Some say that a huge number of listings and a global credit crunch could create buying opportunities.
Politicians prefer to deliver controversial announcements on a Friday afternoon, especially in advance of a long weekend. That’s because the public doesn’t pay as much attention to the news on Saturdays or Sundays. This is especially true over the Thanksgiving weekend, when they’re spending time with their families. And by the time they resume watching newscasts the following Tuesday, the Friday announcement is no longer part of the news cycle.
So it shouldn’t come as a surprise that Finance Minister Jim Flaherty chose Friday, October 10, to announce that the Canadian government was buying up to $25 billion in mortgage pools from Canadian financial institutions. Yes, you read that figure correctly: $25 billion. Given that Canada is roughly one-tenth the size of the United States, on a per capita basis, it was one-third the size of the bailout of the Wall Street firms that caused such a political firestorm south of the border earlier this month. On October 14, the Bush administration announced that the U.S. Treasury Department would be investing up to an additional US$250 billion to buy shares in banks, bringing the total U.S. government contribution to almost a trillion dollars.
Flaherty, however, was able to pull off his $25-billion bailout with barely a whimper in the Canadian media. It didn’t hit the front pages of major newspapers. There was barely a peep from the NDP, which ran on an anticorporate agenda in the recent federal election. In a news release, the Conservative finance minister assured Canadians that this “relief to Canadian homebuyers and consumers”—note that he didn’t describe it as a bailout for the banks—came at no fiscal cost to taxpayers.
“Our mortgage system is sound,” Flaherty said in the news release. “Canadian households have smaller mortgages relative both to the value of their homes and to their disposable incomes than in the U.S.”
The first bailout—oops, rescue—will occur today (October 16) when the federal government buys up to $5 billion in mortgages, the news release stated. The government explained that this follows a decision by the Bank of Canada earlier this month to increase the volume of liquidity in the banking system by $20 billion.
So have Canadian taxpayers bought a bunch of toxic mortgages from the banks? And would a possible credit squeeze free up opportunities for new buyers by forcing developers to lower prices?
Tsur Somerville, a real-estate expert in the UBC Sauder School of Business, doesn’t see this as a big issue because the mortgages are already insured by Canada Mortgage and Housing Corporation, which is a federal Crown corporation.
“The government stands behind CMHC 100 percent,” Somerville explained in a phone interview with the Georgia Straight. “It’s not any increase in the government’s risk exposure. So it’s a remarkably low-risk way to inject a little bit more capital into the banking system.”
He added that cash is treated a little differently than insured mortgages on the banks’ books. “They have ratios that they have to meet in terms of their assets and liabilities and in terms of how much cash they have on hand,” Somerville said. “Think of it as for every dollar that they’re holding as an asset, they can have $10 in loans. What happens is if people withdraw money, then things start getting out of whack. They can’t raise capital or they can’t borrow, and they have to cut back on loans.”
But the fact that the federal government is buying mortgages from the banks suggests that not all is right in the Canadian real-estate market. Helmut Pastrick, chief economist with Central 1 Credit Union, told the Straight in a phone interview that sales have fallen significantly in the Lower Mainland in the past year. As this has occurred, the supply of homes on the market has increased. This is putting downward pressure on prices, which peaked last February, according to Pastrick.
He said that one way to predict the direction of prices is by calculating the ratio of sales to active listings over periods lasting three months or longer. In the past couple of months, this ratio has fallen to 10 percent in the region. He noted that whenever the ratio falls below 15 percent, this is usually associated with declining prices. As a result, he thinks developers will have to “recast their numbers” to reflect different financing costs as well as an average drop in housing prices of six percent since last February in the area covered by the Real Estate Board of Greater Vancouver (REBGV).
“Some may have anticipated this price change,” Pastrick said, quickly adding that he suspects others haven’t. So how far could prices fall? “We’ll probably see a 15-percent decline from top to bottom before we’re done,” he said. “It’s turning out to be somewhat vicious in the short term.”
Sitting in the Lounge of the Jericho Tennis Club, veteran real-estate agent Shyam Hira didn’t appear too troubled by the current state of the market. In an interview with the Straight, Hira recalled getting his start in the industry in 1981, when interest rates climbed to 22 percent. He recalled spending up to six months helping buyers choose which home to purchase. He was based in North Vancouver, but because of the affordability crisis brought on by high interest rates, he sometimes had to take his clients to Coquitlam and Richmond. “This market is better,” Hira said. “Rates are lower even for people with existing financing. Their monthly payments go down.”
Paul Boenisch, a North Vancouver real-estate agent and blogger, told the Straight in a phone interview that everyone in his industry knows that the market is “correcting” because of the higher number of listings and reduced sales volumes. He said that at the end of September, there were approximately 13 months of “inventory” on the market. He compared that with 4.5 months of inventory on the market last September.
In terms of raw numbers, there are now more than 20,000 listings on the market in the area covered by the REBGV, which doesn’t include Surrey and Langley. In the previous three years, there were never more than 14,000 listings, and usually the numbers were closer to 10,000. “I find it pretty straightforward to know when to sell in this market and when to buy in this market by simply looking at the supply and demand, which is looking at how many homes are available for sale and how many sales are occurring,” Boenisch said. “It’s pretty simple.”
His Web site, at nvhomes.ca/, lists daily and weekly statistics. For the week ending October 11, the median price of a single-family home was $709,500, up from the previous four weeks. The median sale price for a condo within the REBGV was $339,450 for the week ending October 11; over the four previous weeks, the highest median price was $367,450 for the week ending September 20.
He said that for vendors, it’s important to price their property correctly if they want to make a sale. “The last thing you want to do is put your home on the market and do small reductions every few weeks, because you could just end up following the market down, especially in a slower time of year,” Boenisch said. “I know other people who are buying now and saying, ”˜Next spring, it will be worth more.’ ”
Somerville said that there are two issues that are having an effect on the local housing sector. He said that a few months ago, prices peaked because the market had reached a peak. “We were overvalued, so even without any credit crisis or anything like that, the market here was due to turn down at some point,” he noted.
He pointed out that the international credit crunch has added another layer of uncertainty. Somerville said it will have an impact on developers who haven’t sold all of their units but who are being told by banks that they must repay their construction loans. But Somerville added that buyers shouldn’t delude themselves into thinking that the Greater Vancouver housing market will suddenly become affordable, because there’s a shortage of land, and a lot of people want to live here. “Depending on how you measure it, I don’t think anything from a five- to 15-percent decline in prices is going to solve the affordability issue,” he said.
In major U.S. markets like Las Vegas and Los Angeles, real-estate prices have fallen almost 30 percent. But there are some key differences between the American and Canadian housing markets. First of all, unlike some U.S. financial institutions, Canadian banks have not engaged in so-called NINJA lending, which is a term used to describe loans to people with no income, no job, and no assets.
Ten months after the Conservatives won the 2006 election, the Canada Mortgage and Housing Corporation began insuring 40-year mortgages with zero-percent down payments. However, this year the federal government reversed this policy, requiring five percent down and a maximum 35-year mortgage to qualify for CMHC insurance.
Scotiabank Group issued a special update on Canadian mortgages last month, pointing out that the subprime market is small in Canada—making up only five to six percent of total mortgages—whereas it peaked at three times that level in the U.S. “So Canada isn’t anywhere near as exposed to the products that caused most of the damage in U.S. housing markets,” Scotiabank stated.
The bank also noted that the U.S. is home to adjustable-rate mortgage resets, which occur much more suddenly than changes in the Canadian variable-rate mortgages, which are their nearest equivalents. “Furthermore, in Canada some variable-rate products adjust the principal, not the payment,” Scotiabank noted. “On balance, the shock effect from payment resets in Canada is nowhere close to what has caused much of the problem in the U.S.”
According to Somerville, Vancouver’s housing market will only stabilize if there is stability in global credit markets. One big risk, he said, is if banks stop lending money to one another, which could prevent business borrowers from making unsecured loans to meet company payrolls. However, the record recovery on Wall Street on Thanksgiving Day—when the Dow Jones Industrial Average rose by 936 points—left some observers thinking the worst of the credit crisis could be over. That was followed by a record 890-point gain in the Toronto Stock Exchange index on October 14, giving comfort to Canadian investors.
Pastrick said that he expects fewer housing starts in B.C. next year, which could address the imbalance between demand and supply. But this might take a few months to work its way through the system.
In the meantime, the region’s roller-coaster real-estate ride may continue. What that means for prices is anyone’s guess.