchmark prices have been increasing at multiples of the inflation rate since the trough of early 2009. One assumes that higher prices would tend to limit demand. This level of sales, if they continue to be weak, is going to translate into higher months of inventory for the rest of the year (MOI is typically higher in the latter half of the year; an MOI of around 6 normally translates to flat prices) and, likely, concomitant price drops. Prices will likely be year-on-year negative by the end of the summer.

As I mentioned last month, there are some worrying clouds on the horizon: population growth is falling, dwelling completions are set to increase in the latter half of the year, banks are beginning to implement stricter mortgage guidelines, and the home ownership rate is highest in recent memory. On the other hand mortgage rates remain low, near net zero real territory, and it is possible for rates to remain low for a prolonged period (i.e. years). I am nonetheless sceptical low real rates will be a saviour for house prices after looking at examples in other parts of the world throughout history. Indeed Canada is an interesting example of a country whose government is looking to inflict credit controls before free markets do it on their own.

The continued malaise of sales and rising inventory is conducive with slower population growth and high prices. There is no indication that credit has been crimped in any significant way compared to last year, yet. There are strong indications that tighter lending standards are on their way in the quarters ahead; I am speculating the roll-out of these new standards has been delayed compared to what has been advised by government institutions concerned with economic growth in the medium term. I expect credit curtailments to filter their way into the Vancouver area in the fall at the earliest, and almost certainly before the spring of 2013.

Welcome to the new normal.