What's with the new MLS Index in Canada?

Interestingly, just as prices in Vancouver and Toronto and Montreal are turning downward, we get, tada! a new index for house prices in Vancouver and Toronto and Montreal (and some other places that are along for the ride).

Up at the REBGV site there is a handy pop-up window that promises to explain everything. There is little in there but pablum about how great it will be for everyone. Here's a selection:

Combined with the knowledge, experience and skills of your REALTOR®, the MLS® HPI allows you to better understand these trends — and how they can affect the market value of your home.

Anything that supports our cartel is good.

More importantly, though, it helps you approach one of life’s most important decisions — buying or selling a home — with greater confidence.

We can't have you getting scared now, can we? Record debt, Bank of Canada wetting their pants about systemic risks, employment numbers degrading, heck, China slamming on the brakes . . . Not to mention Europe floundering. No, no, we want you confident. That makes you such a better customer when considering highly leveraged speculative investments with high transaction costs. Oh, please write that transaction cost check to us, thanks.

The MLS® HPI tracks changes in home prices by comparing price levels at a point in time with price levels in a base (reference) period. The base period value is always 100.

For example, if the base period for single-family homes is 2005, and the MLS® HPI value for single-family homes in December 2011 is 149.1, you know that the value of single-family homes is up 49.1%, compared with 2005 (149.1 − 100 = 49.1%).

It's all about the gains. It's not a house. We're not even pretending it's a house. It's like a stock, but one that only ever goes up. In fact, look at this example, it went up a boat load. Don't you want to get in on that?

This means that price changes calculated using the MLS® HPI are less volatile than those derived using common measures like average and median, which can swing dramatically in response to changes with high-end or low-end sales volumes over time.

That IS what the median is for, avoiding the dramatic swings. Unless your dataset is very small, average and median are still highly meaningful numbers to report. They are no longer even going to report those. Because why? Let me take a stab: Buyers are children who can't handle getting confused by all these numbers.

And you can't cry housing mix issues if you are throwing away anything older than 2005. Seriously. That's a decades problem.

However, the MLS® HPI is new, in that it is the first Home Price Index to use MLS® data to track trends in home prices in markets across Canada.

Everyone knows that the MLS is absolutely accurate when it comes to reporting house features.

So, we start over in sussing out where these markets are. Maybe with the advent of redpin and hopefully more competitors someone will have real raw data. It's not like Averages and Medians are hard to compute, but you need access to the data, and you can't get that from the outside.

Cartel 1 Homebuyers 0

And it looks like REBGV recoded all the old HPI reports to the new system, because they don't match my spreadsheet. Nice. You know who else was fond of re-writing history?

On the upside TREB has nary a word about this on their site. Good for them, they publish gorgeous reports (recently anyway).

IMF Downgrades China Growth Prediction

IMF shaves growth estimates for China from 9pc to 8.25pc

THE International Monetary Fund is the latest group to warn of lower growth for China, cutting its forecast for this year to 8.25 per cent from a 9 per cent projected in September.

The IMF's call follows a slew of growth downgrades by economists and a warning by the World Bank that the global economy could slip back into recession.

Any further deterioration of the situation in Europe would further hit China's growth rate, which last year dropped to 9.2 per cent from 10.4 per cent in 2010.

Sorry, you are worried about exports, which are 5% of the Chinese economy instead of fixed asset investment, which is somewhere above 30%, depending upon the analyst? Also, so many of these stats are manipulated. Who knows what's going on inside China.

Who's to Blame?

There seems to be a movement afoot to place the blame for the coming debt reckoning in Canada on the doorstep of issuance of lines of credit, secured and unsecured. The perpetrators seem to be those making their dime on churn in real estate.

Lines of credit gone wild: Readers tell their stories

Canadians have gone from a standing start 20 years to owing $219 billion on lines of credit today. Credit line use is growing faster than mortgage debt and now accounts for 12 per cent of all consumer debt owed by Canadians.

Correlation and cause are not the same thing. Maybe, just maybe, people are taking on more unsecured debt in order to live under the excessive burden of their housing costs.

Downturn in Australian Prices an "Increasingly Menacing Risk"

Moody's may be trying to make up for acting as enabler to that little spate of massive scale U.S. mortgage securities fraud.

Australia in blast zone of Europe implosion

It says a downturn in the Australian property market is one of five "increasingly menacing" risks that need to be closely watched in the coming year. The report says mortgage insurance and low loan-to-value ratios provide Australian banks with some protection against falling house prices.

But, if the property market does tumble, the resulting fall in foreign investor confidence would hit the banks' heavy reliance on offshore funding, it says.

When money starts exiting it is really all over. At least Australia can make those foreign bondholders take a haircut the old fashioned way, by devaluing the currency. Pity Ireland and Spain, they can't.

And in case you didn't see it, this is a great chart from the RP Data Blog that really illustrates the psychology of the cycle. Sitting where Australia is right now, the mentality is "it's a little adjustment" sitting at month 36 for the U.S. and "it's a crash! run for your lives!" But you'll notice, it's the same line on the chart.

Toronto, Especially Condos, Show Signs of a Price Slide

Toronto House, Condo, Apartment, Townhouse Prices Graph to Jan 2012 -- Data from TREB

Thanks to the new medians published by TREB we can better track what is happening on the ground in Toronto. Since the most recent peak in November 2011, Toronto Detached for all of TREB have fallen nearly $21,000, or 4%. Given the large sample size, this is a pretty stable measure. Housepriceindex.ca is also showing a local peak at this time for Toronto. I'm going to hold off adding it to the Canadian Peak Bubble Cities List for another two months to be certain.

Other goings on in the Toronto shelter market: Condos in all of TREB appear to have peaked in October of 2011, and have since then fallen $13,000 or 4.2%. Same with condos in Toronto City, which have fallen $17,500 since October or 5.2%. And the category most firmly showing a solid peak, Toronto Central Condos, which peaked way back in September 2011 and have since fallen $27,000 or 7%. Anyone who bought a condo in q3, q4 of 2011 in Toronto with 5% down is at risk of being underwater. Individual properties, of course, vary. But the environment has definitely gotten tougher.

Rush to the Exits?

Is mortgage industry running out of money?

Through the wonderful blue sky of 2.99-per-cent 5-year fixed money, however, is a storm of international and national constraints that may cause a slowdown in mortgage and housing markets.

This made me wonder if the recent rush into low interest rate mortgage offers wasn't just a means for the banks to try and grab the last of the available CMHC insurance pool. Just pondering.

Lessons to be Learned by the Canadian Banks

“Risk-Off” in the Canadian Mortgage Market

“There is a false comfort in loan-to-values.” It’s often better to have more room to service debt, than more equity, said the above source. “If I’m choosing between an 80% LTV with a 42% TDS and a 95% LTV with a 30% TDS, I’ll take the latter.”

This is was an expensive lesson the American banks learned (and have probably since forgotten) . . . it's about credit-worthiness, not Loan To Value or even downpayment. I've been seeing a lot of anecdotes of about friends/relatives getting approved in Canada for very high loan to income ratio mortgages based on large downpayments (20-30%). If this is more than a handful of cases, it is going to come back to bite the banks in the behind.

Just noting something for later

Need a good laugh, here's one for you.

By the way, even if it takes 5 years to decline 40%, it will still look like a crash after the fact.

Banks Max Out Their CMHC Credit Cards

Imagine the banks as drunken college students and the card is in mom and dad's name. The banks have been binging on CMHC insurance (insurance the banks themselves bought, not that purchased by buyers) and the $600 billion limit imposed in 2008 to deal with the crisis is soon going to be hit.

This is what creates a bubble, ever increasing debt. The next round of house price increases requires accelerating volumes of credit. Without that, the party is over. Imagine you just bought your house for 800k and you dream of selling it in 5 years for 1.2 million. That means total outstanding mortgage credit for the entire country of Canada will have to continue to grow by 8% per year. When the GDP is only growing by 3%. Total mortgage credit has been growing at nearly ~100 billion per year on a base of ~1.1 trillion, that is ~10% growth. If that continues, total mortgage debt for the country will be 1.8 trillion and GDP will be 2 trillion. How likely is that?

Setting a fixed amount of debt, even sky high already, will end this bubble quicker than anyone imagines. Prices are set at the margin on ACCELERATING debt. The accelerating part is critical. So keep an eye on the CHMC limit. It directly impacts that excessive credit issuance through securitization because securitization is not allowed without insurance.

The first house sold for less because of limits on credit will reset the price for that entire area. Multiply that by every sale. Then wait 6-10 months (if Australia is any precedent) for a general realization of what is happening to sink in, then watch the rush to the exits. If these 800k houses are going to lose 10% in a year, many more owners than normal are going to want out, because the loss is so large because the leveraged bet is so high. Because of sky high values, buyers are under threat to lose 200% of their of their cash investment if they only put 5% down. Suddenly the house doesn't look so dreamy perfect anymore, it looks like a giant battle ax hanging over the head of one's net worth.

And believe me, lots of people in California said: "I don't care whether the value goes down, I'll just keep making my payments and ignore what is happening." These people changed their minds. Being underwater means you are stuck. Trapped, even if payments are affordable because of your situation, is not a state humans particularly like living in.

CMHC backing fewer loans

Financial institutions are required to have mortgage-default insurance when a consumer has less than 20% equity. However, the banks have been seeking insurance on loans with even high downpayments — something not required by law — so they can securitize those bulk lending loans, thereby getting them off their balance sheets and reducing their capital requirements. In those cases in which the loans to value is less than 80%, the bank pays the insurance charge instead of the consumer.

One of the great myths of Canadian banking: We aren't making the same mistakes as the U.S. like securitizing mortgages. Right. You can't blow a bubble without excessive capital pouring into housing. In Canada that excess has been from securitization for more than the last three years. This isn't new.

“One of the things that has got them [to the limit] faster than expected is they are doing a lot of conventional insurance for lenders,” said one source. Just three years ago, CMHC had $450-billion in loans it was backstopping and had to go to the government to get that increased to $600-billion.

I really really hope CMHC audits every one of the claims from the banks. I fear they will be used as a bailout mechanism, like last time. Sadly.

CMHC gave no indication it would seek an increase in its limit.

Well, that would be something.

CMHC Insurance Limits: A Wake-up Call for Lenders

Mortgage default insurance is typically only “required” when someone with less than 20% equity gets a mortgage.

Despite that, almost three-quarters of CMHC’s outstanding mortgage insurance is low-ratio (i.e., 20% equity or more). That’s largely because banks have been buying portfolio insurance in gobs to insure against defaults on low-risk conventional mortgages.

Wait wait wait. Seriously. 3/4 of their book? Holy moly.

(Incidentally, the biggest bulk insurance customer recently has been Scotiabank, which reportedly had an abnormally large and predominantly insured $17+ billion mortgage-backed securities issuance in December.)

Wow, it's getting ugly out there folks. Be careful.

(If anyone knows what it costs banks in Canada to process a typical foreclosure, please drop a note in the comments. Thanks.)

Australia Q4 2011 House Price Charts

The Australian Bureau of Statistics has been hard at work. Here are the December 2011 charts of Price Changes and Index Price.

Australia, Sydney, Melbourne, Brisbane, Adelaide, Perth, House Price Index Chart

Australia, Sydney, Melbourne, Brisbane, Adelaide, Perth, House Price Change Graph

The change chart, partly due to old data adjustments at the ABS (there were quite a few) shows a return to a nosedive in the change in prices for Melbourne and Adelaide. Perth appears to be trying to stabilize at a moderate decline of -5% year over year. Based on these latest numbers, Sydney is no longer a bulwark against the coming reckoning.