Oddball mortgages make their own fundamentals.

Things aren't quite looking up state-side yet: Countrywide Financial is starting to layoff employees and Capitol One is closing its mortgage unit, but things are certainly different up here.

The Canadian Real Estate Association has just announced that its product will sell very well this year predicting record home sales for 2007.

Klump said the home-financing market in the U.S. and in Canada are completely different.

"(Canadians) have to pass tighter credit standards in order to get home-mortgage financing," Klump said. "So, there's no unwinding in Canada as there has been in the States."

Its good to know that here in Canada we've got higher standards for our No-Doc zero-down Neg-am 40 year specu-vestor mortgages.

The Liquidity Issue.

BCbuds sent in this commentary from the Wall Street Journal about the risk present in loose credit markets:

In 2006, a record 20.9% of new high-yield lending was to particularly credit-challenged borrowers, those with at least one rating starting with a "C." So far this year, that figure is at 33%. No exaggeration is required to pronounce unequivocally that money is available today in quantities, at prices and on terms never before seen in the 100-plus years since U.S. financial markets reached full flower.

Led by private equity, borrowers have rushed to avail themselves of seemingly unlimited cheap credit. From a then-record $300 billion in 2005, new leveraged loans reached $500 billion last year and are pacing toward another quantum leap in 2007.

Even leading buyers of loans, such as Larry Fink, chief executive of BlackRock, say "we're seeing the same thing in the credit markets" that set the stage for the fall of the subprime loan market.

That article will only be available to non-subscribers for a few days, but there are articles popping up all over on the same issue. Here's one in the Globe and Mail:

"One of the biggest risks is the potential for a shift in liquidity," Royal Bank of Canada president and chief executive officer Gordon Nixon said at the conference's plenary session.

The furious pace in the growth of financial assets around the world - owing in no small part to the explosion of hedge funds and private equity - raises the risk that, for example, a sudden rise in interest rates could lead to the reduction or even the drying up of that liquidity, he said.

A tightening of credit and a drying up of liquidity would have an impact on all markets, from stocks to real estate. Is this really something to worry about, or are these voices just crying 'wolf'?

US housing sentiment hits lowest level in 16 years.

There's an article on MSNBC today about the ongoing US housing market woes:

Housing developers are being squeezed by tighter lending standards for borrowers trying to get mortgage loans. In response to weak demand, developers are cutting prices and offering buyer incentives to cope with a mounting supply of unsold homes, the National Association of Home Builders said Monday.

The trade group’s housing market index, which tracks builders’ perceptions of current market conditions and expectations for home sales over the next six months, fell to 28, the lowest reading since February 1991, the NAHB said.

So much for David Lereahs thought from May 2006 that 'this may be the bottom' of the US housing slump. I have a feeling if economic reality hits the Vancouver real estate market you'll be hearing a lot of that from local 'experts', and just like bears that say 'a correction is coming' one day they will likely be correct.

Mortgage rates go up again.

The steady increases in mortgage rates got another bump this morning with predictions of more to come. We're now at a five year record high for rates:

A flurry of increases in the past month has sent Canadian mortgage rates to their highest level in more than five years, and consumers shouldn't expect a return to the low interest rates they enjoyed in the first half of the decade.

Interest rate hikes by the Bank of Canada to curb inflation, coupled with a slowdown in China's economy, are likely to snap the country out of the falling interest rate environment it has been in since 2001, said Benjamin Tal, senior economist at CIBC World Markets.

Canada's chartered banks are already pricing in rate hikes the Bank of Canada is expected to make later this year. Royal Bank of Canada has raised the posted rate for a five-year, fixed mortgage to 7.44 per cent, the highest since April, 2002.

Greenspan predicts trouble

Former federal reserve chairman Alan Greenspan can't stop saying 'boo' to the boom. Today he warned of the potential for a big drop in the Chinese stock market and fallout for the global economy.

Addressing a meeting in Madrid via teleconference, Greenspan said the recent boom in Chinese stocks could not last.

"It is clearly unsustainable," he said "There's going to be a dramatic contraction at some point."
...

"In the last five years, the world as a whole is a growing faster than at any time in the world's history," he said. "It can't last and it won't last because it's a one-shot adjustment."

Greenspan said asset prices around the world could fall but that the economy may escape unscathed if it were flexible enough to absorb asset price shocks.

"We will get major declines in certain levels but it need not feed back significantly to levels of employment or the real economy," he said.

Earlier this month, Greenspan reiterated that he believed there was a one-third chance the U.S. economy, the world's largest, would slip into recession this year.

Jeez, maybe they should call the guy 'gloomspan' his announcement today gave some investors jitters and knocked the North American market back a bit. Just to be safe I'm going to buy some local real estate because I hear prices can never go down there.

US slowdown cutting into Canadian exports

Paulb pointed out this article in todays Globe and Mail about the drag that the US Slowdown is putting on Canadian exports. The Bank of Canada says that slower growth in the US is expected to 'suck the heat' out of the Canadian economy which will balance higher inflation here. In its semi-annual outlook the BOC says that they expect inflation to reach 3% by the end of this year.

“With the U.S. slowdown now expected to be somewhat more prolonged, net exports should exert a slightly greater drag on growth in 2007,” the outlook says. “All told, the Canadian economy is expected to expand at a rate slower than potential through 2007, and in line with potential through 2008 and 2009.”

Potential is considered to be about 2.7 per cent growth annually.

Total inflation is expected to return — on its own accord — to the bank's 2 per cent target by mid 2008, the bank said, but will peak at about 2.8 per cent in the fourth quarter of this year.

Core inflation — which excludes food, energy and other volatile items — will remain above 2 per cent for a few months, returning to target by the end of 2007. Although housing prices are no longer a concern to the bank, capacity pressures will keep core inflation high.

I'm always suprised at how specific they get with their predictions - How has their track-record been for previous BOC outlooks?

Muir sees affordability problems leading to balance.

Reductimat just gave me the heads up on this story: The B.C. Real Estate Association is seeing lower home sales and more inventory going into this spring and they predict this trend will go on due to affordability problems cutting into demand from first time buyers.

The Association's Chief Economist Cameron Muir says BC housing starts will likely drop 7% this year and a further 6% in 2008. He says the BC market is starting to return to more balanced conditions, and the demand for housing has dropped a bit.

Muir says that's good news for some home buyer's deep pockets because there's more inventory to choose from, and less sales pressure to put a bid on a home right away.

Theres a bit more detail in this story in the Sun where there's no prediction of lower prices, just less demand and more supply.. clearly they've studied some esoteric economics courses that I'm not familiar with.

CIBC: House prices will double in 20 years.

CIBC World Markets says that the average Canadian house price will double in the next 20 years:

Yes, the number of people aged 45 to 54 is expected to drop by 2.5 million by 2026 as the baby boomers age. But this age group accounts for only 12 per cent of the housing demand, it said.

Most home purchases take place when people are younger. CIBC says 68 per cent of all first-time home buying is done by people aged 25 to 44. That group is expected to decline only slightly in the coming two decades.

So only slightly less demand = double prices. They base their prediction on three factors:

-Interest rates are expected to stay low
For twenty years? Wow! That's some crystal ball!

-Immigration is expected to increase
Good thing since its so much lower in BC now than the 90's.

-New mortgage products will make home ownership more accessible.
What great news! You wouldn't happen to offer any of those would you CIBC? You know, like those great 60 year mortgages in Japan?

Update: Cailin points out the obvious spin on this story. If all these positive factors come into play and house prices 'double' in the next twenty years that works out to be about 3.75% a year compounded, or a bit less than a presidents choice savings account, but I guess that doesn't sound quite as impressive huh?

Real estate games in the Globe and Mail

Digi pointed out this commentary on risks in the Vancouver 'real' estate market from this weekends Globe and Mail. Its an entertaining read as well as some food for thought:

Nature is logical, but people are not. They seem to think that the laws of physics won't apply if they spend enough money. Sometimes this works for a while, but you can hold back the tide or suspend the forces of gravity for only so long, before they boomerang and thwack you in the puss.

When imaginary value meets real water and real mud, all that pretend money washes away. You can build on the supposition that nothing bad will happen, even put your house on a sandbar in the middle of a river, thinking the river won't ever rise, but that's what rivers do, always have done. Why should they spare you and your big-screen TV?

February building permits plunge

According to this article in the Globe and Mail, Canadian building permits took an unexpected plunge in February. The 22.4 percent drop was more than triple economist expectations.

“The magnitude of the decline is a function of the uncharacteristically robust level at which builders have been taking out permits,” said Stewart Hall, market strategist at HSBC Securities (Canada), in a note.

“Let's not get carried away in spinning this as Canada's own real-estate implosion.”

Douglas Porter, deputy chief economist at BMO Nesbitt Burns Inc., said that while the construction industry remains healthy, “the hefty retreat does support the view that housing activity will moderate in the year ahead.”

Jurock: 'Make sure you want what you own'

Cecil posted a link to this video in the prior thread and I thought it was worth posting on its own - David Ingram & Ozzie Jurock discuss the real estate market. Ozzie say's he wouldn't buy a pre-sale in vacouver even if his 'life depended on it', calling the Vancouver market pure speculation, and suggests some better options for investment include Kamloops & Prince George.

Greenspan warns of US recession.

Well this news is all over so its hard to ignore; after a recent comment about the worst of the US housing slump hopefully being over, Alan Greenspan commented today on the likelihood of a US recession hitting before the end of 2007.

“When you get this far away from a recession, invariably forces build up for the next recession, and indeed we are beginning to see that sign,” Mr. Greenspan said via satellite link to a business conference in Hong Kong. “For example in the U.S., profit margins . . . have begun to stabilize, which is an early sign we are in the later stages of a cycle.”

“While, yes, it is possible we can get a recession in the latter months of 2007, most forecasters are not making that judgment and indeed are projecting forward into 2008 . . . with some slowdown,” he said.

Mr. Greenspan said that while it would be “very precarious” to try to forecast that far into the future, he could not rule out the possibility of a recession late this year.

If a recession did strike the US later this year, I would be very surprised if the worst was over for the housing slump there, but If they can have a housing market slump during a boom, maybe they could have a real estate boom during a recession.

A press release becomes the news.

Yesterday I posted a link to a report by Genworth Financial that declared that "over the next four years, Vancouver condo demand is expected to slow to balance with supply, although a correction is not expected.". As one poster commented, Genworth Financial was one of the first in Canada to insure zero-down and 40 year mortgages as part of their goal to "make homeownership more affordable and accessible throughout Canada".

I'm not entirely clear how helping to drive up debt levels is helping this goal, but every company needs a slogan.

I see now that this story is running in the Province, pretty much verbatim from the press release. The story subtitle is 'growth to continue without any correction' which, though slightly plausible, is still surprising to see as a statement of absolute truth. Imagine a company issuing a press release with a prediction that their stock price will "rise about 6.2 per cent this year and average 4.4-per-cent annual growth through 2010".

I don't doubt that its difficult work being a reporter, but wouldn't it be more efficient and cheaper for the paper to just reprint the press release without the byline? If the market does correct, I expect we'll see a lot more of these press releases from real estate agencies, banks, mortgage brokers, etc. If we hit year over year price drops then we'll get the ones that say 'the worst is over!'.

Paying reporters to retype these press releases over and over seems inefficient at best.

Condo prices set to continue rising.

According to a report issued today by Genworth Financial strong demand will drive steady price increases in the Vancouver condo market until 2010.

"In 2006, Vancouver's condo market remained as strong as ever and the good news is that growth is forecast to continue without a price correction, so it is still a smart time for buyers to realize the dream of homeownership," said Peter Vukanovich, president Genworth Financial Canada. The Metropolitan Condominium Outlook reviewed resale condo markets in Montreal, Ottawa, Toronto, Calgary, Edmonton and Vancouver based on data from the Conference Board of Canada. New condo prices were not included.

According to the news release "Genworth Financial Canada, The Homeownership Company, works with lenders, mortgage brokers, real estate agents and builders to make homeownership more affordable and accessible throughout Canada."

So they're an impartial source for sure.

But heres a question I have: If the market will continue to rise gently until 2010 getting further and further away from rent values, what happens after 2010 and when is the best time to sell to realize gains on a Vancouver property?