May 2010 Real Estate Statistics

May 2010 stats are out for Metro Vancouver.

I see some interesting numbers on page 6.

May 2010: 6977 properties listed, 3153 sold (45% sell/list ratio)
May 2009: 4706 properties listed, 3518 sold (75% sell/list ratio)


This means that 48% more properties were listed in the same one-month period compared to last year, yet sales dropped by 12%.

Another way to put this is that in May 2010, for every 1 property listed, 0.45 were sold, but in May 2009, for every 1 property listed, 0.75 were sold.


Inventory is now just below 19,000 and continually trending upwards to surpass 20,000 in July.  The norm in the summertime peak is 12,000 to 13,000 units available.  The last time we saw these inventory counts was 2008 when property values dropped 15% over the summer.  Back then the inventory count at the end of May was a touch below current inventory levels (source: http://paul-northvancouverhomes.blogspot.com/2010/04/big-one-and-parallels.html).

This time, there won't be an interest rate drop and relaxing of CMHC mortgage lending rules to prop real estate back up, like what happened at the end of 2008.

We're seeing a mass rush to the exits by homeowners.  The landslide is just starting, the rocks are starting to fall off the cliff.

But don't worry, the HST will get blamed for the housing crash.  It couldn't possibly be the high prices.

CMHC debt threshold doubled in 2 years to keep housing bubble going

According to this article, the government has doubled the CMHC's debt threshold to $600 billion in 2 years (the latest increase was this March from $450b to $600b).

House sales are up by a third nationally. The average price is ahead 11% on average. Mortgage loans have hit an all-time high – rising an estimated 12% in 2009 alone. Consumer credit has soared 9% during the recession. And we now owe more, per head, than the Yanks. Household debt in Canada is 140% of income. Down south, it’s 132%.

So why do we have a real estate boom, when they are still wallowing in their bust?

Simply because CMHC, a federal government agency, backs all high-risk mortgages with taxpayer dough. By removing all risk from the banks, it lets them lend to people without money and little prospect of paying their loans off. It allows them to give the cheapest, lowest rate to those with the highest default risk. In case that sounds familiar, we used to call them ’subprime.’

In fact, the government encourages this. It obviously wants a housing bubble. It’s doubled CMHC’s debt threshold to $600 billion, just slightly higher than the current national debt – an amount of money which goes 100% into high-ratio loans and which is guaranteed by taxpayers.

And a very good comment about this on a local blog:

No, the CMHC even if it does implode and in a worst case scenario loses about 1/4 of the 600 billion it can currently insure won’t bankrupt the country, we’re 800 billion in debt now, it would just push the debt clock back a decade.

Still, a decade of paying off debt cancelled out by a few years of fiscal mismanagement from a so called “conservative” government is nothing to sneeze at. I could find a better use for 150 billion dollars other than propping up a market that will inevitably collapse and will only cause more damage the longer it goes on. Healthcare, education, daycare subsidies…

It’s beside the point that it won’t kill the Canadian economy, it’s grossly irresponsible behaviour that hurts Canadians for the sake of short term political gain.

Some other good reading material on the subject:

CMHC: Canada's Freddie and Fannie?

In March, CMHC was allowed to insure up to C$600 billion in mortgages, up from C$450 billion the year before, said a CMHC spokesman today. “Last year alone, CHMC did 919,780 deals worth a staggering C$148 billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to C$600 billion, or about double what it was two years ago.”

Why Canada's Housing Bubble Will Burst

What few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world.

Mortgage Rates - up and away

Source: http://americacanada.blogspot.com/2009/07/interest-rates-have-no-ways-to-go-but.html

We are living off an excessive amount of fiscal and monetary stimulus. But none of it is sustainable. In the next couple years, we will have to raise taxes, raise interest rates and cut government spending. Furthermore, the United States, with the international reserve currency will need to resell over $1 trillion in bonds purchased by the treasury. This last action will dramatically increase bond yields. UK who embarked on a more generous quantitative easing plan will need to make the same dump.

Other countries such as ours will need to defend their currency. If the Bank of Canada and Federal Reserve in America lifts interest rates from 0% to 4%, still a very low rate historically speaking, the bank's prime rate will go up to around 6%. As the rate rises, Canadian home prices will most likely plunge and the banks will begin charging a premium over prime (instead of under prime, which right now seems to be the norm). This premium will help compensate the banks for the added risk. As a result, a variable rate mortgage of 7 or 7.5% is quite optimistic. Historically it is a very competitive interest rate. It also assumes that nothing crazy happens with the currency markets (such as a US or UK dollar collapsing – which will happen if the US loses its reserve currency status).

But many Canadians justify that buying now makes sense because of exceptionally low interest rates. So in other words, there is a rush while rates are low. So we are all in agreement that rates will go up. So for all those squeezing into the largest home they can afford on a variable rate mortgage, what can they possibly expect? I thought I'd calculate it out to show the risks that they are taking.

MARRY AND BOB

Let's assume Marry and Bob earn $60,000 and $50,000 respectively. They are approved for $500,000 loan and choose a 35 year, variable rate mortgage. After-tax income is $75,000 or $6,250/mth.

$6,250 / month income
less:
Two Vehicles:
$500 car payment
$200 insurance
$125 car maintenance
$500 gas

Home:
$400 property taxes
$100 house insurance
$300 house maintenance
$200 utilities
$150 internet, cable, phone

Food
$800 groceries
$200 work lunches, snacks and coffee ($100 a piece)



Total deductions:
$3,475

Total left over for mortgage payment, entertainment, debt repayments on loans, CC's and HELOC's, household improvements, disposable consumption, savings and investments.
$2,775

So let's see what happens when the couple signs on for their $500,000 mortgage for 35 years and the associated mortgage payment:

2.5% - $1,787 - "cheap, anyone can afford that, we have about $1,000 left over for everything else.. let's put a new deck in while the reno tax credit is still in effect"

3% - $1,924 - "we can cut back on our lunches and we'll be fine"

4% - $2,213 - "$500 a month extra, where are we going to get that? - we are breaking even despite cutting back on entertainment and lunches"

5% - $2,523 - "we are going to have to max out the cards this month to pay for this"

6% - $2,850 - "home prices are plummeting and we're in negative equity"

7% - $3,194 - "It's been like since like the late 90's since rates were like this!

8% - $3,551 - "Our mortgage has doubled"

9% - $3,920 - we're broke

10% - $4,298 - mortgage payment is now 2.4 times larger than the initial loan.

The point is, whether you are calling for a subtle 1.5% rise in mortgage rates, or 6.5%, the change is quite dramatic. This does not bode well for home prices.

Real estate buying strategy

A post on a local real estate blog about getting the best price on a new home:

If I was a predator I would know that the ‘ blood trail’ is the place to look for an easy feed. The best deals are not going to be found in the ‘mom and pop’ market who will tend to pull thier listings off the market when they don’t ‘get thier price’.

I would go after the specuvestor multi unit holders and especially the small builders. As a real estate school grad mentioned correctly in an earlier string ‘the builders profit is tied up in the last 25% of the project’ although this number isn’t carved in stone it is on the right track. This isn’t just 25% it is actually ALL THIER CASH .

You want to find someone who “HAS” to sell not someone who’ll only sell ‘IF’. i would pay attention to large projects who may suddenly ‘ blow up’ into recievership.

Single family home builders are particularily vulnerable at this point in the cycle. They simply cannot afford to hold on, the COC loan gets pulled every thirty days after the construction phase is completed, this type of builder has the most to lose. This is where the knives are going cut the deepest. I don’t think we’re at that stage yet. I would look for a small project.

Bottomline, as a hunter you must be very patient, the game is still afoot. I would look at every project and start to inventory, without any offers tendered. Research is power.

Last time I bought an investment property I waited for everything to be in my favour. I walked away from dozens and dozens of ‘deals’. I waited to find a true forced sale which turned out to be a marital breakdown and the occupier being transferred suddenly out of Province and they needed to sell immediatly ( that week). I offered all cash, no subjects and quick ( same week ) completion. I got a HUGE discount. I paid far less than other offers because I could make it happen , no subjects.

I waited for that deal to come along for at least four months and that was in a good market. I made money the day I signed that deal, thats the way it should be. I would have waited six months I don’t care about time.

The low ball offer is not an art it is a tool. If you don’t get the deal so what, walk away and keep looking, theres a deal a minute in real estate.

Baron Rothschild said ” Only buy when theres blood in the streets”, we are not quite at that stage yet, but it’s like a big wave coming into view. For now, sit back on your cash and good credit and wait until desperate sellers are begging you to buy. Be predatory, stay alert and don’t fall for some of the slick spin the developers and governments are puking up. They are desperate , you are not.

Realty Plunge-o-Meter

A very informative site.

http://www.canadian-housing-price-charts.235.ca