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Baby, we got a bubble!?
- Thread starter simuls
- Start date
cdr108
Senior Member
attached article in case the link doesn't work ...
Monday, January 10, 2011
Building permits drop on fewer condos, commercial buildings
The value of building permits issued fell for the second straight month in November as contractors planned to build fewer condos in British Columbia and commercial buildings in Ontario.
The value of building permits dropped 11.2% to $5.5 billion, Statistics Canada said. Permits for buildings in the non-residential sector dropped 16.1% to $2.3 billion, while residential permits declined by 7.2% to $3.2 billion, StatsCan said.
Seven provinces recorded a drop in building intentions, led by B.C., Ontario and Newfoundland and Labrador. Quebec saw the biggest gain in permits, it said.
The demand for permits to build condos dropped 22.4%, falling to its lowest level since February 2010.
Intentions to build single-family homes increased by 3.4% to $2.1 billion, after a 9.3% drop in the previous month. Gains were posted in six provinces led by Quebec.
urbandreamer
recession proof
Building permits mean nothing--they lag the market by 2-3 years so infact what we're seeing is the result of the 2008-2009 market dip; BC is obviously at bottom.
simuls
Senior Member
The first thing that jumped out at me for the December numbers was the difference between new and active listings. While new listings are indeed down 22% yoy, active listings are up 9%. This doesn't really come as a surprise considering days on the market have also increased yoy from 27 to 37 (33%increase) in the GTA.
Price depreciation continued to accelerate in central Toronto and the result was quite marked. The median price in the Central District was $390000 vs. Nov. 09's $398000 - a 2.01% drop. So for the first time, we have yoy drop, not only in condos, but in the entire Central district overall. Average price in the entire C1-15 is up a measly .6% yoy. Bad news indeed and again double the drop normally seen at this time of year. Days on the market also increased significantly (because of Dec 09's irrationality) from 24 to 38 an also accelerated increase of 58% - which is huge. Even month over month, going from 31 - 38 is 3 times the average length increase as compared to the last 10 years in Toronto. Properties are also selling for 98% (of a lowered list price) vs. 100%.
In the condo dense sector of C01 (my favourite!) DOM have gone from 24 to 40 (up 70%) or 35 to 40 month over month (250% more than historical averages for these months), median price depreciated further and is now down 3.8% yoy (339750/352700) and average price continues to be down about 1% (389366/392168). I anticipate that these numbers will only get worse until June as we start comparing numbers with last years unusually scorching spring market.
As a fun statistic, vs. the peak in May, in C1-15, median price is now down 11% or double the historical seasonal difference.
I think we're beginning to see a slightly larger snowball rolling downhill.
interested
Senior Member
^^^
Yes Simuls, I for one definately appreciate the in depth analysis. Keep up the good work.
I too am most interested in C01 the core. I think your analysis is bang on. That said, I don't think we are going to see a rush to market in the early part of this year. While I expect inventories will pick up a fair bit, I still think there will be price resistance to seeing big drops. Slow attrition on the other hand as has been happening I think will be the case. More incentives at new Precon sites.
That said, I think we will have to wait until the end of the year before we see bigger price declines that become clearer to the majority of people.
Yes Simuls, I for one definately appreciate the in depth analysis. Keep up the good work.
I too am most interested in C01 the core. I think your analysis is bang on. That said, I don't think we are going to see a rush to market in the early part of this year. While I expect inventories will pick up a fair bit, I still think there will be price resistance to seeing big drops. Slow attrition on the other hand as has been happening I think will be the case. More incentives at new Precon sites.
That said, I think we will have to wait until the end of the year before we see bigger price declines that become clearer to the majority of people.
daveto
Active Member
Nationwide price decreases for our southerly neighbours now exceed the price decreases of the great depression.
http://www.financialpost.com/news/home+price+drops+exceed+Great+Depression+Zillow/4091741/story.html
Whew. Its a good thing that we're different up here and this could never happen to us! (because of our commodoties, asian investors, great banks, and conservative nature).
http://www.financialpost.com/news/home+price+drops+exceed+Great+Depression+Zillow/4091741/story.html
Whew. Its a good thing that we're different up here and this could never happen to us! (because of our commodoties, asian investors, great banks, and conservative nature).
interested
Senior Member
Wow, sobering isn't it.
simuls
Senior Member
I think you're being a bit coy Mr. Interested! How an 11% drop in prices in 7 months can be seen as a small decline is beyond me. It's huge!
interested
Senior Member
^^^
Not being coy Simuls.
I meant though perhaps not saying it clearly that your analysis shows up the decline but I think it will be another 1/2 year or more before it becomes clearer to the "masses" and that the mainstream media starts to pick it up.
In fairness, 11% I assume is the drop from the May peak. I feel we have to be fair with the playing field. Jan to May saw rapid price escalation in 2010. So the fact that it is down from that I don't find particularly worrisome. I have always judged year on year for the whole year and so while the trend is down now, it may be a little unfair to say it is a huge drop from the absolute peak just as it was not reasonable to pick the absolute bottom and say it was up so much. Most of us, and certainly myself for sure, are not smart enough to pick the bottom nor the top. All you wish to do is to ride the wave.
Now if the trend continues as the past 7 months, then next year's figures will likely show a year on year average decline and I think then it will be clearer and more significant.
Not being coy Simuls.
I meant though perhaps not saying it clearly that your analysis shows up the decline but I think it will be another 1/2 year or more before it becomes clearer to the "masses" and that the mainstream media starts to pick it up.
In fairness, 11% I assume is the drop from the May peak. I feel we have to be fair with the playing field. Jan to May saw rapid price escalation in 2010. So the fact that it is down from that I don't find particularly worrisome. I have always judged year on year for the whole year and so while the trend is down now, it may be a little unfair to say it is a huge drop from the absolute peak just as it was not reasonable to pick the absolute bottom and say it was up so much. Most of us, and certainly myself for sure, are not smart enough to pick the bottom nor the top. All you wish to do is to ride the wave.
Now if the trend continues as the past 7 months, then next year's figures will likely show a year on year average decline and I think then it will be clearer and more significant.
CN Tower
Banned
I'm still shocked that the new CMHC rules haven't killed the 50%+ pre-con investor market yet. Could it be a case of the investors only putting min deposits down and hoping to flip before closing and therefore never really having to tap the mortgage mortgage? If soothe consequences are even scarier!
interested
Senior Member
I really can't believe the investors would be thinking that.
I saw Phil Soper being interviewed (President and CEO of Royal Lepage) and he was asked about flipping and he said point blank this was a terrible time to be buying with the intent to flip.
If there are alot of investor/flippers, then you are right, the consequences will be very scary.
Jamie Johnson whom Ka1 and I have often posted who writes a monthly report at remaxcondosplus I think while biased potentially has been quite accurate in forcasting what is happening. What is interesting is that he says the precon market is now almost totally foreign investors, the majority of whom are arriving with "cash", as in expecting to pay 100% and park their money in our "wonderful Canadian economy". Of course, as you have heard me lament before, this is great, but this hot money will go where the return makes the most sense. Now given our relatively stable currency outlook (at least vis a vis the Euro and the USD), maybe it will stay for a while. But that money logically will go where it is both safe and can yield a return. The fear I have is how much of the total market can pickup and leave, even if at something of a loss, thereby creating a big glut of property on the market and subsequent pressure on prices. This to me is the big unknown.
Of course, if he is wrong, and people are still investing to "flip" or alternatively trying to put less than 25% down (and even much less if they can get away with it), then this would only accelerate the problem, especially if this is a substantial amount of the precon market. He states as I posted earlier that the Precon market is now almost exclusively the domain of investors and not end users due to the time delay between purchase and move in date.
I saw Phil Soper being interviewed (President and CEO of Royal Lepage) and he was asked about flipping and he said point blank this was a terrible time to be buying with the intent to flip.
If there are alot of investor/flippers, then you are right, the consequences will be very scary.
Jamie Johnson whom Ka1 and I have often posted who writes a monthly report at remaxcondosplus I think while biased potentially has been quite accurate in forcasting what is happening. What is interesting is that he says the precon market is now almost totally foreign investors, the majority of whom are arriving with "cash", as in expecting to pay 100% and park their money in our "wonderful Canadian economy". Of course, as you have heard me lament before, this is great, but this hot money will go where the return makes the most sense. Now given our relatively stable currency outlook (at least vis a vis the Euro and the USD), maybe it will stay for a while. But that money logically will go where it is both safe and can yield a return. The fear I have is how much of the total market can pickup and leave, even if at something of a loss, thereby creating a big glut of property on the market and subsequent pressure on prices. This to me is the big unknown.
Of course, if he is wrong, and people are still investing to "flip" or alternatively trying to put less than 25% down (and even much less if they can get away with it), then this would only accelerate the problem, especially if this is a substantial amount of the precon market. He states as I posted earlier that the Precon market is now almost exclusively the domain of investors and not end users due to the time delay between purchase and move in date.
EXgeMMy
Active Member
Here's a good one from the financial post today
http://www.financialpost.com/news/Canada+mortgage+hazard/4094821/story.html
Neil Mohindra, Financial Post · Wednesday, Jan. 12, 2011
In a year-end interview, Finance Minister Jim Flaherty noted, "I find it just strange that I get some of the financial institutions telling me to mind my own business on regulatory matters -- and then we have some worries about the level of consumer debt, and the banks are saying the government needs to move in and tighten standards." The minister's remarks followed calls by some bank CEOs for the government to tighten lending standards for residential mortgages, such as a reduction in amortization periods.
The debate over whether lending standards need to be tightened has gained attention over concerns about rising household debt. Mark Carney, the Bank of Canada governor, continues to flag the escalation of household debt as a risk to financial stability if interest rates rise. The International Monetary Fund also weighed in last December, when it flagged stretched household balance sheets as a near-term risk to Canada's financial system.
The question is, why don't banks set their own tighter credit standards? The answer is, because they are protected by government-backed mortgage insurance, which is mandatory for all mortgages with a loan-to-value ratio in excess of 80%. The government backing is provided through either the Crown-owned Canada Mortgage and Housing Corporation (CMHC) or a private mortgage insurer that has been extended a government guarantee. Hence, the conventional incentive for banks to set their own underwriting standards and monitor risk exposure has simply been washed away. Rather than screening mortgage applications for risk, bank staff simply tick the boxes required by government. At most, banks have an indirect interest in assessing credit risk since households with too much mortgage debt may be more at risk of defaulting on other loans such as credit cards.
Nevertheless, the objective of getting banks to be more engaged in setting their own standards for mortgage loans is a good one. Managing credit risk is a core competency of banks, and it makes sense to engage their risk management expertise rather than rely on that of federal bureaucrats to tinker with the rules. Changing the one-size-fits-all federal risk standards is a crude mechanism. There may be credit-worthy borrowers that simply don't fit into a standard set of prescribed rules.
If the Canadian government sees rising household debt levels as a real concern and bank underwriting standards as the solution, the logical course is to exit the business of mortgage insurance and stop guaranteeing residential mortgages with public money. Such a move would protect taxpayers from a business they do not need to be in. Australia has shown that a mortgage finance system can operate successfully without government backing of mortgage insurance or any other form of government guarantee while U.S. experience has shown that even just implicit guarantees can create a giant fiscal black hole for taxpayers. Despite a lack of government guarantees, Australia's mortgage finance system has contributed to high levels of home ownership comparable to the rates both in Canada and the U.S., showing that such guarantees simply are not necessary.
But another benefit is that Canadian banks will have a real incentive to actively manage risk when extending mortgage loans. How would the system work in a world without government guarantees? Even when credit mitigation is used, such as mortgage insurance, banks would still have reason to take more seriously the risk in their mortgage portfolios because they are exposed to counterparty risk, the risk that the provider of credit mitigation defaults. The banks would need to manage this risk and set aside capital against this exposure to satisfy the requirements of Canada's solvency regulator (OSFI), and also market participants such as credit rating agencies. Private mortgage insurers would also influence bank credit underwriting standards through their contractual arrangements with the banks as part of their own risk management practices. OSFI would exercise oversight over all the mortgage insurers including how they manage their insurance risk. Currently, CMHC, the dominant mortgage insurer, is not subject to OSFI oversight.
As long as the government insists on backstopping the risk of high-ratio mortgages with taxpayers' money, banks simply won't have any skin in the game and will react half heartedly at most to calls for them to tighten lending standards to address concerns over rising household debt. Instead, the banks will simply sell as many high-ratio mortgages as they can, knowing that taxpayers will ultimately pay the price if rising household debt creates problems in the future. Ideally, the government should begin exiting the business of insuring mortgages and providing government guarantees. But if unwilling to do so, it should consider other steps that will help ensure banks have some skin in the game when they provide mortgages.
- Neil Mohindra is director of the Centre for Financial Policy Studies at the Fraser Institute.
http://www.financialpost.com/news/Canada+mortgage+hazard/4094821/story.html
Neil Mohindra, Financial Post · Wednesday, Jan. 12, 2011
In a year-end interview, Finance Minister Jim Flaherty noted, "I find it just strange that I get some of the financial institutions telling me to mind my own business on regulatory matters -- and then we have some worries about the level of consumer debt, and the banks are saying the government needs to move in and tighten standards." The minister's remarks followed calls by some bank CEOs for the government to tighten lending standards for residential mortgages, such as a reduction in amortization periods.
The debate over whether lending standards need to be tightened has gained attention over concerns about rising household debt. Mark Carney, the Bank of Canada governor, continues to flag the escalation of household debt as a risk to financial stability if interest rates rise. The International Monetary Fund also weighed in last December, when it flagged stretched household balance sheets as a near-term risk to Canada's financial system.
The question is, why don't banks set their own tighter credit standards? The answer is, because they are protected by government-backed mortgage insurance, which is mandatory for all mortgages with a loan-to-value ratio in excess of 80%. The government backing is provided through either the Crown-owned Canada Mortgage and Housing Corporation (CMHC) or a private mortgage insurer that has been extended a government guarantee. Hence, the conventional incentive for banks to set their own underwriting standards and monitor risk exposure has simply been washed away. Rather than screening mortgage applications for risk, bank staff simply tick the boxes required by government. At most, banks have an indirect interest in assessing credit risk since households with too much mortgage debt may be more at risk of defaulting on other loans such as credit cards.
Nevertheless, the objective of getting banks to be more engaged in setting their own standards for mortgage loans is a good one. Managing credit risk is a core competency of banks, and it makes sense to engage their risk management expertise rather than rely on that of federal bureaucrats to tinker with the rules. Changing the one-size-fits-all federal risk standards is a crude mechanism. There may be credit-worthy borrowers that simply don't fit into a standard set of prescribed rules.
If the Canadian government sees rising household debt levels as a real concern and bank underwriting standards as the solution, the logical course is to exit the business of mortgage insurance and stop guaranteeing residential mortgages with public money. Such a move would protect taxpayers from a business they do not need to be in. Australia has shown that a mortgage finance system can operate successfully without government backing of mortgage insurance or any other form of government guarantee while U.S. experience has shown that even just implicit guarantees can create a giant fiscal black hole for taxpayers. Despite a lack of government guarantees, Australia's mortgage finance system has contributed to high levels of home ownership comparable to the rates both in Canada and the U.S., showing that such guarantees simply are not necessary.
But another benefit is that Canadian banks will have a real incentive to actively manage risk when extending mortgage loans. How would the system work in a world without government guarantees? Even when credit mitigation is used, such as mortgage insurance, banks would still have reason to take more seriously the risk in their mortgage portfolios because they are exposed to counterparty risk, the risk that the provider of credit mitigation defaults. The banks would need to manage this risk and set aside capital against this exposure to satisfy the requirements of Canada's solvency regulator (OSFI), and also market participants such as credit rating agencies. Private mortgage insurers would also influence bank credit underwriting standards through their contractual arrangements with the banks as part of their own risk management practices. OSFI would exercise oversight over all the mortgage insurers including how they manage their insurance risk. Currently, CMHC, the dominant mortgage insurer, is not subject to OSFI oversight.
As long as the government insists on backstopping the risk of high-ratio mortgages with taxpayers' money, banks simply won't have any skin in the game and will react half heartedly at most to calls for them to tighten lending standards to address concerns over rising household debt. Instead, the banks will simply sell as many high-ratio mortgages as they can, knowing that taxpayers will ultimately pay the price if rising household debt creates problems in the future. Ideally, the government should begin exiting the business of insuring mortgages and providing government guarantees. But if unwilling to do so, it should consider other steps that will help ensure banks have some skin in the game when they provide mortgages.
- Neil Mohindra is director of the Centre for Financial Policy Studies at the Fraser Institute.
interested
Senior Member
^^^
Probably sage advise but I suspect it won't happen. At least not at this time. The government would not want to be seen as creating a financial crisis or wearing the issue if house prices take a sudden tumble because we removed the marginal players. I am not saying it should not happen from a policy point of view, I just think politically no one will want to handle or touch this hot potato unless forced to deal with. That said, if we have a measured slow correction, followed by a period of stability, it would be a good time to tackle this for a government. But then they won't again because they will point to the fact that everything"worked out" so don't fix it (until of course we do get a crisis a la US style.)
Probably sage advise but I suspect it won't happen. At least not at this time. The government would not want to be seen as creating a financial crisis or wearing the issue if house prices take a sudden tumble because we removed the marginal players. I am not saying it should not happen from a policy point of view, I just think politically no one will want to handle or touch this hot potato unless forced to deal with. That said, if we have a measured slow correction, followed by a period of stability, it would be a good time to tackle this for a government. But then they won't again because they will point to the fact that everything"worked out" so don't fix it (until of course we do get a crisis a la US style.)
EXgeMMy
Active Member
The part that worries me is that the banks admit there is no risk to them so there is no need for them to screen clients.
cdr108
Senior Member
sounds eerily familiar doesn't it ...
so much for risk adverse Canadian banks when it's back-stopped by tax payers via Federal gov't