CMHC minimum changes

There has been a lot of talk about CMHC rule changes to prevent a bubble. The rules should be modified to prevent people from getting in over their heads, regardless of where prices are. It appears that 30 year/10% down is not in the cards, but that does not mean that there aren't some other ways of preventing foreclosures.

1. Ensure the minimum downpayment is from personal savings, not another loan.
2. Raise the credit score required for higher amortization mortgages.
3. Ensure those qualifying on historically low variable rates are able to handle higher payments. I suggested 6% here. For those that don't qualify for 6% then at least limit the term to a 5-year fixed. The choice to go variable should not be done for affordability.
4. Verify incomes with tax statements if self employed individuals want CMHC insurance for high ratio mortgages.

I think the entire discussion being framed around preventing a bubble was a mistake. The goal of the changed rules should not be to cool down the housing market, but to prevent future foreclosures.

Edmonton Sales Down

The REALTORS Association of Edmonton and the Edmonton Real Estate Blog have posted January statistics. Just like in Calgary seasonally adjusted sales are very weak. In fact, while we would normally expect sales to increase 18% in January they fell by 7%.

Despite slower sales new listings are following the same rate as the 2nd half of 2009 seasonally adjusted.


The seasonally adjusted sales/new listing ratio has decreased to 51% (non-adjusted is 40%). A sales to new listing ratio of 50% indicates a market with no price appreciation.


The weaker market is due to sales not increasing with listings last month.

Below are the charts for sales and listings seasonally adjusted.

Calgary January statistics - Weaker sales

Calgary stats for January have been posted by Bob Truman and it is clear they have deteriorated on a seasonally adjusted basis. Normally we could expect a 27% increase from December to January, but instead sales were flat. They have moved closer to a rate equivalent to the six months of the financial crisis labeled scorched earth on the chart below. An explanation of all the benchmarks can be found in this post.

Seasonally adjusted new listings are occurring at a rate very close to the last half of 2009.


The seasonally adjusted sales to new listings ratio currently sits at 51% (non-adjusted is 40%). A 50% ratio leads to a market with stable prices.

The deterioration in the ratio is a result of sales not increasing as they normally do in January.

Seasonally adjusted sales have fallen for 3 consecutive months.


Listings are closely following the same pattern as previous years.


Übernerd alert: All the benchmarks and seasonally adjustment factors were calculated last month and I did not re-calculate them using new data from January.

Who's getting rich off rich dad?

Marketplace has a special on Rich Dad Poor Dad seminars going on in Canada. It shows for a $500 fee the course just exploits people's insecurities about not being wealthy to sign up for more expensive courses of up to $45,000. The instructor pushed his class to raise their credit card limits immediately because they are going to need the "cash" for real estate "investing". Conveniently, as one student points out, they will also be able to charge these courses with the high limits as well. Rich Dad author Robert Kiyosaki was confronted about this and admits he is not happy with Whitney Information Network, the company which licenses his brand. Of course his disgust doesn't change the fact he is still getting rich off them.

Marketplace also followed up with one of the example the instructors used, a trailer court in Saskatchewan that ended up being bogus and also with some unhappy customers.

Watch the video here

I agree with Garth Turner

From Garth Turner's recent post (emphasis mine)

The main point is that real estate here is grossly overvalued and, as I’ve tried to underscore in the last two posts, the folks who don’t understand that are destined to relive the experiences of others. Yes, the market will be lower in a year or two than it is now, but I’m not expecting a 40% decline with foreclosures and abandoned blocks of McMansions. What happened in Vegas will stay in Vegas.

Nonetheless, Canadians will taste the bitter remedy of negative equity which has been forced down the throat of 23 million Americans. Those who bought most recently, at the highest levels, and with extreme leverage, are at greatest risk. The dangers we face have been well articulated here and will logically result in a 15% decline in the national average house price. In Toronto, maybe less. In Calgary and Kelowna, more. In Vancouver, may God be with us.

I think a 15% national decline is likely, especially with the price gains of 2009 considered.

Anyway, I was surprised to see such a mild nationwide correction prediction from Garth. I wonder how some of the blog dogs will react?

CAAMP assumptions

CAAMP put out a report dismissing the risk of low interest borrowers defaulting when rates increase. The goal was to downplay the talk which has modeled recent borrowers as 35-year variable rate risk takers speculating on increasing prices. While this model is inaccurate, there are some fairly extreme assumptions in this report to look at.

First things first - it is way too soon after Bernanke said subprime is contained to title the report `Revisiting the Canadian Mortgage market - Risk is small and contained`. The title is a bearish signal by itself.

After running numbers for current buyers with higher interest rates they conclude:

No harm can be done by reminding Canadians to be prudent in borrowing money. But…

Virtually every Canadian who is in a position to buy a home and qualify for a mortgage is well-educated and capable of assessing what is in their best interests, of looking forward, and of anticipating threats to their financial well-being. The Canadian mortgage lending industry is amply incentivized to avoid making bad loans and to optimize risk exposures. This research on the characteristics of recent mortgage transactions suggests very strongly that current rules and practices are resulting in an acceptable level of mortgage related risks in Canada.

However some of their assumptions to lead to this conclusion are questionable.

Mortgage interest rates are assumed to increase to 5.25% for both fixed rate and adjustable/variable rate mortgages. For mortgages with current rates above 5.25%, the rates are assumed to be unchanged in future.

Fixed rates at 5.25% is a low number to run a stress test against when current rates are around 4%. Of course if interest rates only rise 1.25% the impact on payments in 5 years will be limited. This is not the type of rates commentators are warning about so its not exactly fair to use them to dismiss these risks. From the bank of Canada statistics fixed rate mortgages were 2.05% higher as recently as December 2007 than they were in 2009. These historically low rates are higher than their future rate scenario not to mention 8, 9 or 10% interest rates which also have somewhat recent historical precedent.

Incomes rise by 2.5% per year. This is a conservative assumption, as most of these recent borrowers are early in their careers and can expect raises due to promotions, in addition to cost of living adjustments. Other costs for housing and debt service that are included in the calculation of GDS and TDS increase by 2.5% per year.

Historically incomes have been rising, but I question extrapolating that gain going forward given the current unemployment rate. Even if incomes do rise by that amount it will not happen uniformly across all highly leveraged buyers.

A further factor mitigating risk for these households is that they have varying degrees of equity in their properties. Among the households with adjustable/variable rate mortgages, who may face TDS ratios of 40% or more, about 40% have 10% or more equity in their homes. In the event of future financial difficulty the home equity gives them options to solve their problem, as a last resort by selling their home. That leaves about 6,000 Canadian households with adjustable/variable rate mortgages who have less than 10% equity. Some of these households may face very difficult challenges in the event of significant rises in mortgages rates, but relative to 13.25 million Canadian households, the overall risk is very small.

There are a couple of problems in taking comfort in those with 10% equity. One is the equity is assuming current market prices which have had a significant run up. Even the most mild national "correction" would erase 10% which seems quite optimistic given the situation south of the border has been severe enough to wipe out much more. While I don't think the Canadian situation will be as bad in terms of peak to trough national decline I believe 10% is probable if not optimistic given the gains made in 2009. Next the transaction costs take up a fairly significant portion of those with 10% equity - commission alone could easily take half.

Now I do appreciate them stating the assumption in this report, and there were a couple of points that I believe are important. It re-iterated the fact that most new purchases are taking fixed rate mortgages with less than 35 year amortization. It also accounts for some of the recent increase in disposable income to debt ratio to an increase in home ownership. I think that is an important point, but I believe they are too dismissive of the amounts people are able to borrow from low interest rates and lax CMHC lending.

Home inspection remains a buyer-beware environment

Good article from Vancouver Sun

However, despite a property inspector's report that indicated some minor problems and noted a roof needed to be replaced within five years, Zallen faces spending up to an estimated $40,000 to make major repairs before she can move in.

She purchased the home for $405,000.

...

He added that while the provincial licensing requirement did succeed in pushing inspectors without credentials out of the industry, it did not adequately address a problem he sees with realtors referring clients to certain inspectors.

Hunter said inspectors wind up in a potential conflict of interest if they depend on referrals from realtors for work, or let realtors pay the fees for inspections.

Also see this marketplace video where 5 home inspectors miss the signs of a contaminated former grow op.

Links taken from Vancouver Real Estate Anecdote Archive