Canada's Own "Subprime" Borrowing Slapped In The Face

I don't have much time to blog but I'd like to just quickly put up a post regarding today's news. This might be redundant, as most of you have already heard (in the MSM or on other blogs), the federal government is tightening mortgage lending practices. A slap on the face, if you will. Not extreme but it is certainly a step in the right direction.

According to the Finance Department announcement, the following changes will be made to the rules of government guaranteed mortgages:

• Fixing the maximum amortization period for new government-backed mortgages to 35 years;
  
  
• Requiring a minimum down payment of 5% for new government-backed mortgages;
  
  
• 45% maximum TDS ratio (Total debt service ratio - % of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards)
  
  
• Establishing a consistent 620 minimum credit score requirement; and
  
  
• Introducing new loan documentation standards.

All changes become effective on October 15, 2008 and affect all mortgage lending institutions.

I'm afraid that it's too little, too late. About 62% of first time home buyers choose the 40 year mortgage route as affordability has been stripped in the past years during the real estate bubble. Is this the government's own indirect admission that 40 year mortgages are kin of the famous subprime mortgage? No more liar loans with no downpayment, no authentic documentation and relaxed lending. This will certainly put further downward pressure on prices. In addition, the pool of buyers just shrunk dramatically. The implications of this announcement will be widespread. The government should have done away with the 35 year mortgages as well. The market will always correct itself. Those who forced affordability and bought in the last two years will have a nasty financial ending.

Now, the pressure will be squarely on the sellers. Those now wanting to get out because of the new changes will have to take a financial loss. Remember we are still at record inventory levels. To sell in this marketplace would mean to lower expectations and prices dramatically. On the already over-saturated condo front in Calgary, watch for more intensive promotions (free cars, free gym passes, free trips, first born children, free home entertainment systems, free kitchen makeovers, etc.).

Now I wonder if Ed Jensen will recant his statement in Creb's June report that the market will pick up in activity in the Fall?

I'm expecting realtors (some who are struggling) across Canada to further increase their advertising/marketing budgets from now till October 15, 2008. With sales down 30%-40% yoy already, what will most of them do after that date?

I can already envision the new emergency marketing slogan:
"The best time to buy is now - before October 15, 2008."

Letter To The Editor

Recently, CREB released it's June summary package for the city of Calgary. In conjunction, Mario Toneguzzi released his June housing report.

********

RE: "Calgary home sales continue decline, prices hold steady," July 2, 2008

Dear Editor,

I am disappointed at Mario's inability to gather facts with prudent responsibility concerning accuracy of information. Provided that he writes articles where information is disseminated to the masses, journalistic integrity should be of utmost priority. This should be done to circumvent further financial entrapment of unprepared, unqualified and uneducated home buyers. The article does not challenge the facts presented by an association that's main goal is to market the real estate market in an eternal positive light for only one reason, profit. It would have been deemed more efficient and similar in purpose if Ed Jensen had wrote the article himself.

CALGARY - Calgary's residential real estate market in the first half of this year has been marked by declining sales, increasing listings and stabilizing average sale prices compared with a year ago.

...

And the average sale price in both markets is close to a year ago - up by 0.20 per cent for single-family homes ($472,163) and down by 0.76 per cent for condos ($312,460), according to statistics released by the Calgary Real Estate Board on Wednesday.

These proclamations on pricing are misleading to the public. Firstly, average prices are not stabilizing. They are declining. A simple comaparison of June 2008 and June 2007 numbers would show a declining trend. SFH average and median prices are way lower this year compared to last June. For June 2007, the average sales price for the metro area was $496,890. The median metro home price was $439,000. In contrast, June 2008 average price is $473,774 and the median price is $408,000.

That is a decline of $23,116 (-4.7%) YOY in the SFH average price and a $31,000 (-7.1%) YOY decline in median prices.

For the condo market, the June 2007 average price was $323,269 and the median price was $304,900. The June 2008 average price is $315,042 and the median price is $282,000.

That is a decline of $8,227 (-2.5%) YOY in the condo average price and a $22,900 (-7.5%) YOY decline in median prices.

The numbers offered by CREB in their report are year-to-date numbers. By quoting these numbers psychologically mitigates the tremendous drop in prices year-over-year. The reality is June prices are substantially down compared to a year ago. The element of "statistical camouflage" should have been more challeneged in the article.

In a news release, CREB president Ed Jensen said the sales numbers "reflect that more buyers are finding a home that fits their family's needs. As we move into the summer months, it's an excellent time for buyers to capitalize on the wide selection of homes, rather than waiting for the fall when things start to pick up again."

From a historical trend, sales peak in the months of May and June. Sales never pick up in the fall season extending on to winter. Now quoting Ed Jensen (who I would assume has experience in the market and understands the past trends), that sales will pick up this fall is not conducive to objective journalism. Yet again, there is an omission of critical analysis.

Spring was supposed to be the best time to buy. Spring came and went. At that point in time, houses supposedly "went on sale" and summer was the best time to buy. Now that sales are still down YOY, the best season to buy will be fall. By fall, I can predict that winter is actually the best time to buy. Nothing like a new house as a Christmas present. Hopefully we don't get any snowfall in Calgary because that would chase buyers away as it did in Ontario earlier this year.

Perhaps it's time to find other sources for information where the cheerleading of the real estate market is dampened and not relied on for livelihood. This would promote a more pure and objective market perspective.

Afterall, journalistic mantra is such where one usually strives for the truth and challenges conventional facts and preconceived notions.

Regurgitating information from a single biased source is not the best form of journalism by any stretch of the imagination.

********
Hey everyone, I'm going to be involved in some big projects soon and blog updates will be quite slow for a bit. If anyone would like to write a guest post or submit photos, please email me: calgaryrebb@gmail.com

I look forward to hearing from you. Thanks for your continued contributions and readership.