Canadian Capitalist » Housing

Competition Bureau versus CREA, Round 3

Canadian Capitalist — Mon, 18 Oct 2010 03:38:38 +0000

Recently, the Competition Bureau announced that it has reached an agreement with the Canadian Real Estate Association (CREA) that will ensure that real estate agents to offer a variety of services and prices, including simply posting a property on the Multiple Listing System (MLS). The agreeement, which will remain in force for 10 years, is kept under wraps until the deal is ratified by CREA’s members.

Citing sources familiar with the deal, the Globe and Mail reported on the broad contours of the agreement between the Competition Bureau and CREA:

Only licensed agents will be able to post a listing on the MLS. The agent will be responsible for the integrity of the listing.
Sellers hiring an agent for simply listing their property will not have their contact information posted directly on Realtor.ca. But the listing can contain links to other sites that provide contact information.
FSBO listings will be expected to reveal how much they will pay the buyer’s real estate agent.
CREA will eliminate its ability to adopt rules that discriminate against real estate agents who provide listing-only services.

It appears that the Bureau has succeeded in its battle with CREA to (a) allow agents offer a variety of services at different price points and (b) remove CREA’s ability to change to restrict consumer choice. This agreement will allow brokers such as Best Value Real Estate that offers to list a home on the MLS for just $109 (admittedly, as a loss-leader) to continue offering “listing-only” services.

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A Tale of Two TIME Magazine Covers

Canadian Capitalist — Wed, 08 Sep 2010 01:58:54 +0000

Back in June 2005, TIME magazine put what in hindsight turned out to be a massive housing bubble on its cover, cleverly calling it “Home $weet Home”. Inside, the main story titled America’s House Party raved about how disk jockeys, hair dressers and Taco Bell cashiers were making fortunes flipping houses:

You shouldn’t get the impression that you can make six figures in real estate by snapping your fingers. Just ask Max Kaiser. It once took him a whole hour. The South Florida real estate investor bought a Miami-area two-bedroom luxury condo–which had not yet been built–for $425,000 last year. After signing the purchase papers, Kaiser, 32, heard that a couple outside the developer’s office was interested in the same apartment. So he sold it to them on the spot for $525,000. “I heard it’s now going for $570,000, but what can you do?” he says. Don’t cry for Kaiser. Four years ago, he was an accountant, stultified by his job. Now he’s pricing Porsche Carreras.

At that time, I wondered if the cover story portends a real estate downturn. It turned out that in a mere weeks, the housing market started to slow down, setting off a chain reaction of economic events that brought the financial world so close to Armageddon.

How TIMEs have changed! Now, with US National home prices back at the level they were in the Fall of 2003, the magazine is at it again putting the housing market on the cover (thanks to Thicken My Wallet for alerting us to the story), only this TIME the caption reads “Rethinking Homeownership: Why owning a home may no longer make economic sense”. This may or may not be the absolute best time to buy a home in the US but we can say with some confidence that it is less risky buying a home after prices have dropped sharply than it would have back in 2005 after years of strong home price increases. Did TIME once again nail the precise moment in which the market turns? We’ll know in 2015.

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Competition Bureau versus CREA, Round 2

Canadian Capitalist — Tue, 23 Mar 2010 04:37:31 +0000

The Canadian Real Estate Association (CREA) tried its best to beat back the charge by the Competition Bureau that CREA’s rules that limit the choice of consumers as “anti-competitive”. The Association voted to change the rules requiring agents to represent sellers for the entire duration the property is listed on the Multiple Listing Service (MLS). CREA says the change will address the Competition Bureau’s concerns and provide consumers with the choice of listing a home on the MLS for a flat-fee and handling the rest of the home selling process on her own.

While that sounds like the Competition Bureau has prevailed in its attempt to inject competition, CREA’s proposal is reported to include an escape clause that would allow local real estate boards to enforce their own set of rules. The Competition Bureau lost no time in firing back that the amendments do not go far enough:

“There is nothing in these proposals that we haven’t seen before and they do not solve the problem,” said Melanie Aitken, Commissioner of Competition, “They are a step in the wrong direction. These amendments amount to a blank cheque allowing CREA and its members to create rules that could have even greater anti-competitive consequences.”

The Competition Bureau will now take its case to the Competition Tribunal but CREA can be expected to put up a good fight. It will be a fascinating battle to watch but you do get the feeling that CREA is fighting a losing battle. It is naive to expect that the real estate market will remain immune from the competitive forces that have brought in discount pricing in so many other industries.

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New Mortgage Rules and Rental Properties

Canadian Capitalist — Wed, 17 Feb 2010 04:55:18 +0000

Attention Ottawa-area readers: CBC Ottawa is looking to talk to a regular investor between the ages of 25 and 50, who actively keeps an eye on the stock market and may have lost money during the economic downturn and are changing their investment strategy. If you are interested please contact Sannah Choi at 613-288-6471. You can also reach Sannah via e-mail at Sannah-(dot)-Choi-(at)-cbc-(dot)-ca.

You would have heard by now that the Federal Government has announced three changes to the rules governing government-backed mortgages (current rules in brackets):

All borrowers must meet the debt service ratios for a five-year fixed rate mortgage even if they opt for a mortgage with a lower interest rate and shorter term. (Borrowers must satisfy the debt service ratios with the interest rate on a three-year fixed even if they opt for a variable-rate mortgage).
Mortgage refinancing will be limited to 90 percent of the value of the property. (Refinancings are limited to 95 percent of the value of the property).
Small rental properties of 1 to 4 units will require a minimum down payment of 20 percent. (Rental properties require a down payment of just 5 percent).

The first tweak appears to be a marginal change because the differential between a 3-year rate (that is currently used to determine debt service ratios) and a 5-year fixed-rate mortgage is only about 0.5%.

The second and third tweak are likely to have a significant impact on investors in rental properties. Many investors purchased their first rental property by taking equity out of their primary residence. With ever-increasing home prices, they would then proceed to take equity out of their first rental property and purchase their next property. Rinse and repeat and pretty soon you can own a string of properties supported by massive amounts of leverage. It would be interesting to see if prices for rental properties decrease (and rental yields increase) in the wake of new mortgage rules.

You can also check out Canadian Mortgage Trends’ take on the subject here.

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Real Estate Agent Incentives

Canadian Capitalist — Wed, 10 Feb 2010 04:06:10 +0000

In his book Freakonomics: A Rogue Economist Explores the Hidden Side of Everything, economists Steven Levitt and Stephen Dubner point out that a real estate agent has the incentive to sell a home quickly, not get the best price for the seller. Consider a home that is listed at $400,000. Assuming that a selling agent nets a 1.25% commission on the house after splitting the commission with the buyer’s agent and his agency and the home sells for the listed price, the agent will earn a commission of $5,000. The seller is left with $380,000 after paying his agent’s commission.

Now, assume that the seller holds out for a higher price of $410,000 or $389,500 net of commissions. The seller has an extra $9,500 on the sale of his home but the agent has just $125 more in commissions. Clearly, the agent’s incentive is to sell the home quickly, not hold out for a higher price. Mr. Levitt and Mr. Dubner found that sales data for homes in the Chicago area reflected the way realtor incentives are structured: when an agent sells his own house, they keep in on the market an average of 10 days longer and sell it for 3% more compared to homes sold for clients.

You might want to check this excerpt from Freakonomics on the subject of real estate agents. It includes terms you should put in a for sale ad (and terms to avoid) and this funny story related by a professor who was looking to purchase a home:

I was just about to buy a house on the Stanford campus, and the seller’s agent kept telling me what a good deal I was getting because the market was about to zoom. As soon as I signed the purchase contract, he asked me if I would need an agent to sell my previous Stanford house. I told him that I would probably try to sell without an agent, and he replied, ‘John, that might work under normal conditions, but with the market tanking now, you really need the help of a broker.’

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Real estate rules termed “anti-competitive”

Canadian Capitalist — Tue, 09 Feb 2010 17:21:46 +0000

The Canadian Real Estate Association (CREA), which owns the Multiple Listing Service (MLS), has rules preventing realtors from listing a home in the database for a flat fee. A homeowner simply wanting to list her home in the MLS and is willing to do the legwork to sell her home on her own cannot do so. Instead, she is forced to hire a registered realtor, who in turn is prohibited to simply list the home in the database for a flat fee. The realtor is bound to represent the seller throughout the sale process under the “minimum service” standards required by the CREA.

The Competition Bureau, a federal watchdog mandated with protecting and promoting competitive markets, is saying that it will challenge CREA’s rules because the “rules restrict the ability of consumers to choose the real estate services they want, forcing them to pay for services they do not need”. You can read the Bureau’s press release here.

It is not clear how long it will take for discount brokers to start offering services to simply list a home in the MLS. What is noteworthy though it that it has taken close to three years for the Competition Bureau to rule on CREA’s “minimum service” standards. If CREA creates additional road blocks, could this dispute drag on forever?

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What are these home owners thinking?

Canadian Capitalist — Wed, 18 Nov 2009 15:55:29 +0000

We are just recovering from a punishing recession in which millions of jobs were lost and portfolios were decimated by a market downturn. Across the border, home owners are defaulting on their mortgages in record numbers because they loaded up on mortgage debt at teaser rates and are unable to make mortgage payments when the rates reset at a much higher level. Therefore, it is surprising to read that many Canadians refuse to learn from recent experience and are loading up on long amortization, variable-rate mortgages at record low interest rates. The Globe and Mail reported today that mortgage brokers are doing brisk business as many first-time home owners rush in to take advantage of today’s (probably temporary) low rates:

It’s these buyers who have raised fears of a bubble, negotiating mortgages at historic lows, opting for 35-year terms and making small 5-per-cent down payments to keep monthly outlays down and put previously unaffordable homes within their reach.

“They are taking advantage of things that are a lot more attractive initially but they could find themselves in a position where they couldn’t afford their mortgage if rates start to go up,” Mr. Averbach says.

This report comes in the wake of a recent interview The Toronto Star conducted with Peter Aceto, CEO of ING Direct Canada:

Aceto said he is so concerned about the market that he has instructed staff to advise customers not to go with longer-term amortizations if they can help it. More than 50 per cent of all mortgages in Canada this year were amortizations longer than the standard 25 years, says Aceto.

As a result, the lender said he is worried that some consumers are biting off more than they can chew.

Those who fail to study history are condemned to repeat it. Those who ignore very recent experience are just being stupid.

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Is Canadian Real Estate Overvalued?

Canadian Capitalist — Mon, 29 Sep 2008 03:03:33 +0000

A recent UBC report that found real estate in many Canadian cities to be overvalued got much play in the media. It found that home prices are over-priced by as much as 25% in some cities. The surprising part is the cities mentioned wouldn’t be the first ones that come to mind as overvalued: Montreal, Ottawa, Regina, Winnipeg and Halifax. Calgary and Vancouver were found to have “balanced” conditions with predicted price declines ranging from 7% to 11%, Edmonton undervalued by 8% and Toronto priced just right.

If you dig deeper, you’ll find that the report is riddled with questionable assumptions. The study arrives at its findings by comparing difference between the cost of ownership (calculated by adding the mortgage rate, taxes, insurance and maintenance) and the rental yield of a home with the expected rate of appreciation. If the cost differential equals the expected price appreciation, home prices are said to be in equilibrium; if it’s less, homes are undervalued, overvalued otherwise.

The problem isn’t with the methodology (in fact, we’ve used the same method in many earlier discussions on housing) though there is a lot to quibble about in the data. For instance, does a 7.37% mortgage rate sound reasonable when a discount of almost 2% off the posted rate can easily be obtained? The key question is the expected rate of home price appreciation and the authors recognize the challenge:

The greatest challenge in measuring the cost of capital is determining the expected price appreciation. All other variables in the equality are directly measurable, even if they are measured with some error, but individuals’ subjective expectations are not. The “correct” rate cannot be solved for from the relationship without assuming that prices and rents are already in equilibrium because the owner cost of capital relationship is an equality. There is always some expectation of future house price growth that will ensure that the relationship between rents, prices, and the cost of capital holds. In this study we assume that the best predictor going forward of expected long run equilibrium house price appreciation is the historic rate.

The authors then assume that future returns will be the same as “the average of trough-to-trough and peak-to-peak rates of appreciation of past cycles”. In addition, conclusions are drawn about certain markets (Halifax and Ottawa) using data that spans just 17 years. As Canadian Financial DIY pointed out, these assumptions are, at best, tenuous and hardly justify the bold assertions made in the report.

Merrill Lynch joined the negative parade recently warning that Canada faces a “meltdown” but their report is not available online (Update: Thanks to Retire @ 31 for the link to the report). Scotia Bank economists, on the other hand, think that a “modest erosion of house prices” is more likely.

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Book Review: House Lust

Canadian Capitalist — Tue, 10 Jun 2008 03:17:46 +0000

House Lust by Newsweek reporter Daniel McGinn is an eye-opening account of the obsession that many Americans have for their homes, which first led to one of the biggest boom in housing prices and later turned into a bust with far-reaching consequences. A Washington Post columnist quoted in the book probably defined the term best – “a house or an apartment becomes not just a place of shelter or an emblem of status or even a considered investment, but an obsession that haunts us no less intensely than Vladimir Nabokov’s nymphet Lolita tortured the imagination of poor, sick Humbert”.

As the author himself admits, this book is not a comprehensive analysis of the rise and fall of the housing market. Instead, it simply tells stories of (mostly well to-do) people who became fixated on their homes – constantly talking about it, checking out the prices of their friends and co-workers’ homes on Zillow or just endlessly renovating their properties. Consider the following vignettes:

Some homes now have master bedrooms so large that they may need an “extreme ultra king” bed that measures 12 feet wide and 10 feet long.
To deal with the emotional, financial and marital stress of renovating their homes, couples are engaging the services of a new breed of therapists who offer counselling at $90 per session, with a regular treatment lasting four to six sessions.
Investors purchasing run down rental properties (for the “cash-flow”) in far-off places like Pocatello, Idaho, sight unseen. One economist estimated that in 2005, about one in three homes was purchased as an “investment property”.

If you even have a passing interest in real estate (who doesn’t?), you might want to check out this book. Mr. McGinn’s intrepid reporting from the front lines of the real estate bubble covers people buying McMansions, lusting for newly constructed homes, undergoing renovation hell, watching or reading “real estate porn” on shows like House Hunters, looking for cash flow in odd locations, rushing to become realtors, buying one (or more) vacation properties makes for an entertaining read. The book’s website features an excerpt, articles and a quiz.

Rating: 7 out of 10.

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Global Housing Bust

Canadian Capitalist — Wed, 30 Apr 2008 04:30:08 +0000

The news on the housing front out of the U.S. continues to be bleak – prices were down 12.7% on average in 20 markets in February 2008 compared to the same time last year, with prices dropping 20% or more in Las Vegas, Miami and Phoenix. In Canada, at least one analyst boldly declared the housing boom “officially over”, not to mention an entire grim book on the subject but the IMF thinks that Canada is in a much better position compared to other major economies. Here’s the housing bust is playing out around the world:

Australia: Home prices have started to fall in many Australian cities (Melbourne and Sydney) and some estimates suggest property prices could fall as much as 25%. With interest rates at 7.25%, many reports indicate that overleveraged homeowners are struggling to pay the mortgage.

Ireland: The Independent newspaper colourfully labelled 2007 as “the year the roof began to fall in” and another later report notes that Irish home prices fell by an average of 7.3% in 2007.

United Kingdom: Reports indicate that the housing bubble has already started to deflate in the U.K. The Times featured anecdotal reports of falling home prices, while The Economist magazine calls for a “hard landing”.

Spain: Property sales are down, prices are moderating and home buyers are treated like movie stars.

India: After prices tripled over four years, reports indicate that housing prices have fallen as much as 20 to 30 percent.

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