Sun

There was an awkward moment on the Business News Network the other day when an interviewer asked eminent Yale University economist Robert Shiller whether an American-style real estate crash could happen in Canada.

He appeared visibly uncomfortable and prefaced his remarks with an admission that he had never studied the Canadian housing market. He ventured that if the psychological forces that have fuelled the U.S. crisis take hold here, a similar situation could unfold.

Several media interviews later, Shiller’s qualified and cautious statements had become bold predictions that Canada‘s housing bubble would burst.

This followed a report last month from David Wolf, an economist at Merrill Lynch Canada, who warned that it was only a matter of time before Canada‘s housing market tanked, just like the U.S. market did. Canadian household net borrowing, he said, reached 6.3 per cent of disposable income last year, not far off the seven-per-cent peak in the U.S. in 2005, just before the U.S. housing market collapsed.

But Canada is not the U.S. The stresses on Canada‘s housing and mortgage markets are not the same as those affecting its southern neighbour.

A recent report by the Bank of Nova Scotia highlights some of the differences. It points out that total debt as a percentage of total assets in Canada stood at 20 per cent at the end of 2007. The U.S. ratio is 26 per cent. In other words, Americans used 30 per cent more debt to purchase assets than Canadians did.

Because mortgage interest is deductible against taxes in the U.S., and not in Canada, Americans have a greater incentive to be more highly leveraged than Canadians.

Furthermore, up to 25 per cent of new mortgages written between 2004 and 2006 in U.S. were subprime. Canada‘s non-prime mortgages represent only five to six per cent of the market, and even those tend to be near-prime rather than subprime because of Canadian lenders’ prudent lending practices. Even the short-lived 40-year amortization mortgage in Canada, was nothing like the Ninja (no income, no job, no assets) mortgages seen in the U.S.

Less than a quarter of Canadian mortgages are securitized, meaning the banks retain mortgages on their balance sheets rather than selling the debt to third parties. While U.S. lenders relied on short-term financing, leaving them at the mercy of market swings, Canadian banks are solidly financed, backed by a vast base of deposits.

For these and other reasons, it seem unlikely that Canada will experience the kind of housing crisis that has led to so much financial distress in the U.S.

Still, Canadian real estate prices are slipping and can be expected to fall further in the coming year. Last month, residential property sales in Greater Vancouver dropped nearly 43 per cent, while new listings were up 29 per cent.

The benchmark price for a detached house in Greater Vancouver has declined 5.8 per cent since May, a modest dip considering prices for many properties have doubled over the past five years.

Despite the alarm raised by certain economists, Canada‘s housing market appears headed for a respite, not a rout.

© The Vancouver Sun 2008

Cheryl Chan
Province

Detached homes and apartment prices in most Metro Vancouver municipalities have dipped below 2007 levels as inventories rise and sales fall.

The benchmark price for a detached home in Metro Vancouver in September was $726,331, a 1.6-per-cent drop from September last year.

Prices for apartments dipped by 0.7 per cent to $369,062 compared to September last year.

Richmond and Port Coquitlam, where detached home prices rose 3.9 per cent and 2.6 per cent respectively, were exceptions.

“After five years of unprecedented increases, housing prices are beginning to realign,” Dave Watt, president of the Real Estate Board of Greater Vancouver, said in a release.

 In Metro Vancouver, residential sales dropped almost 43 per cent last month to 1,585 compared to 2,776 in September last year.

Listings increased almost 29 per cent to more than 6,100.

In the Fraser Valley, 980 homes switched hands in September, down 26 per cent compared to 1,332 sales in September last year, said the Fraser Valley Real Estate Board.

Listings jumped 56 per cent, to hit a record high of 12,379.

“If you’re looking to buy, you’re not having to rush to buy,” said Tsur Sommerville, director of the Centre for Urban Economics and Real Estate at UBC’s Sauder School of Business.

“It’s creating an environment of downward pressure because you’ve got a lot of product looking for buyers.”

B.C. Real Estate Association chief economist Cameron Muir said buyers are taking a wait-and-see approach.

He said he does not foresee a U.S.-style meltdown in B.C.

“We don’t have the subprime mortgage crisis they have there,” said Muir.

“There is no spike in mortgage rates on the horizon, or sharp increases expected in interest rates.”

In fact, conditions might be ripe for a reversal. Muir believes listings will decline as sellers become wary of lower sale prices and the longer time required to sell in a slow market.

“It’s going to have the effect of home sellers pulling their homes off the market and taking a wait-and-see approach themselves.”

© The Vancouver Province 2008

 

‘We’ll raise the bar with our level of service,’ GM says

Lena Sin
Province

After more than a year’s delay, Vancouver‘s newest boutique hotel is finally set to open this month.

Loden Vancouver, located at 1177 Melville St. in Coal Harbour, is now ready to accept bookings after more than a year of delays caused by construction issues.

The upscale hotel, scheduled to open its doors Oct. 18, will be Vancouver‘s first new hotel in six years.

The estimated $35-million, 77-room, 14-storey property includes seven suites, a 1,600-square-foot penthouse suite and spa.

Its restaurant, Voya, led by local chef Marc-Andre Choquette, is being billed as the hotel’s centrepiece.

Edel Forristal, daughter of legendary Vancouver hotelier Dennis Forristal and former manager of the Bayshore Hotel, is Loden’s general manager.

“Loden’s opening signals an important moment for Vancouver hospitality,” Forristal said in a press release. “We will raise the bar with our level of service and our impressive team to complement the hotel’s superb, stylish and iconic surroundings.”

Loden is the first Canadian venture for California-based Kor Hotel Group and was developed by the Amacon Group of Vancouver.

© The Vancouver Province 2008

 

The Benefits of Financing

Other

In the past, if you wanted to purchase a home in Mexico, the only way to achieve this was to pay all cash. This, of course, limited your purchase price to the amount you could afford to pay, thereby limiting your purchase options. Additionally, this did not insure transfer of Title, whereby you would actually be the legal owner of the home.

Close to 3 years ago, Finance North America pioneered the first loan for U.S. and Canadian citizens purchasing in Mexico. Although still in its infancy, financing in Mexico has had an important impact on the ability for more people to qualify for a purchase and buying a higher priced property with a minimum of 20% down.

Listed below are a few other significant benefits to consider when choosing to finance your Mexican Dream Home:

Clear Title
Enjoying the property and all its amenities is one of the main reasons people purchase homes in Mexico. Knowing that you have been transferred clear Title to the property is something you expect but may not have occurred. When you finance your property, the lender requires that the Title is free & clear before they will fund your loan and verify transfer of Title to the Fideicomiso, thus insuring your ownership.

Financial Leverage & Mitigate Risk
Financing allows you to substantially increase your purchasing power, enabling you to purchase the home that you desire. With a minimum of 20% down, your ability to buy the home that may once have been out of reach is now within reach. More importantly, you mitigate your risk by only putting a minimum down instead of the whole purchase price.

Alleviate Refinance Closing Costs
Many buyers, who decide to pay cash initially and take transfer of the Title, wind up refinancing at some point to recover their purchase funds and minimize their exposure. Unfortunately, the closing costs for a refinance are considerably close to the closing costs when they purchased the home. Essentially, it is equivalent to paying twice for the closing costs which is an expensive oversight. Careful consideration should be given to financing for the initial acquisition so as to avoid future costs for a cash-out refinance.

Do it While You Can
In light of current global market conditions and credit availability, now is a good time to finance your purchase or do a cash-out refinance while the conditions are still favorable. In other words, do it while you can.

Although you may have the ability to pay all cash for your Dream Home in Mexico, financing still is a better option overall. Let the professional and experienced staff at Finance North America leverage your purchasing power to buy the home that you want.

But Canadian observers highlight the differences

Jacqueline Thorpe, Derrick Penner
Sun

The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets such as Vancouver and Calgary, according to Robert Shiller, the University of Yale professor who predicted both the U.S. housing slump and the 1990s stock market boom and bust.

However, local experts say Vancouver‘s market fundamentals are very different from those south of the border, and that the biggest driver of the U.S. collapse — subprime mortgages — doesn’t exist here.

Shiller, co-founder of the S&P Case/Shiller Home Price Index, said psychology is the primary driver of bubbles, and it appears that Canada has been caught up with home-buying fever just like the United States and other countries around the world.

Asked whether that meant Canada could face a similar bust, Shiller said: “Yes, especially in places that went up a lot like Vancouver and Calgary. I don’t think Toronto has been quite as extreme.”

Shiller said there was a natural connection between the United States and Canada.

“I would be surprised that the bubble that appeared in the United States and elsewhere didn’t appear in Canada,” he said in an interview with the Financial Post. “It’s psychology, I think, that drives it.”

But observers in Vancouver note that while the market cycle here has shifted to slower sales and the easing of prices, it hasn’t been accompanied by the same financial calamity around mortgages that U.S. markets have experienced.

“Our economic fundamentals are different,” said Stanley Hamilton, a professor at the Sauder School of Business at the University of B.C. “Whether [Canada‘s market] psychology will be the same is a little more difficult to say. You don’t know what cranks people in times of stress, and we’re all facing times of stress.”

Hamilton added that in the U.S. it was subprime mortgages, which he characterized as “garbage-can” mortgages, that drove the problem and created a lot of the bad news about massive mortgage default and foreclosure rates.

Hamilton said that while Canadian mortgage-lending criteria did loosen a bit during the housing market’s run-up, it was nothing like what happened in the U.S. where thousands of people were granted mortgages with no down payments and teaser interest rates that buyers would have no chance of repaying once set to market interest rates.

Where Canadian institutions offered high-debt-ratio mortgages, those mortgages are insured by Canada Mortgage and Housing Corp.

“I don’t think [Canadian lenders] came within a country mile of what [American lenders] did,” Hamilton said.

For that reason, Hamilton said Canada isn’t seeing big increases in the number of people defaulting on mortgages.

Cameron Muir, chief economist for the B.C. Real Estate Association, added that the number of British Columbians in arrears on their mortgages — those who have missed three payments or more — is the lowest it has been 10 years, and the lowest in Canada.

Muir said rapid descents in real estate values in British Columbia “tend to come on the heels of a very poor financial outlook for households.” And while B.C. households might be less confident than they’ve been in the past, and some elements of the economy have weakened, unemployment remains low and homeowners aren’t under the stress that would force large numbers of them to bail out of their homes.

Shiller, whose book Irrational Exuberance came out in March 2000 just as the tech bubble peaked, said it was essential for the U.S. government to pass a financial bailout, although he believes the United States is facing a “severe recession,” regardless.

“I’m concerned problems are deeper than can be handled by the bailout, but that doesn’t mean the bailout doesn’t do some good,” he said.

He said a bailout might help restore some confidence to the stressed financial system.

“What creates a crisis is a lack of confidence,” he said.

He said the housing crisis was primarily a policy failure by U.S. authorities.

The U.S. government was “totally blind” to it, regulators failed to monitor the mortgage industry properly, and the U.S. Federal Reserve had very low interest rates at a time of the greatest housing bubble of all time.

While homeowners should take some personal responsibility for the debacle, they were being goaded into the fervour by an establishment that endlessly pushed an ownership society.

“They were doing what was considered right at the time,” Shiller said.

In his current book, The Subprime Solution, Shiller proposes several measures to reduce bubble conditions in the housing market, including better information for prospective buyers, and broader markets that trade risk better.

Shiller said he does not have another bubble in his sights as the U.S. economy will be “damaged for years.”

“The housing bubble was of record proportions,” he said. “Maybe the next big bubble will be your children’s or grandchildren’s . . . The excitement we had in the 1990s and in 2000 in the housing market is a fragile thing and it won’t come back for some time.”

© The Vancouver Sun 2008

 

Vancouver, Calgary could take the biggest hit

Jacqueline Thorpe
Province

TORONTO — The Canadian housing market could face a housing bust similar to the United States’, particularly in more bubbly markets like Vancouver and Calgary, said Robert Shiller, the Yale University professor who predicted both the 1990s stock market boom and bust and the U.S. housing slump.

Shiller, co-founder of the S&P Case/Shiller Home Price Index, said psychology is the primary driver of bubbles and it appears that Canada has been just as caught up with home-buying fever as the U.S. and other countries around the world.

Asked whether that meant Canada could face a similar bust Shiller said: “Yes, especially in places that went up a lot like Vancouver and Calgary. I don’t think Toronto has been quite as extreme.”

connection between the U.S. and Canada.

“I would be surprised that the bubble that appeared in the United States and elsewhere didn’t appear in Canada,” he said in an interview. “It’s psychology, I think, that drives it.

Shiller, whose book Irrational Exuberance came out in March 2000 just as the tech bubble peaked, said it was essential for the U.S. government to pass a financial bailout, though he believes the U.S. is facing a “severe recession” regardless.

“I’m concerned problems are deeper than can be handled by the bailout, but that doesn’t mean the bailout doesn’t do some good,” he said.

He said the housing crisis was primarily a policy failure by U.S. authorities.

The U.S. government was “totally blind” to it, regulators failed to monitor the mortgage industry properly and the U.S. Federal Reserve had very low interest rates at a time of the greatest housing bubble of all time.

While homeowners should take some personal responsibility for the debacle, they were being goaded into the fervour by an establishment that endlessly pushed an ownership society.

“They were doing what was considered right at the time,” Shiller said.

While ups and downs in the market can lead to creative destruction, the current housing crisis has morphed into a system problem.

“The problem is that perfectly good firms are in trouble,” he told the Financial Post in an interview at the Ontario Economic Summit.

A bailout may not be palatable, but government assistance is required when the system fails.

The trick is to reduce conditions that fan bubbles.

In his current book, The Subprime Solution, Shiller proposes several measures to reduce bubble conditions in the housing market, including better information for prospective buyers and broader markets that trade risk better, such as the housing futures he has developed on the Chicago Mercantile Exchange.

There should also be new retail products such as “continuous workout mortgages,” that go up and down with the value of the home equity and mortgage equity insurance.

Shiller, who would not give a precise forecast on the outlook for U.S. home prices, nevertheless said futures markets are predicting more price declines of 10 per cent or more.

— Financial Post

© The Vancouver Province 2008