Monday, March 29, 2010

Could the CHMC bankrupt us?

There is some good analysis coming out of the net warning of the liabilities that we will all face should this long-awaited correction happen and leave CHMC's large dangling liabilities covered by fairly skimpy assets.

There are a few interesting facts I have been able to glean from the net:

The CHMC liabilities are probably not far shy of $500 Billion or about 40% of the total GDP of Canada.

This come from this excellent report which I would encourage everyone to read. At least read page 21-27 on the CHMC. You can find it on this site- about half way down, March 22nd,
Canadian Housing Bubble Trouble looms.

(hat-tip to Hosuing Analysis)

The CHMC is insuring 90% of all insured (and therefore high risk) mortgages. Why are we in the business of insuring mortgages again? Could someone remind me.

Our total debt is $700 Billion:

So as you can see it wouldn't take much of a correction for the feds to have to step in and soak it up for the CHMC losses.

Meanhwile Mish has some comparisons between near-bankrupt California and solvent Ontario which makes the fomer look better!

As for our banks, no wonder they are doing so well, when the CHMC is underwiting the risk. this is from the NYT no less!:

This is not a bash-Canada post. I am a patriot, that's why I want strong accountable insitutions, sustainability and common sense.

We have already seen the US shoot themselves in the head, by allowing Freddie and Fannie to pile on the debt and liability and then transfer that to the tax-payer. Meanwhile the executives and all the bank CEOs all got huge bonuses
like they were all doing a good job- did anyone pay them back?

Why are we doing the same thing? Didn't we learn anything? The problem is transferring private debt and liability to the public sector, when the profits were all enjoyed by the private sector. That isn't capitalism or even socialism, it is just bad public policy.

Saturday, March 27, 2010

Where are we now?

Actually, we are at a very unusual spot.

We have by all accounts, rather panicky and anxious action from buyers; multiple bids, back up offers etc. all leading to (mostly) higher prices in Vancouver. So you would logically think that we have the same very hot parameters.

That would be low MOI and low inventory and high sales.

However that is not the case!

Our total listings are running above 2008's numbers and our MOI are 4-5. Not bearish by any means but not in the psychotically low levels we saw in 2007.

So the price action is hard to explain. Why would buyers be in such a panic when the inventory is rising? I don't have any explanation for it, but here are some ideas (some serious and some not):

1) The HST fear is driving them to buy
2) They are worried about having to put that extra 5% down when mortgage rules change
3) They think the BoC, having been completely irresponsible for the last few years, will suddenly find religion and increase rates to where they should be (2%-3%)
4) They think Mark Carney will borrow Ben Bernanke's helicopter and take it for a money-dropping ride around the country.
5) They think we are on the threshold of another big boom which will lead to higher wages and bridge that affordability gap.
6) The country is about to split up and there will be a long caravan of anglophones leaving Quebec for the west coast.
7) Alberta will make an unsolicited offer to buy BC, in return for paying off our Olympic debts.
8) they are selling their stock options in Gold and Potash companies to buy property.

I have trouble thinking of many other reasons why everyone is diving in head first, except herd action drives the herd. Ie the more people that panic, the more the rest panics- like the stock market. People rarely buy when it is dropping, but sell along with everyone else.


BTW- I encourage you to read this article. It is about life in the Shangri-la and sounds like the Titanic has been reproduced in Vancouver. Here's a great quote:

“I had a wealthy corporate citizen in Vancouver who wouldn’t buy in the Shangri-La because it didn’t have separate elevators for the staff,” says Mr. Rennie, who was shocked."

I agree. What an absolute affront to have to ride the elevator with the peasants who clean up after you. I hope that he found somewhere else, where he felt comfortable in our fair city. We need more discerning people like that in Vancouver - A$$-HOLE.

Saturday, March 20, 2010

Real Estate Ville

Every City has it's moniker. Vegas is Sin City, Toronto is Hog Town, Detroit is Motor City..what is our alter ego?

We are definitely RE City. How do I come by that?

Firstly as an industry RE is probably the biggest employer in this City. Realtors, Mortgage brokers (independent and bank), Appraisers, residential construction workers, renovators, sub-contractors, RE papers, Notaries, RE Lawyers ...add it all up and I think it beats every other industry hands down. And this is one of the main reasons why this bubble has got to be kept inflated at all costs..future be damned.

In fact I would go so far as to say one of our major exports is Real Estate too. How so? Take a walk past the fancy buildings in Coal Harbour one evening at 9pm, and you will see that only 20% of the lights are on. What's happening in the other 80%. Maybe they spent so much on the apartment that they are trying to save money by living in the dark.

However the truth is, they are absentee owners. I was told that one building was marketed in Hong Kong before it was even marketed here. Most of the units were sold, and several years after opening, many owners still haven't come to look at their units, but have an agent here to take care of it. In fact very country in the world is represented; South Africa, Australia, the Middle East and of course plenty of US owners.

This is the natural result of becoming a desirable city with strong property laws in a safe country. It happened in London and New York and Toronto. Lots of absentee owners. It hasn't happened in Winnipeg yet, or Des Moines.

It is the same as Canucks owning property in Palm Desert, the only difference is Palm Desert is sorrounded by, well endless desert, which can be watered and planted with grass and voila- another golf course to build homes around- and we aren't.

I recently looked at a Townhouse for rent. The agent told me he had investors from Toronto and the Far East who owned several town-houses and apartments EACH, all bought with cash. Unless things get really bad, these don't sound to me like they would be the desperate-sellers-of-the-future.

Not only is RE the big cheese here, it is almost the whole cheese. Now that Natural gas has taken such a tumble, the government needs a robust RE market for revenues. Each transaction generates many thousands in direct and indirect taxes and economic activity.

Everyone talks about it. How many dinner parties have I been to where half the discussion is about RE. It is quite bizarre. No one talks about RE in California anymore, or so I am told. But for us, it is all consuming.

I see David Dodge is extolling Canadians to save more and borrow less, or face the dire consequences. Eh, and do what with it? Put it in the bank and get 0.25%?? Put it in the stock-market which goes up 50% one year and down 60% the next? Or leave it under the mattress and wait for the government to devalue money even more??

If you want people to save more and borrow less...INCREASE THE INTEREST RATES. I would have thought that was obvious.


Ok folks we are heading into the last 10 days of March. the market is starting to wobble a bit. This could be the start of the down-slope. I would not expect another Hail Mary drop like we had in 2008, but a more gradual decline which will exasperate bears and bulls alike.

And that is only a maybe. It depends on what happens with interest rates, with the stock-market and commodities, with the Chinese economy, and with unemployment.

However with the current confluence of factors:

Tighter Mortgage Rules
Post Olympic Fizzle
Lowest ever interest rates
Provincial Government cutting jobs and more to come
Terrible Affordability

If we don't get a down-turn, then we will have to wait for the asteroid in 2012.

Monday, March 15, 2010

Why are analysts so often wrong?

Ok I could start this post with a cheap play on the word anal-yst, but I won't. How many RE analysts forecast the sudden drop in demand and the free-fall in RE that took place late 2008? None. They mostly called for slowly rising prices.

What about the huge rebound since 2009?

Nope. Most called for a gradual stabilization or slowly rising prices again.

None of them called it. Why? Because there are sooo many variables, some of which we can guess at, most of which we cannot.

Larry Yatter has pulled a quote from Cameron Muir, the BCREA Economist, which is below.

“As we settle in to a post recession economic environment and bask in the benefits from our Olympic legacies, take comfort in knowing that during the worst financial crisis since the Great Depression, the Vancouver housing market suffered only a few bumps and bruises, and the healing process is now complete.”

I have nothing against Cameron, in fact we would probably have a good talk about economics over a beer. However I cannot see how anyone can make any predictions, when so many unknowns exist out there.

It is lucky that analysts aren't held to their predictions, unlike..say bridge engineers or aeroplane designers.

Lets think about us bears. We have been looking at affordability as our main measure.

It hit all time lows in 2008 and os we reasonably expected a proper correction. Especially as the financial world started to unravel.

It started and then the government panicked and dropped rates to all time lows, ever, never before seen. Ergo the affordability went up again. The industry..developers, RE brokers, mortgage brokers, CHMC, banks- all rejigged their numbers and showed buyers how much more they could afford. The party was off again and we are now at all time highs in most parts of Canada.

Who could have possibly forecast it?

Lets look at the variables -we are in a worldwide recession where large banks were saved from bankruptcy, the US has over 10% unemployment, we have 2% higher unemployment than 2008, the Federal and Provincial governments have brought down huge deficit budgets and we are still heading into huge debt for the foreseeable future, Ontario's manufacturing sector is in trouble, Alberta lost 15,000 jobs last month, large countries like Greece are on the verge on defaulting, to be followed by many more...etc etc

All these variables added up to nought!

The ONLY variable that dragged this bloated bubble out of the gutter, were the emergency rate cuts to zero (almost) and the pumping of the CHMC. It wasn't the Olympics, because the whole country has seen a rise, especially Toronto, where the Provincial debt is in worse shape than ours.

Who would have thought it?

How could an analyst have forecast that?

They can't. They look a few things and then make their best guess and sometimes they end up being right FOR TOTALLY DIFFERENT reasons!!

In any case, take all analysis on the net and from wise words from experts with a pound of salt. Look at the numbers yourself and do what feels right. Where is the pain more? Buying an over-priced asset that may go down, or watching that asset go even higher. That is the crux of the decision.

Saturday, March 6, 2010

Faint Hope Clause

Take a look at the two charts above.

The first is the graph of the price of RE for the bubbliest town in the Universe, courtesy of Larry Yatter.

The second graph is the typical graph of a Elliott Wave, 5-stage bull-run.

Sorta fits the first graph. Wave 3 is always the most dramatic upwards (or down), and so it was with our RE . Wave 5 has to pop up over wave 4 and can go a long way or not. The problem is no-one knows where wave 5 ends.

What does this all mean. Not a lot yet. We have to see a good drop, to say that wave 5 is over.

We have HST, tighter CHMC lending, a drift higher in rates, all time low affordibility- if this doesn't make us come to the inflection point- what will? An imminent asteroid??!!

Channelling the Future

Unless you just got back from Cancun you will know that we had two budgets in the last week. One from the indebted BC government and one from the more indebted Federal Government.

There are links below for those who missed the high-lights. However, the gist is, small cuts that don't add up to much and hope the world economy and inflation pull out us out from under the pile of steaming debt.

I have found a way to channel future budget speeches and am going to give you a little snippet of a few of these.

2012 Federal Budget

Minister of Finance: " as you know, the renewed slow-down in China/US/Europe has caused our fiscal projections to be wrong (there that didn't hurt so much to say we were wrong) and so we have had lower tax receipts, while expenditures have gone up. Some of these expenditures have been from extending the UI eligibility, others were for increased Provincial transfers to prevent credit down-grades and higher borrowing costs. We have also had increased expenses from the entitlement programs of the baby-boomers and also from having to assume some liabilities of the CHMC due to the weakness in the housing market.

The result has been a ballooning of the deficit. The opposition want us to spend more and monetize out debt. Other countries have done this and have seen their currency devalued, and inflation take flight. The Conservative party is committed to fiscal responsibility so we reluctantly are forced to take drastic action. We will be cutting Provincial transfer payments (God help them), we will ask all departments to find 5-10% savings and increase certain taxes such as GST."

BC Provincial Budget 2012

BC Finance Minister: "Since the Federal Government has so irresponsibly cut our transfer payments by 20%, we are in a difficult fiscal situation. Their balance sheet looks better, but they have down-laoded the responsibility for making the tough decisions to the Provinces.

This is not helped by the fact that Health Care is now consuming $6 out of every $10 we spend due to our aging population.

We have had to look for ways of raising revenue in a difficult business environment. The NDP will not cut the basic services that our people need. Our research has shown that there are many in this Province who have significant wealth, acquired in other Provinces and even outside this country who live in multi-million dollar homes and pay very little income tax. Yet they use services. We have therefore decided to place a 'home value surcharge' until the fiscal situation improves. The amount will be 1% of the accessed value of homes over $1,000,000. If you can afford to live in a $2 Million dollar home, you can afford to contribute to the costs of society. Currently the burden falls mostly on middle income earners."

Federal Budget 2014

Federal Finance Minister: " This new government is committed to doing whatever it takes to get Canadians back to work and reverse the funding cuts of the last two years. We will achieve this by increasing taxes on corporations and high earners and we have instructed the Bank of Canada, under it's new Governor, to reverse the interest rate hikes of the last three years and to purchase Government bonds from the market if and when needed. The opposition says that such moves will cause investors to leave the sell the Canadian Dollar. The NDP has often said that the Canadian dollar is over-valued and has lead to a loss of manufacturing jobs. We do not fear such an event."

Tuesday, March 2, 2010

A Tale of Two Countries

So the big party has ended. Kudos to the thousands of volunteers who put in hundreds of thousands of free hours into making it work. Without their free and friendly labour, we would have had a very different, and less successful event.

So to Canada and BC now and what we have in store for us. Forgive the rambling post- I am going to write it as it hits my cerebral cortex.

First lets look at BC.

We are in deep doggy doo-doo. $1.7 Billion budget deficit this year. Our debt will be an astounding $36 Billion in three years. The Government now says we will have a budget surplus by right! This is the same government that was forecasting a balanced budget just a year or so ago- before the elections of course. Truth is they have no clue and if commodities start to go soft, expect a higher deficit and more cuts.

They are going to cut 3500 government jobs by attrition, (lets see which industry is going to pick them up) and are spending more on infrastructure- what more do we need to build? How about an eight lane highway to Cache creek?

I would expect Olympic bills and law-suits and costs to maintain the new facilities will roll in for some time, and will add to our fiscal woes. Then there is the city and we have to wait and see how much we all end up being on the hook for the Olympic village.

Now to the BoC

In Australia which is very much like us- it is also a commodity-exporting nation, where there is also a housing bubble, despite Millions of acres of uninhabited land- the Australian Reserve Bank just raised rates to 4%.

That's right 4%.

Meanwhile our bank, after warning about the housing bubble, after warning about the personal debt bubble- has today decided to stay PAT at 0.25%! Pathetic really.

Why the difference, because our Bank, like the Fed in the US has become completely politicized and is not an objective defender of either currency value or stable prices.

Rather they see themselves as defenders of asset values. Since they allowed the cat of the bag, by allowing assets to balloon and then allowing debt to be piled high on these assets, they are left with no choice but to try and prop the assets up at ALL COSTS.

They hoped that the breathing space would allow speculators to unwind leverage gracefully, but to their shock the leverage HAS GROWN (duh.. what do you expect at 0.25%) and so they wag their limp fingers at borrowers and... do nothing.

Much like that complete fool Greenspan did.

In any case we should be at 2% at least..Why 2%?

-that is our true inflation rate,
-it will dampen speculation without damaging legitimate businesses
- AND you have something left to cut when the next &(*& hits the fan.

But how can they raise when one Province alone will be in debt to the tune of $36 Billion in a few years, when $500 Billion has been added to the National liabilities by the CHMC alone.

OK- To Vancouver Housing.

What now? I have no idea whether rich Finns and Danes will start flocking here to buy properties or whether the current problems in Europe will escalate and they will have their own problems to deal with.

However we are now up their with the most expensive cities in the world, based on price to income and price to earnings (rental income).

Demand has been strong, both local and Far East. We are now at the all time highs in terms of price, in fact a couple of % higher than May 2008. What a difference a year makes. If you think about it, what has driven the desire to buy is the fear of being left behind and the greed for gains.

Late 2008 and early 2009, the game ended and the rampant price rises became price declines and folks pulled back sharply. The price was heading towards fundamentals. This was something that could not be tolerated, since the fundamentals dictated a price 40-50% less.

So they changed the fundamentals- 0.25% rates and the new fundamentals supported price and in came the fear and greed again.

I noted this in early March and April, that the 20% price drop and the 30% drop in carrying costs had given us the 50% decline that we were looking for, and some folks may want to buy in.

The dramatic way the policy makers would throw caution to the wind and AGAIN try and prevent a normal business cycle (which requires price busts too to cleanse out speculation and PREVENT a bubble) took all us bears by surprise.

Capitalism REQUIRES a boom/bust cycle. If you are stupid enough to think you have found a way to prevent the bust, like Greenspan and his idiot students in the World's Central banks, all you have done is blow up the boom to lunatic levels and made the subsequent bust catastrophic. I don't think for one minute that this credit implosion cycle is over.

Those who do, are missing the news of countries like Greece, which are fiscally bankrupt and now need other countries to bail them out!

This either has to end in a deflation or inflationary resolution, and it is not clear which one it will be.

The biggest problem with all this, is if the market does collapse, then the fiscally prudent ones will carry most of the burden. How?

By getting next to nothing on their hard earned, tax-paid savings. By having to bail out the CHMC if loans go sour. By having their cash inflated away so that those who piled on debts can pay them back with cheaper dollars.

Now our wise Premier has said that taxes can be deferred and paid on sale of the home, as if the home is some treasure chest which mints gold coins. What happens if prices drop and the seller cannot pay back-taxes? the services still have to paid the rest of us, who kept up with our obligations.

So where does this get us?

As I said before, the bubble graphs would still be valid if we just had a divergent high. That means the price goes up, but with lower volume and in a more narrow area. This seems to be the case. However, if we keep pounding up, then the graph has been invalidated and all bearish bets are off.

Graph from Larry Yatter's site: