I can't speak to all the specifics of the Canadian housing market, as I don't know everything about their version of Fannie/Freddie, but I do know they have this crazy idea that people need to document their income (outlandish and an affront to "financial innovation") and for the most part require 5% down. There does seem to be far more emphasis on adjustable rate mortgages, much like Australia versus the U.S. which is more of a fixed rate environment in general.
All that said, parts of this story remind me of one of the two stories that woke me up to what was happening in parts of Cramerica (we never had a housing boom in Michigan so I had nothing first hand to rely on). As I wrote in [Jan 14, 2009: WSJ - Would You Pay $103K for this Fixer Upper?]
So when was your "I see the light moment" regarding real estate? 2007? 2008? Maybe even 2006 if you were lucky. As I've written in the past [Aug 13: Option ARMs- Who Thought Up these Time Bombs?], my moments started happening in mid 2005 (I'm usually early on these things) as I read about Zareh Tahmassebian in a Fortune article [May 30, 2005 - Fortune: Riding the Boom]. I was aghast at the tale of an early 20s mortgage broker in Las Vegas, making $100s of thousands a year churning out mortgages, driving fast cars WHILE flipping 8-9 houses he owned. I have to tell you, I was 10 years older than him and felt like the biggest slacker in the world after reading about his exploits. But I could see this was nonsense... and it would blow up "someday". If you have never read the article, it truly is an awe inspiring tale and I suggest you follow the link and take some time out to review (a reader has since emailed me that a google search revealed Zareh has fallen on hard times - easy come, easy go I suppose).
So are we repeating in Vancouver? Hard to say. I assume Vancouver is a lot like San Francisco, where limited area to build along with a large amount of Asian money coming in, will keep prices elevated over the national average. But I sense the ghost of Zareh Tahmassebian nonetheless as I hear about "contracts" being flipped like they were in the good ole days in the U.S.
The other interesting situation is national, and international, wealth arbitrage (I made that term up). In the U.S. you had Californians extracting their bubble value home equity via cash out refinance and going to other parts of the country (namely Las Vegas, Portland, Seattle and Phoenix) to "crowd out" the local market prices. Suddenly you had an influx of buyers who could take $300K out of their homes to bid on "cheap" homes in other locales, which led everything up. Until it all came crashing down, of course. Now we see a similar situation on a more global scale, as rich foreigners (in Vancouver's case, they seem to be Chinese) can come in and bid up the local market in an almost exact repeat of what Californians did to many parts of the nation. Yet another fascinating development as global borders become less meaningful.
Via BusinessWeek: (My comments in parenthesis)
- The Olympics are over, and the Village is for sale. The complex in Vancouver, British Columbia, that housed the athletes during the 2010 Winter Olympics has been converted into 1,100 luxury condos. About 450 have been pre-sold, and the sales of the remainder may well render a verdict on a mystery that looms over this city like Grouse Mountain: Did Canada prudently steer its way clear of the worst of the financial crisis only to be rewarded with a massive housing bubble of its own?
- Millenium Water is a city of the future, built with enviro-touches like green roofs and automatic shades that moderate the temperature inside the apartments. An 815-square-foot, one-bedroom apartment is on sale for C$879,000, which works out to C$1,078 per square foot, or $12 higher than the average price in Manhattan, according to The Corcoran Report.
- Millenium Water isn't in downtown Manhattan, of course. It's not even in downtown Vancouver, which is across an inlet known as False Creek. It isn't really even in a neighborhood; the nearest establishment is the sales office for another condo development. If all this is starting to sound a little irrationally exuberant, especially given the shaky international outlook, well, that's Vancouver for you.
- "Real estate is like a sport here," says Tracie McTavish, president of Rennie Marketing Systems, which is overseeing the sale of Millenium Water. In the last 12 months alone, the average home price has risen 14%, to around C$1 million.
- To a visitor, it can seem as if Vancouver's main industry is real estate, like it used to seem in Las Vegas or Orange County. A newcomer, emerging from the gate for international arrivals, is greeted with three separate backlit billboards, all offering architects' renderings of planned communities. Aspac Developments promises that they're "building a legacy of excellence." Concord Pacific describes each of its multiple developments as "a master planned world unto itself with park, schools, daycares, shops, restaurants, and resort-style amenities." Polygon calls itself "Vancouver's Builder of Choice," and offers contact information in English and Chinese. Driving out of the airport and up Vancouver's main thoroughfare, Granville Street, one notices billboards for brokers and advertisements on the backs of buses for Realtors and developments.
- "Some of the brokers in Vancouver think they're rock stars," says Grant Connell, a broker with Sotheby's (NYSE:BID). According to Connell, they are getting paid like them, too. "Many have made $500,000 or $1 million this year," he says. Connell, a former professional tennis player who spent years on tour, is among Sotheby's top-producing brokers. As of June of this year, he had amassed 52 "ends," as he calls a completed sale. (That's on pace for 100 sales in a year - or 2 a week - amazing.)
- The market in Vancouver wasn't entirely unscathed by the financial crisis. Like the rest of the world, it took a hit. But prices rebounded, and the average home in the city is now about 10 percent above the pre-crash peak. As Canada headed into 2009, Canadians jumped back into buying homes. Home prices in Canada have been strong from coast to coast, especially relative to the U.S. Vancouver prices, however, have run with special gusto. In the second half of 2009, says Connell, "it was just spastic."
- Canada was supposed to have been safe from flippers, teardowns, bidding wars, and the other markers of the bubble that covered the States. Its banking system was voted the soundest by the World Economic Forum's most recent Global Competitiveness Report. The mortgage default rate in Canada is less than half a percent, compared to 3.73 percent in the U.S., and its first quarter 2010 gross domestic product growth was a robust 6.1 percent.
- Canada's banking system is healthy in part because it went through a reform after a crisis in the early '90s. Though Canadian banks are among the largest in the world, and appear similar to the big American ones, they are much more tightly regulated—in ways that keep loan quality high and increase banks' incentives to hold those loans.
- Terms are largely dictated by the Bank of Canada; borrowers putting less than 20 percent down, for example, are required to purchase insurance from providers like Genworth or the Canadian Mortgage & Housing Corporation. (Which used to be the case in the U.S. before "financial innovation" found its way around it) Unlike in the U.S., the big Canadian banks write the majority of those loans.
- Lastly, the majority of Canadian loans are recourse, meaning that lenders can go after a borrower's earnings and assets; walking away is a very unattractive option. (So old fashioned; being held responsible for debts. No "innovation" in that - how the heck do you support a nation of strategic defaulters with lame rules like that?) All this has made Canadian home loans sound and banks stable.
- All that safety and stability has come with a price. It may have overinflated prices. At least that's how some doubters see it. Among the skeptics is Petr Pospisil, a teacher in Vancouver who created a website called "Crack Shack or Mansion," in which the visitor attempts to guess whether a pictured bungalow is a bombed-out home of little value or a real Vancouver listing with a price of over a million Canadian dollars. Pospisil, alternately concerned and amused by what he saw as an irrational mania for real estate, got 30,000 views on the first day he put up the site. Within five days, 200,000 had played the game.
- "Canadians defend their bubbles, especially here in Vancouver," says Pospisil. "People get angry when you tell them it's a bubble. They say it's different here, that this is such a beautiful place and everything is different. Everywhere there is a bubble, they say it's different."
- Professionals like Robert Hogue, a senior economist at RBC Royal Bank, use less exciting language but fundamentally agree. "The type of price increases that we've seen in Vancouver are unlikely to be sustained," says Hogue. "There might be some downside risk to that market."
- Some, like Garth Turner, a financial writer and former member of Parliament, see Canada going all the way down the road the U.S. took. "My basic view," he says, "is that we have a Canadian version of the U.S. real estate bubble. Not exactly the same, but close enough. We've relaxed lending standards, we have high unemployment, and we've reached a point of unsustainability in the housing market. I see real estate values falling shockingly."
- Rosenberg notes three factors that have spurred home sales in recent months. First, as in the U.S., near-zero interest rates have kept mortgage prices at historic lows, sustaining demand for housing. Until June 1, the overnight rate target set by the Bank of Canada was one-quarter of a percent. Second, the Canadian Mortgage & Housing Corporation, Canada's hybrid version of the Housing & Urban Development Dept. and Fannie Mae, announced in February that in April it would be moderately tightening its standards for loans, decreasing the maximum length of loans from 40 years to 35 and increasing minimum down payments for certain types of loans. Third, a sales tax on services in Ontario and British Columbia goes into effect on July 1. The imminence of all three together has likely pushed some buyers to jump into the market, especially in Ontario and B.C.
Of course, much like the United States NAR - whose chief proganda chief economist we made fun of in 2007 and early 2008 as he called for ever higher bounces in real estate prices even as we called for a crash, the Canadian real estate agents claim nothing to see here, move along.
- Cameron Muir, chief economist for the British Columbia Real Estate Assn., argues for Vancouver's special situation, as do many in the trade. "Vancouver has had the highest prices in Canada for some time," says Muir. "The geography is constrained. You've got the Pacific on the West, the mountains to the north, the U.S. border to the south, and land reserves to the east. That puts tremendous upward pressure on land prices. We also have solid population growth with a sizeable proportion of immigrants."
- Vancouver is a city of just over 2 million, and Muir expects 40,000 immigrants this year. On top of that, says Muir, there are "high-net-worth Asian purchasers buying as investments, as second homes, or for satellite families."
Aside from quotes like "It's a sport" and "it's different
this time here," the following should ring a bell for anyone who was following the U.S. bubble mid decade forward. Remember how people would camp out in new developments so they could buy and "flip that pre-development contract"?
- In Vancouver, new developments are pre-sold via "assignment letters," or commitments to buy. Throughout 2009, say Connell and others, assignment letters were being flipped. "The minute I actually heard a taxi driver talking about flipping assignments," says Connell, "I knew something had to give."