First-time-buyer delusion

One of the common reasons we hear in the local media, and echoed by our friends and family, of people who buy for the first time in this market, is "I'm tired of living in a dark, dingy, mouldy basement suite."

I always laugh. "Why not move into a Fairfield/James Bay above ground condo/apartment then?"

It seems that the only way out of the rental trap of overpaying for under-cared-for rental suites is to buy them. It's as if owning that mouldy, dark, dingy place somehow makes it ok?

It makes no sense. The average FTBer in this town is either:

1. Paying Oak Bay waterfront prices for a new condo in Langford on a busy street, or
2. Over-leveraging to get into a "fixer-upper" 3 bed 2 bath SFH with a basement suite (in "move-in" condition no doubt) that hasn't seen a coat of paint or a new roof in 30 years

Victoria has a serious problem. For a city so gorgeous, with so much wealth tied up in real estate, it has a serious lack for quality properties. And I'm not just talking about the ones on the market either.

Drive through Fernwood/Mount Tolmie on a rainy day. Look at peoples yards and roofs, look where the water is collecting and draining back into homes. Drive through James Bay and look at the 50-year-old concrete condo buildings with moss-infected balconies. Take a drive through the neighbourhoods of Mayfair, Cook St, Hillside and Maplewood and see old homes on big pieces of land. Sure, some of them have been looked after, but many, and I mean many, homes sit under-cared for.

Compare those homes to the ones on the market. Scratch the surface of cosmetic clean-up inspired by the selling comments of realtors in the know and you'll find a myriad of home owning headaches never found on a listing brochure.

The Victoria real estate market is like walking into Future Shop to buy an old-school 13 channel tube TV when you could go almost anywhere else and find a 1080p plasma flat screen for less money. Except our Future Shop is volume selling like it's Boxing Day all year. Go figure.

CMHC insured mortgages are sub-prime

Lot's of confusion about sub-prime mortgages in Canada. We hear things like Canada doesn't have sub-prime mortgages; we don't have adjustable rate mortgages either; our banks are solid and prudent and we'll never have a sub-prime problem because Canadians are by their very nature risk adverse and prudent. I call bullsh&t.

Apparently so does the CEO of ING. The problem lies in the narrow definition of sub-prime in Canada. People believe--incorrectly--that sub-prime refers only to poor credit rated borrowers. In fact, sub-prime is a category of mortgage debt that would not be granted to borrowers without either

1. a higher interest rate to price in the risk of the credit worthiness of the borrower, or
2. some form of insurance to protect the lender

In Canada, a conventional mortgage is one that includes a down payment greater than 20 per cent of the purchase price. Every mortgage written on down payments less than 20 per cent are unconventional and, by law, require mortgage insurance, mostly backed by the CMHC, regardless of the credit rating of the borrower. You may have flawless credit, but if you don't have 20 per cent to put down, you're a risky client for the banks (without the CMHC that is).

There is no arguing that CMHC has allowed millions of Canadians to own homes earlier than they otherwise would have. Banks would not take on the risk of these debtors if it weren't for the CMHC. The real estate industry applauds this practice. The scheme is so brilliant it's disgusting. The scheme has created market manipulation on a scale that is economically unmeasurable. In 2009, the CMHC will insure $600 billion in mortgage debt that otherwise wouldn't be written by the banks.

The Canadian taxpayer is now the world's largest holder of sub-prime mortgage debt. All of it Canadian, much of it packaged up as mortgage backed securities and sold to the government.

Here's a quote from the ING guy:

"Canadians have been proud internally that we're very different than the Americans in the way we behave in terms of our spending habits and the way we deal with credit. But over time we have become a lot closer than we think,"

We have no idea how the Canadian sub-prime mortgage market will unravel, or even if it will. We do know the government will intervene to prevent its unraveling. The government faces a massive economic dilemma though: any policy changes will likely lead to downwards price pressure, and that is a very slippery slope that ends in economic calamity.

Breaking: Competition Bureau says CREA fees and commissions are uncompetitive

The Competition Bureau's report hasn't been released on their website yet, but the Toronto Star has picked up this story (we don't expect the TC to ever do so, but I digress).

the bureau has concluded the Canadian Real Estate Association (CREA) has anticompetitive rules and must change its ways

the bureau's findings are expected to have a profound impact on the real estate industry -- by permitting more innovative discount brokers into the market while allowing sellers to list their properties less expensively on the Multiple Listing Service

The Bureau is concerned that CREA's rules have restricted consumer choice and limited the scope of alternative business models

The Bureau's position is that if CREA does not remove these restrictions, the Commissioner of Competition will initiate an application before the Competition Tribunal

CREA decided not to go before the tribunal, which can administer penalties, but is pursuing a settlement agreement with the bureau

This is the gist of it so far: CREA has a monopoly on residential real estate buying and selling and admit that they do (by not elevating this to the Tribunal).

Here's where things get really interesting. This is the list of rules that the Bureau wants changed:

1. Listing realtors must act as the agent of the seller

2. The listing realtor must receive and present all offers to the seller

3. No posting of property information is allowed on the Multiple Listing Service without an agent representing the seller for the term of the contract

Changes to these rules would mean offers could be sent directly to the seller without the involvement of the listing agent, and consumers could probably have their listings posted on the MLS for a small fee

The issue of agency doesn't really interest me as much as the issue of listing fees for MLS does. Good agents will innovate and adapt and continue to make great money. But the effective break on the MLS monopoly (where 90%+ of all homes sold are listed) is a landmark decision and will forever change real estate transactions in Canada should these changes come to pass. This is a very good thing IMHO.

Buying a house is not an investment

Home owners are stupid

Or at least many of them are. Here's proof (H/T to S2 for the link):

Who needs to save for retirement when your home is the new RRSP?

"House prices will not go up forever," says Mr. Tal... "Home valuations can go down," he cautions.

"If planning is done right, it shouldn't be a large part of your retirement..."

"People are buying houses that are larger than they can afford and larger than they need."

Canadians [have] so much wealth invested in their homes that an increasing number are turning to reverse mortgages to fund retirement.

"Our recent research indicates 77% of senior net worth is in home equity, and 17% view their home as their retirement fund,"

84% of seniors don't want to leave their home.

On a $400,000 house, you could probably get a reverse mortgage of $120,000, at an interest rate of 4.9%. You don't have to make payments, but that debt will grow quickly.

Welcome to Canada, where debt is the new savings and spending is the new investment. For F&%$'s sake people, when are you going to learn that wrapping a car loan into your mortgage or spending 65% of your take home income on shelter does not equal the smart financial planning you think it does?

More must reading (H/T to Reid)

Diane Francis tells it like it is

This article merit's no highlights or editing, re-posted in full:

Ottawa has been creating a housing bubble in Canada with taxpayer money, which is why residential real estate prices rise in defiance of high unemployment and recession.

Ottawa's low interest rate policy and Crown agency Canada Mortgage and Housing Corporation's dramatic increase in mortgage backstopping, for people who put only 5% down, have pushed up activity and prices.

Some, such as Post reader and accountant Derek Bruce, worry that the Tories are allowing CMHC to become like Freddie and Fannie south of the border, a rogue financial institution the size of one of our Big Five commercial banks.

In March, CMHC was allowed to insure up to $600-billion in mortgages, up from $450-billion the year before, a CMHC spokesman said yesterday.

"Last year alone, CHMC did 919,780 deals worth a staggering $148-billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to $600-billion, or about double what it was two years ago," wrote author and former MP Garth Turner.

This is a looming problem that flies in the face of Ottawa's smugness about its superior regulatory regime and Canadian banking conservatism. For starters, CMHC is as big as a bank and not regulated.

It's a mortgage slush fund that distorts the market. It allows banks to lend recklessly without consequences and pushes up the price of housing for everyone. It rewards those willing to speculate with leverage and discriminates against those who are prudent. It's unfair because the Canadian banks charge the same mortgage interest rates to those who put only 5% down with CMHC backing as those with skin in the game and large down payments.

Thus Canada's real estate markets are hitting highs in the middle of the worst recession since the Depression.

"Since CMHC is insuring so many mortgages, the banks have no incentive to test the credit-worthiness of home purchasers. Then the mortgages can be neatly packed into MBS securities and have a CMHC 100% Canadian guarantee on the back of the investments, thus insuring end-investors these papers are insured from loss," Bruce wrote.

Some may argue this is simply another stimulus strategy, but this is cancelled out by the fact that it encourages bad and unfair behaviour and banking practices. It also has serious monetary/currency implications because air will eventually have to be let out of the bubble by imposing higher interest rates. This will mean a higher Canadian dollar.

The question is why should taxpayers be involved in this when it shoots them collectively in the foot? Why shouldn't banks have skin in the game? And homebuyers? If not, why shouldn't they share the upside with taxpayers? This amounts to a subsidy to our highly profitable commercial banks, real estate developers and speculators. The greater good would be served if housing prices fell to where a fair and unfettered market dictates, thus squeezing out real estate inflation and creating sound ownership opportunities.

A similar bubble was attacked by Australia, where interest rates jumped to 3.25% (from 0.5%) and damage, as a result of a higher currency value, resulted.

Clearly, CMHC must be reined in and regulated properly.

Yes, this is a bubble. Yes, it's been fueled and guaranteed by Canadian taxpayer's money. Yes, you should be angry. Yes, when the president of the VREB states he sees no downside risk to Victoria real estate prices and sales volumes he is clearly ignoring the facts.

The Daily on Shaw

Tune into The Daily on Shaw beginning at 11pm tTuesday until 4pm Wednesday afternoon for a chance to see real estate reporting including a blogger's viewpoint for the first time in Victoria. Did an interview via Google Talk this morning, hopefully the message gets across. Let me know if you see it and how you think it turns out please.