London House Prices Reach Record Unaffordability

Earlier this month, we noted further evidence that London’s housing bubble is bursting. In its October 2017 survey, the Royal Institute of Chartered Surveyors (RICS) reported the largest proportion of respondents seeing a drop in London house prices versus the previous month since 2009. The net balance was nearly two thirds (-63%) in favour of declines, which contrasted sharply with a national average which was marginally in positive territory (+1%).

The RICS data corroborated the Bank of England’s regional agents’ report a day earlier which highlighted “signs of excess supply in London and the South, but some excess demand in most other parts of the United Kingdom”.

The bad news for wannabe London residents is that in spite of the (slightly) lower prices, the affordability of residential property in the capital – at nearly 15 times income - is the worst it’s ever been. According to Bloomberg,

London homes are less affordable than ever before, despite slowing price growth and government attempts to cut the cost of housing for first-time buyers.

 

It now costs the average Londoner 14.5 times their annual salary to purchase a home, the highest level on record, according to a report Tuesday by researcher Hometrack. Cambridge, Oxford and the English seaside town of Bournemouth also have price-to-earnings ratios in the double digits, the report shows.

“Unaffordability in London has reached a record high, despite a material slowdown in the rate of house-price growth over the last year,” Richard Donnell, research director at Hometrack, said in an interview. “The gap between average earnings and house prices in the capital has never been wider.”

Even with the recent slowdown, the average cost of a first home in the U.K. capital is still up 66 percent since 2012 as supply fails to meet the demand from domestic buyers and overseas investors. Spiraling values have caused the number of younger buyers in the capital to fall, something that Chancellor of the Exchequer Philip Hammond sought to address last week when he abolished stamp duty for first-time buyers of homes worth up to 300,000 pounds ($400,290).

London house prices rose an average 3 percent in the year ending October to 496,000 pounds, less than half the 7.7 percent growth rate of a year earlier, Hometrack said. The researcher defined London as the 46 boroughs in and around the U.K. capital.

Last week, making housing more affordable was one of the centerpieces of Chancellor of the Exchequer, Philip Hammond’s, budget speech. However, some commentators doubted that the new measures would help, as the Financial Times noted.

Mr Hammond’s signature policy plan was a £44bn package of investment, loans and guarantees to increase the annual amount of new homes built to 300,000 in the middle of the next decade, up from 217,000 last year, aided by planning reforms designed to encourage homebuilders not to sit on permissions already granted.

The measures on housing supply were augmented by a headline-grabbing cut in stamp duty for first-time buyers on properties below £500,000. No stamp duty will apply for purchases below £300,000.

However, in a blow to the chancellor, the independent Office for Budget Responsibility said the main effect of these cuts would be to raise house prices and only lead to the purchase of an additional 3,500 homes a year. The fiscal watchdog also indicated it did not think the house building measures would make much difference. Lower household incomes led it to reduce its forecast for the growth in spending on home building.

Speaking to Bloomberg, Hometrack’s Donnell was not convinced either since housing, in London particularly, is already so unaffordable.

Still, Donnell is skeptical that the tax measures in Hammond’s budget speech last Wednesday will have much effect on affordability, given the large sums needed to get on the housing ladder. “The changes to stamp duty are unlikely to significantly impact this trend as the greatest challenge for first-time buyers is the income required to pass mortgage-affordability stress tests,” Donnell said.

However, London’s lack of affordability and limited available stock is having a positive impact on the rest of the UK, as Bloomberg explains.

The northern English cities of Manchester and Birmingham registered the fastest house-price growth, at more than 7 percent. London will continue to underperform some regional cities over the next two to three years as costs adjust to levels buyers are willing to pay, while the price-to-earnings ratio in the capital is “expected to drift lower,” Hometrack said.

It will take more than underperformance to make London housing affordable, more a like a crash.
 

House Price Bubbles 2.0 In Pictures

By Mark Hanson Of M Hanson Advisers

Bottom Line: House prices and end-user, shelter-buyer fundamentals have never been further apart in key, economically significant cities.

The two charts presented in this note highlight just how diverged house prices have become from end-user, shelter-buyer, employment and income fundamentals in the most populated, economically significant US cities.

I maintain that House prices are always drawn to the purchasing power — or, economic strength — of the end-user, shelter-buyer cohort, as the dominant, permanent demand driver.

But, sometimes House prices, like other asset prices, go through periods of separation from end-user, shelter-buyer cohort fundamentals.  And based on the most recent data of incomes, mortgage rates, and House prices in key cities around the nation, house prices and end-user fundamentals have never been further apart.  Even in Bubble 1.0, the divergence wasn’t this bad because exotic loans, which were the incremental driver of House prices, made for legitimately low monthly payments.

Some positive or negative divergences can be solved through lots of time, as the economy shrinks or grows.  But, over the past several years, as the economy barely grew each year, house prices soared at a pace that exceeded Bubble 1.0 in most regions.

As such, it’s reasonable to assume that the massive divergence in most key metros has been driven largely from the three things that just so happen to be present in all bubbles throughout history; SPECULATION, LEVERAGE, AND EASING CREDIT STANDARDS, regardless if on an individual, corporate, financial market, or Gov’t level.

* * *

THINK ABOUT IT THIS WAY…

If everybody had to buy a house the exact same way — say, with a 30-year fixed, fully-documented mortgage and 20% down — HOUSE PRICES could never detach from the end-user, shelter-buyer employment and income fundamentals for a particular region. In other words, HOUSE PRICES would be attached to and track these fundamentals, perfectly.

But, in times, of increased speculation, leverage, and declining credit standards, the end-user, shelter-buyer employment and income fundamentals get drowned-out and asset prices attach to the incremental spec and high-leverage drivers.  How long and far asset prices are driven by the incremental, spec and leverage drivers determines the scope of the divergence and ultimately the possible downside risk in an asset class.

For housing, in particular, using these data, I can easily calculate the potential HOUSE PRICE downside in each area.

Bottom line:  This massive HOUSE PRICE/fundamentals divergence will close at some point, either from surging wages, plunging credit standards or rates (make monthly payments less), falling HOUSE PRICES, or a combo of all three. 

* * *

Onto the data.

A big problem with house prices experiencing even a “moderate” correction of 10% to 20% — already underway in many of the most over-priced regions — is with between 40% and 50% of all house purchases for years being of the “less than 10% down” variety — and because it takes 8% to 10% equity to sell plus the 3% to 10% down payment on the new house — it doesn’t take much downside to swamp the nation in “NEGATIVE EQUITY” once again. And we know for certain that many homeowners rather pay their credit cards and car payments before their mortgage when they are underwater.

* * *

ITEM 1)  Household income INCREASE needed to Buy the Median Priced House in Key Cities.

Bottom Line:  On a “national” basis the divergence isn’t too bad…6%.  But, in the key cities that drive the US economy, Bubble 2.0 has blown large.  This represents significant downside, especially in the sand states, just like in Bubble 1.0.

ITEM 2)  DIVERGENCE between Actual Household Income & Income Needed to Buy the Median Priced House.

Bottom Line:  Here too, on a “national” basis the divergence isn’t too bad…-6%.  But, in the key cities that drive the US economy, Bubble 2.0 has blown large.

Mark Hanson Reveals "The Next Housing Bubble"

The striking Case-Shiller regional charts shown below, courtesy of MHanson.com, make Mark Hanson angry: "so, 2006/2007 was the largest house price bubble ever, but there is nothing to see here in 2017?" and sarcastically points out that "if this isn"t a house price bubble, I would hate to see one."

His bottom line:

If 2006/07 was the peak of the largest housing bubble in history with affordability never better vis a’ vis exotic loans; easy availability of credit; unemployment in the 4%’s; the total workforce at record highs; and growing wages, then what do you call “now” with house prices at or above 2006 levels; worse affordability; tighter credit; higher unemployment; a weakening total workforce; and shrinking wages? Whatever you call it, it’s a greater thing than the Bubble 1.0 peak.

And visually:

Below are some further observations and "red-flags" from Hanson on Peak Housing, after the latest new home sales data:

• Sharp downward sales revisions for past 3-months.


• Huge downward price revisions for past 3-months, lower by 10%, 5% and 3%, respectively, exactly as I predicted on last month"s release.


• Builders maxed out on pricing power; Med & avg prices flat for 2-years.


• The all-important Southern Region was flat YY; the South makes up over half of all sales in the nation, and drives builder demand and profits.


• 100% of the June YY sales gain came from the Western Region, which doesn"t jibe with the weak price performance and will likely be revised lower next month.


• Income required to buy the avg priced builder house is at historical highs and has completely diverged from the multi-decade trend line.


• Historically low growth & rebound relative to resales suggest "lack of supply" meme in the Existing Sales market is over-stated.

As he says, "Peak builder is here."

Finally some other quantitative and qualitative observations from the housing guru:

1) New Home Sales "up to" 1995 levels after $15 TRILLION in debt and Fed liquidity aimed largely at the sector.

2) Builder pricing power largely flat for 2-years.

3) Income required to buy the average priced builder house has completely diverged from the multi-decade trend line. This obviously explains why sales are only at 600k SAAR now vs 1.2 million in Bubble 1.0. Reversion to this mean will occur...either thru a sharp rise in income; new exotic loan programs, which make payment less; or house prices dropping.

4) Last time builders were this euphoric was the peak of the biggest credit bubble in history.

5) It"s too bad the public isn"t as euphoric about buying as the builders think they are.

Spot The Outlier - Seattle Home Prices Go Vertical As Laundered Chinese Money Flows In

Last summer we declared that "China"s favorite offshore money laundering hub is officially no longer accepting its money" after the city of Vancouver slapped a 15% tax on foreign real estate buyers.  The tax was intended to curb a massive real estate bubble which had resulted from an influx of Chinese money over the preceding years.  The move seemingly worked as it resulted in a staggering and immediate 96% drop in foreign buyers (see: Foreign Buying Plummets In Vancouver: Sales To Foreigners Crash 96%). 

According to data released by British Columbia’s Ministry of Finance on Thursday, foreign investors officially disappeared from Vancouver’s property market last month after the local government imposed a 15% surcharge to curb a record-shattering surge in home prices. Overseas buyers accounted for a paltry 0.7% of the C$6.5 billion of residential real estate purchases in August in Metro Vancouver; this represents a 96% plunge from the seven weeks prior, when foreigners were responsible for 16.5% of transactions by value.

According to the latest data overseas buyers snapped up C$2.3 billion of homes in the seven weeks before the tax was imposed, and less than C$50 million in the next four weeks. The government began collecting data on citizenship in home purchases on June 10. The ministry said auditors are checking citizenship or permanent residency declarations made by buyers and also reviewing transactions to determine if any were structured to avoid tax (spoiler alert: most of them were).

So, take a look at the chart below and see if you can figure out where all those Chinese buyers may have gone...

As The Seattle Times points out today, Seattle"s sudden surge in home prices is the market"s most rapid ascent since just before the housing bubble collapsed a decade ago. 

It marks the most rapid housing-price increase here since 2006, when home values were rising at an unsustainably brisk pace — up to nearly 19 percent growth — before dropping during the recession. The previous high-water mark in the current boom came in fall 2013, when home values soared 13.2 percent.

The price hikes also surpass anything Seattle saw during the 1990s or early 2000s (Case-Shiller’s data began in 1990).

The market isn’t just hot by Seattle standards: No region in the country has had prices soar this fast in the past three years. The last metro area to get this heated was San Francisco, where home costs soared more than 20 percent in 2013 and 2014.

Meanwhile, to our complete "shock", the Times goes on to point out that the Seattle market has seen a lot of interest from Chinese buyers of late who like to pay cash (also shocking) for luxury homes that they don"t even bother to visit before buying and rarely ever actually occupy.

For the past few years, a small but growing portion of homebuyers had been coming from overseas, especially from China — targeting mostly upscale homes, and often paying cash, sometimes sight unseen.

Interest soared last year, after British Columbia enacted a tax on foreign buyers in the Vancouver area. At one point after that tax took effect, Seattle was the No. 1 American city for inquiries from Chinese homebuyers, according to Juwai.com, which helps people in China buy homes abroad.

Foreign homebuyers have themselves contributed to rising prices in some ZIP codes here: Real-estate agents say foreign buyers are more likely to pay cash and bid up homes than other buyers. They also tend to eye luxury homes. In some parts of West Bellevue and along the Lake Washington waterfront, Realtors have reported that half or more of their business now comes from foreign homebuyers.

Juwai’s data show 38 percent of Seattle buyers from China purchase the home primarily as an investment. Some of those buyers might also live in their new home or allow family members to live there, but in other cases, they sit empty.

But it"s probably nothing...maybe Americans are just suddenly attracted to Seattle"s thoroughly depressing climate where residents can go months and months without ever actually seeing the sun.

Rental Growth Is Rapidly Decelerating Across The US

Single-family rents, as measured by the CoreLogic Single-Family Repeat Rent Index (SFRI), climbed steadily between 2010 and 2016. However, as CoreLogic reported last week, rent growth has seen a material decline during the last 18 months. The index shows that rent growth has been slowly decelerating (Figure 1) since February 2016 when it peaked at a 4.3% year-over-year increase. As of May 2017, single-family rents increased 2.9% year over year, a 1.4% point deceleration since the February 2016 peak. The index measures rent changes among single-family rental homes, including condominiums, using a repeat-rent analysis to measure the same rental properties over time.

Corelogic"s analysis of the value tiers of the index reveals important differences.

Figure 1 shows that the index’s overall growth was pulled down by the high-end rental market, defined as properties with rent amounts of 125% or more of a region’s median rent. Rents on higher-priced rental homes increased 2% year over year in May 2017, down from a gain of 3.1% in May 2016. Growth in the low-end market, defined as properties with rents less than 75% of the regional median rent, increased 4.5% in May 2017, down from a gain of 5.6% in May 2016.

Rent growth varies significantly across metro areas and over time. Figure 2 shows the year-over-year change in the repeat rent index for 20 large metro areas in May 2017.

Figure 3 shows the relationship between the index growth and rental vacancy rates for 37 metro areas in Q1 2017.

Cities with limited new construction and strong local economies that attract new employees to the market tend to have low rental vacancy rates and stronger rent growth. Seattle experienced 5.4% rent growth year over year in Q1 2017 2 , driven by strong employment growth of more than 3% year over year and rental vacancy rates of 1.9 percent in Q1 2017, about 5 percentage points lower than the 7% national single-family rental home vacancy rate.

In contrast, Houston, which has been hit with energy-related job losses since early 2015 and a rental vacancy rate of 11.3% in Q1 2017, experienced a 1.8% year-over-year decrease in rents according to CoreLogic data.

New Home Prices Are Over 50% Higher In Canada Than The US

Authored by Kaitlin Last via BetterDwelling.com,

The price of new homes is quickly diverging in Canada and the US.

 Data from the Canadian Housing and Mortgage Corporation (CMHC) show that new homes are selling for substantially more than the same time last year.

Meanwhile south of the border, data from the US Bureau of Census show that new home prices are on the decline.

This has lead to an even wider gap between the average price of a new home in Canada and the US.

Canadian New Construction Is Higher

The price of a new home across Canada is up for the second month in a row. The average sale price in April was CA$751,881 (US$559,123). This represents an 11% increase from the same time last year, when measured in Canadian dollars. When compared in US dollars, that increase drops to a much more conservative 2.64%. Even after factoring in the loonie’s decreased buying power in Canada, new home prices still climbed.

US New Construction Is Lower

American new home builders aren’t seeing such steep climbs in sale prices. Actually, they aren’t seeing climbs at all. The average price of a new home in the US was CA$495,271 (US$368,300). This represents a 3% decline from the same time last year, when measured in US dollars. In Canadian dollars, this was a 0.49% decline from the same time last year. Both forms of measurement show declining home prices in the US, curious since their economy is in a much better state than Canada right now.

US Vs. Canadian Prices

New homes are trading at substantially higher values in Canada than the US in April. The average new home in April 2017 was 51% higher in Canada than the US. The same time last year, prices in Canada were only 36% higher. It appears in a post-crash United States, new home buyers are taking much more conservative strides. In a hasn’t-crashed-in-decades Canada, new home buyers are optimistic about future values.

The gap between new home sale prices in Canada and the US is growing substantially. The US is a country with a booming economy, almost 10 times the population of Canada, and less land mass. Somehow, new home prices in the US are dropping compared to the same time last year. In sparsely populated Canada, prices are increasing – despite the precarious position of our economy.

Are Americans being overly cautious on homeownership, or are Canadians demonstrating irrational exuberance for homeownership, much like the US did in a pre-2006 America? Tell us your thoughts in the comments.

70% Of Millennials Have Less Than $1,000 Saved For Buying A House

One of the frequent reasons cited for the failure of the US housing sector to rebound to its pre-recession levels, is the lack of household formation among young American adults and specifically the unwillingness, or inability, of Millennials, which last year overtook Baby Boomers as America"s largest generation...

... to move out of their parents" basement, or stop renting, and purchase their own home. Now, a new study from Apartment List confirms the underlying problem: nearly 70% of young American adults, those aged 18 to 34 years old, said they have saved less than $1,000 for a down payment. This is similar to what a recent GoBanking Survey found last year, according to which 72% of "young millennials"- those between 18 and 24 years old - had $1,000 in their savings accounts and 31% have $0; a sliver (8%) have over $10,000 saved. Of the "older millennials", those between 25 and 34, 67% had less than $1,000 in their savings accounts, 33% have nothing at all, and 15% have over $10,000.

As the WSJ frames it, with most millennials having saved virtually nothing for a down payment on a home "many will face steep obstacles to homeownership in the years ahead." It also means that the US housing market, traditionally the bedrock of middle-class American wealth, may never recover to levels seen during the prior economic cycle which incidentally peaked as the housing bubble burst, scarring an entire generation with the vivid memories of what happens when millions of Americans rush to overpay for homes.

Which is not to say that US housing is languishing, on the contrary. As we showed earlier this week, in the first quarter of 2017, the number of California homes that sold for $1 million or more totaled 10,562 up 11.7% year over year and the highest on record for a first quarter.

However, while the 1% (or even 10%) of America"s wealthiest buy and sell trophy real estate among each other (or to Chinese oligarchs) with impunity, creating another bubble in luxury real estate, for the vast majority of America, it"s "middle class", homeownership is becoming an increasingly elusive dream, forcing many to contend with renting indefinitely.

And, going back to the original study, the culprit appears to be the inability, or unwillingness, or America"s youth to save because according to Apartment List, even senior members of the age group are falling short. Nearly 40% of older millennials, those age 25 to 34, who by historical measures should already own or be a few years away from homeownership, said they are saving nothing for a down payment each month.

Here is the punchline: the vast majority—some 80%—of millennials said they eventually plan to buy a home. But 72% said the primary obstacle is that they can’t afford it.

That"s a pretty big obstacle as the study"s creator admitted. “It’s encouraging that millennials do want to buy homes. It suggests that they are delaying forming households but they’re not giving it up,” said Andrew Woo, director of data science and growth at Apartment List. “The biggest reason [they aren’t buying] is because of affordability.”

This is how America"s most troubled generation sees the problem in their own words: Catie Peterson, a 22-year-old graphic designer in Fort Lauderdale, Fla., said she doesn’t expect to start saving for a down payment for another five years or so. “I barely have enough savings to cover my car if it were to break down,” she said. Peterson said she pays $975 a month in rent for a small one-bedroom apartment, which is about one third of her paycheck, leaving little room to save.

“Once I get settled in my career and settled in my family, I think buying a house would be reasonable.” It would, but good luck finding something that is affordable enough for the bank to give you a mortgage.

As for the main reasons cited by Millennials why they are unable to save any money, these should be familiar to regular readers: they include student loan debt, rising rents and the slow starts many got to their careers during the recession. Furthermore, with many living in vibrant urban centers with ready access to restaurants, bars and entertainment might, saving seems less urgent. Furthermore, many are children of the affluent baby boomer generation and some expect their parents to give them a boost when the time comes, i.e., they expect to inherit their parents wealth. In total, some 25% of millennials ages 25 to 34 expect to receive help from friends or family, according to the survey. Still, three-quarters said they expect to receive less than $10,000, which might not be enough to close the gap.

* * *

It was not all bad news: the study found that some young people, if not nearly enough, may be saving more. On average, millennials who make more money save a smaller share of their incomes. Those making less than $24,000 save about 10% of their incomes, for example, while those making more than $72,000 save just 3.5%, according to the survey. Also, more millennials are finding a way to buy homes than a few years ago. First-time buyers have accounted for 42% of buyers this year, up from 38% in 2015 and 31% at the lowest point during the recent housing cycle in 2011, according to Fannie Mae (still, a first-time buyer is anyone who hasn’t owned a home in the past three years, a group that could include older people as well.)

Unfortunately for the generation that represents America"s future, the bad news dominates, and as the WSJ concludes many millennials face daunting odds: "less than 30% of 25- to 34-year-olds can save enough for a 10% down payment in the next three years, while just 15% could save that much within a year, according to the Apartment List survey."

Of course, there is a loophole. As we reported last week, programs are being rolled out to allow first-time buyers to purchase homes with even smaller down payments.  In fact, none other than the bank which had to be bailed out less than a decade ago, Bank of America, recently announced intentions to slash down payments to help Millennials. Speaking to CNBC, BofA CEO Brian Moynihan, the proud owner of Countrywide Financial, said that his mission is to reduce mortgage down payment requirements to 10% for traditional loans.  Per CNBC:

"But, you know, I think at the end of the day is people forget that, at different points in your life and different points on what you"re doing in life requires you to think about housing differently as a place for you and your friends, as a place for you and maybe your significant other, and then ultimately, a place for family. That drives change. And so yes, it"s taken more time. And we talked a lot about this, you know, four or five years ago, that if you require a 20% down payment, it takes just a little more time to accumulate 20% than it would 3% or none, which is what the rules were for a short period of time."

"So our goal, going back to regulatory reform, is should you move the down payment requirement from 20% to 10%? Wouldn"t introduce that much risk."

Of course, as we pointed out last week, we are certain that Moynihan"s sole purpose for wanting to
lower down payments is to help those poor millennials living in mom"s
basement, and has nothing to do with the fact that"s Bank of America (and Wells Fargo) has lost a ton of
fee revenue to government-backed loans that only require a 3% down
payment.

Why not?  Gradually destroying lending standards worked out really well last time around.

But we digress, so here is 33-year-old data analyst Gina Fontana who explained her problem so simply, even a Fed president could get it: she said she has saved a bit for a down payment but doubts she will use it anytime soon because home prices are so far out of reach. She added that she had saved enough for a 10% down payment on a $200,000 house when she was living in Philadelphia, but couldn’t buy anything in the neighborhoods she liked.

Now she has moved to Berkeley, Calif., and said the area’s home prices—where starter homes can go for close to $1 million—make the odds of buying a home essentially zero. “I don’t see that ever happening,” she said. “I just prefer to travel.”

Which is why it is only a matter of time before everyone throws in the towel on the housing recovery, and Goldman launches its first millennial travel-collaterialized securitization product (and its synthetic derivative).

The Toronto Housing Market Is About To Collapse By This Measure

With the collapse of Home Capital Group focusing the world"s attention on the Canadian real estate market, nowhere is the subprime debt time bomb more likely to go off than Toronto, which as we recently noted "has gone nuts."

Even Bank of Canada Governor Stephen Poloz (who declined to comment on questions about Home Capital Group and whether he’s worried about contagion), noted that Toronto is out control tonight while answering questions following a speech in Mexico City...

"pretty sure recent gains in Toronto home prices were not sustainable and that the city’s housing market had elements of speculation"

"Financial stability is part of the Bank of Canada’s monetary policy decision making, but the central bank’s primary mission is inflation targeting,... it would be odd to use interest rates to target home prices in just one city."

Perhaps Mr. Poloz... But, as we noted previously, it doesn’t take a genius to figure out that this will end in tears.  Even the big Canadian banks are fretting. “Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal Chief Economist Doug Porter warned clients. But the bubble’s deflation would push the city into a fiscal and financial sinkhole

Jason Mercer, TREB’s Director of Market Analysis, explained the basic supply and demand problem:

“Annual rates of price growth continued to accelerate in March as growth in sales outstripped growth in listings,” he said.

“A substantial period of months in which listings growth is greater than sales growth will be required to bring the GTA housing market back into balance.”

And that is exactly what Capital Economics is pointing out is occurring - in a very accelerated manner... as listings flood the market and an extreme lack of affordability means homes remains unattainable to all but the oligarchs seeking safe-haven for their "hard"-hidden gains, prices will have to adjust rather rapidly.

Additionall, Mercer told policy makers to tread carefully: “As policy makers seek to achieve this balance, it is important that an evidence-based approach is followed,” he said. This is a gravy train, and it must be allowed to speed on until the last cent has been extracted.

What we don’t know yet is when it will end in tears, and whose tears it will end with. But we already know: When it does end in tears, real estate organizations will first be denying it, and then they’ll be clamoring for a bailout of their stakeholders – so it will end in the tears of others.

"It's Just Crazy" (Again): 2-Bedroom LA House Sells 40% Above Asking

Two days ago we looked at the latest troubling development in US home price trends: a new bubble appears to be emerging in all the "usual suspect" places. As we noted on Thursday, "home prices in markets that bubbled over back in 2006/2007, like Las Vegas and San Francisco, got cut in half in 2009 but have since doubled again of their lows.  Meanwhile, markets like Denver and Dallas that didn"t participate as much in the 2007 mania are now surging to all-time highs, with Dallas prices up 55% over the past 5 years."

The Wall Street Journal added that some of the home buying behaviors of consumers, like paying prices well above appraisal values and waiving home inspections, are starting to be eerily reminiscent of 2006:

In some markets, bidding wars are breaking out. Agents said some buyers are kicking in extra cash when properties don’t appraise for the asking price, and some are waiving their right to home inspections.

“It can’t be sustained,” said David Berson, chief economist at Nationwide Insurance and a former chief economist at mortgage giant Fannie Mae, referring to the frenzied buying. “It can’t go on forever.”

Other signs of overexuberance have emerged, including surging levels of licensed Realtors all chasing a quick buck.

The number of licensed Realtors has jumped by nearly 25% since 2012, hitting a nine-year high in 2016 and sitting just 9% below the peak in 2006, according to real-estate consultant John Burns. In Denver, homes are selling briskly. The median number of days that homes spent on the market declined to eight in the first three months of the year from 61 in 2012, according to Redfin. Home prices rose 8.5% in Denver over the year ended in February, according to Case-Shiller.

Nicki Thompson, an agent in Denver, said she recently had a listing that was on the market for two weekends at $1.2 million and she received multiple all-cash offers above the listing price. 

“It’s just crazy,” she said.

And for a practical example of just how crazy it truly is, take this renovated 2-bedroom, 1,948 sq. ft house first built in 1951 in the Eagle Rock section of Los Angeles, which was listed in mid-March for $699,000, was estimated by Redfin at $780,000, and sold yesterday for $980,888 (more than $500/sq foot) and 40% above asking, just over a month after it was first listed.

Maybe it was the house"s profile "description" that unleashed the buying frenzy:

In the 1960s-80s drums played on some of the most famous pop songs known (Good Vibrations, Mrs. Robinson, A Little Less Conversation, to name a few) were built in this garage in our beloved Eagle Rock. A. F. Blaemire and his wife, Kirsten, filled this home with music and creativity for decades, and now it"s ready for its next inspired owner! With freshly refinished hardwood floors and repainted interior, 5208 Monte Bonito is a blank canvas with great potential. The rooms are bright and spacious, including a downstairs recreation room perfect for a jam room, art studio, den (or all of the above!). The two-car garage has direct access to the house and an additional storage room. The back yard has plenty of space for entertaining and gardening - there is already an avocado tree, an orange tree, and a pitaya to get you started! Views of the Eagle Rock from the master bedroom, and sunset views from the front porch make this the ideal setting to call home.

Then again, maybe not.

So what do you get for just under a million in LA these days? Not much: two bedrooms, less than two bathrooms, a 2 car garage, a decorative fireplace, a rec room, and a 7,195 sq foot lot.

Here are some photos showing what a "million dollar house" looks like in the latest US housing bubble.

Toronto House Price Bubble Goes Nuts

Submitted by Wolf Richter of Wolf Street

Based on fundamentals? You gotta be kidding.

Residential property sales in Greater Toronto soared 17.7% year-over-year to 12,077 homes, according to the Toronto Real Estate Board (TREB). New listings jumped 15.2% to 17,052. Prices for all types of homes, based on the MLS Home Price Index Composite “Benchmark,” soared 28.6%. The “average” selling price soared 33.2%!

That average selling price of C$916,567 is up from C$688,011 a year ago. Over the past five years, it has doubled!

The heavenly manna was spread across the spectrum. For condos, the average price in Greater Toronto soared 33.1% to C$518,879; for townhouses it soared 32.9% to C$705,078; for semi-detached houses, 34.4% to C$858,202; and for detached houses, 33.4% to C$1,214,422.

Even the house price bubble in Beijing cannot compete with this sort of miracle; new house prices there increased only 22% year-over-year in February. And Sydney’s fabulous house price bubble just flat out pales compared to the spectacle transpiring in Toronto, with prices up only 19% in March.

Vancouver has its own housing bubble to deal with. But there, the government of British Columbia has tried to tamp down on wild speculation with various measures, including a transfer tax aimed squarely at foreign non-resident investors, with “mixed” success.

Now the great fear in Toronto’s real estate circles is that the government of Ontario might impose similarly cruel and unusual punishment on the participants in this spectacle. Some measures are on the table, with folks wondering how to stop the bubble from inflating further and causing even greater harm to the real economy when it deflates, as all bubbles eventually do.

They’re reluctant. It seems they want to see how BC’s measures are washing out in Vancouver. The central government too is trying to fine-tune some macroprudential measures, but they’ve had absolutely no effect on Toronto’s housing bubble. And the Bank of Canada, which has been fretting about the housing bubble for a while – always couched in its very careful terms – refuses to raise rates. Everyone is talking. No one dares to do anything real about Toronto’s house price bubble.

In Toronto, according the real estate folks, it’s all based on fundamentals. It’s based on supply and demand and very rational calculated thinking, and there is no bubble in sight, lenders are just fine, and if Canadians are locked out of the housing market, so be it, it’s just a shortage of housing, really. So TREB President Larry Cerqua is glad the efforts to tamp down on it all have not come to fruition, in part due to TREB’s vigorous lobbying:

“It has been encouraging to see that policymakers have not implemented any knee-jerk policies regarding the GTA housing market,” he said in a statement.

“Different levels of government are holding consultations with market stakeholders and TREB has participated and will continue to participate in these discussions,” he said. “Policy makers must remember that it is the interplay between the demand for and supply of listings that influences price growth.”

Singing a similar tune, Jason Mercer, TREB’s Director of Market Analysis, explained the basic supply and demand problem:

“Annual rates of price growth continued to accelerate in March as growth in sales outstripped growth in listings,” he said. “A substantial period of months in which listings growth is greater than sales growth will be required to bring the GTA housing market back into balance.”

And he told policy makers to tread carefully: “As policy makers seek to achieve this balance, it is important that an evidence-based approach is followed,” he said. This is a gravy train, and it must be allowed to speed on until the last cent has been extracted.

It doesn’t take a genius to figure out that this will end in tears. What we don’t know yet is when it will end in tears, and whose tears it will end with. But we already know: When it does end in tears, real estate organizations will first be denying it, and then they’ll be clamoring for a bailout of their stakeholders – so it will end in the tears of others.

Even the big Canadian banks are fretting. “Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal Chief Economist Doug Porter warned clients. But the bubble’s deflation would push the city into a fiscal and financial sinkhole

"Trickle Down" Has Failed; Wealth And Income Have "Trickled Up" To The Top .5%

Authored by Charles Hugh Smith via OfTwoMinds blog,

Central bank policies have generated a truly unprecedented "trickle-up" of wealth and income to the top .5%.

Over the past 20 years, central banks have run a gigantic real-world experiment called "trickle-down." The basic idea is Keynesian (i.e. the mystical and comically wrong-headed cargo-cult that has entranced the economics profession for decades): monetary stimulus (lowering interest rates to zero, juicing liquidity, quantitative easing, buying bonds and other assets-- otherwise known as free money for financiers) will "trickle down" from banks, financiers and corporations who are getting the nearly free money in whatever quantities they desire to wage earners and the bottom 90% of households.

The results of the experiment are now conclusive: "trickle-down" has failed, miserably, totally, completely.

It turns out (duh!) that corporations didn"t use the central bank"s free money for financiers to increase wages; they used it to fund stock buy-backs that enriched corporate managers and major shareholders.

The central bank"s primary assumption was that inflating asset bubbles in stocks, bonds and housing would "lift all boats"--but this assumption was faulty. It turns out most of the financial wealth of the nation is held by the top 5%.

As for housing--yes, a relative few (those who happened to own modest bungalows in San Francisco, Seattle, Portland, Toronto, Vancouver, Brooklyn, etc.) on the left and right coasts have registered spectacular gains in home appreciation as the housing bubbles in these cities now dwarf the 2006-07 real estate bubble. But on average, the gains in home appreciation have barely offset the declines in real (adjusted for inflation) household income.

These charts illustrate the abject failure of the "trickle-down" economic theory.The majority of the assets that have soared in value are owned by the top 5%:

Wages as a share of GDP (gross domestic product, i.e. the nation"s total economic activity) has been declining for decades:

The only segment of households who have registered gain in real income over the past 20 years is the top 5%:

Even excluding capital gains--the source of much of the wealthiest class"s income--wealth disparity has reached astonishing asymmetries: most of the gains are flowing to the top 0.5%:

The Clinton, Bush and Obama presidencies shared one commonality: the wealth of the bottom 90% cratered in their presidencies while the wealth of the top .1% skyrocketed.

Central bank policies have generated a truly unprecedented "trickle-up" of wealth and income to the top .5%. Evidence supporting "trickle down" is nowhere to be found, at least in the real world.

"This Is Going To Blow Sky High" - Observations On Canada's Housing Market

For months we"ve been warning about real estate bubbles re-emerging in various markets around the world from Canada to Australia (see "There Are 66,719 Empty Mansions In Vancouver" and "Vancouver Home Sales Crash 40%, As Toronto Home Prices Soar 22%").  And while facts and figures clearly indicate that certain markets are bubbling over courtesy of all the same mistakes that caused the "great recession" in 2008, nothing helps to confirm the truly obscene nature of a real estate bubble quite like attending a good ole-fashioned, get-rich-quick real estate expo. As such, below are the musings of one financial market observer who recently attended the Canadian Real Estate Wealth Expo as a joke but walked away convinced the system is about "to blow sky high."

* * *

Originally Authored By Tim Bergin of On Beyond Investing

Originally, I thought this would be a bit of a joke.  There were billboards in all the Toronto subway cars advertising the Canadian Real Estate Wealth Expo - learn how to become a millionaire.  I thought this was so ridiculous, it may be fun.  What better way to experience the top of the housing market than watching Tony Robbins and Pitbull along with a bunch of US real estate professionals explain how Toronto real estate is the path to riches.

Prices were originally $150 per ticket, but I was able to buy for $50.  While it deeply bothers me that I paid $50 to these shameless (amoral) self-promoters, I thought it would be worth it to witness, in person, the top of the housing market.

I had thought, there can’t be that many people stupid enough to attend this, but I was very wrong - 15,000 people were there!  I was blown away.  Bubbles are largely psychological.  This crowd was tangible proof of that.  15k people in one spot listening to Americans explain why real estate in Toronto is an exceptional investment.  The whole experience was horrifying.  The crowd was very well-dressed, middle- to upper-middle class (from appearances), and super excited to hear how much money could be made if you just buy real estate (most of them clearly already owned).

The first real segment of the expo was a panel of Canadian developers and real estate agents giving their views on the market.  It actually started off a touch bearish, which surprised me.  Two of the panelists were saying that prices are exceptionally high and no market goes up forever.  With that slight bit of caution thrown out there, it became a real estate FOMO-building talk.

There are, apparently, two very important things to know when dealing with real estate.  First, you have to face your fear; this fear is to be ignored and then you should ‘just do it’ and "buy now".  The next step is find what you can afford and then buy it.  Ignore all ‘non-doers’, don’t overanalyze or focus on the numbers, just fucking buy.  To allay fears the speakers are actually quite clever as they shift between a long to short term focus when it suits.  For example, now is a great time to buy because short-term the market is on fire. If, however, markets cool then you just hold because it always goes up long-term - and you are a savvy long-term buyer, aren’t you?  By showing no scenario where you can lose I can see how this pitch works on the susceptible.

The second important factor in real estate is financing.  Not everyone has money, so what can they do?  The answers were shocking.  Be ‘creative’ was the first response.  Pool your money, borrow from friends and family, own just 5% of a house, get the money however you can and just do it - remember, it only goes up.  Other financing suggestions were get cozy with a lender and they will ‘bend the rules’ for you!  The fact that the biggest condo developer in Canada (Brad Lamb) said lenders will bend (but not break, apparently) rules to get you financing in front of 15k people with most people smiling and nodding was shocking.

So there you go - when it comes to Toronto real estate, just do it (using borrowed money any way you can get it).

The booths outside of the presentation hall were just as troublesome.  Plenty of “high double-digit monthly yields”, retire early with real estate, “everyone needs a place to live - buy apartments” type messages.  Almost all of these pitches were second lien lending.  Most offered yields in the 8 to 10% range.  The presentations all suggested that you can borrow money, if you don’t have it, at 4% and then buy these investments at 10% - easy money.

The apartment pitch booth was like most other pitches - it revolved around stable cash flows + mortgage paydown by renter + equity appreciation = profit.  (Now that all sounds great but owning a condo at current prices in Toronto is a negatively carrying asset, so where does this cash flow come from?)  Further, investing in apartment funds is even better if you borrow the money to do so.  The pitch goes on to explain that levering a 30% return makes you more money than not levering...

The Paramount Equity pitch was also interesting and stated in all caps “HIGH DOUBLE-DIGIT RETURNS ON YOUR CASH, RRSP”.  This product pays monthly, is a second lien mortgage, with a one year term and LTV <85%.  Paramount uses clever language that states they cover the cost of defaults.  By that they mean they pay some of the fees, not the default risk itself.

There was a space to pick up business cards.  I got quite a few from real estate investors.  I plan on emailing them all to learn just how bad their pitch/product is.  I want to learn more about how these second lien investor pools are sourced and just how bad this is going to be.

Also, perhaps there will be an opportunity to meet a bunch of distressed sellers, before they even know it themselves…

Nowhere in any of this was there ever a mention of risk, the dangers of leverage, how terrible negative equity can be, how that can trap you, etc.

The amount of shadow leverage in this system is crazy.  The terms on these second lien loans is 1yr.  What happens when all of these loans are called?  Even lenders with first positions will see clients sell when these loans become due and there is no money to pay them.

This is going to blow sky high.

The Houston Real Estate Market Crisis (Video)

By EconMatters

We discuss the fundamentals of the oil market, and how we are starting to experience the beginnings of the Real Estate crisis that is going to hit Houston`s Commercial and Residential Real Estate Market in this video. I knew there was going to be a delay, and the telltale signs are starting to emerge in the Market.

© EconMatters All Rights Reserved | Facebook | Twitter | YouTube | Email Digest | Kindle   

New York Real Estate Prices Plunge In 4Q As Listing Days and Discounts Soar

After reviewing the Elliman Report on the New York City Real Estate market at the end of 3Q 2016, we concluded that sellers had simply refused to accept the fact that the Manhattan real estate bubble had burst and rather than dropping prices had decided to simply let their apartments sit on the market unsold while hoping for a miracle.  Here was our conclusion (see "NYC Real Estate Bubble Bursts As Apartment Sales Crash 20%"):

In conclusion, the lesson seems to be that the marginal New York City buyer has been priced out of the market (volume down 20%) while sellers have not yet accepted that the bubble has burst deciding instead to maintain listing prices while letting their apartments sit on the market longer amid growing inventory levels.  Meanwhile, the luxury market is the only segment that seems to be holding up which only serves to prove that Chinese billionaires still have cash they would like to hide in the U.S.

Alas, with the release of Elliman"s 4Q 2016 report, it has become apparent that that miracle never materialized for New York"s hedgies and i-bankers.  In fact, the data from Manhattan real estate sales was almost universally bad with median pricing down 8.7% YoY, volume down 3.7%, listing days up 14.6% and discounts up to 5.5%.

Meanwhile, a view of the longer term sales and pricing trends for Manhattan seems to suggest that the 2013-2015 expansionary period has officially turned.

As was the case last quarter, the re-sale market was among the hardest hit segments with median prices down 6.3% YoY and volume down 1.5%. 

Also like previous quarters, the luxury market, despite sinking volumes, is the only segment to continue to show growth in median sales prices.

And while buyers are abandoning Manhattan en masse, Brooklyn seems to be the key beneficiary with purchases there soaring 22% YoY and median prices climbing 15%.  Per Bloomberg:

Home buyers in Brooklyn competed for a record-low number of listings in the fourth quarter, driving up prices in the New York borough that’s historically been seen as a refuge from Manhattan’s high costs.

Purchases in Brooklyn rose 22 percent from a year earlier to 2,582, while the median price of those deals climbed 15 percent to a record $750,000, according to a report Thursday by appraiser Miller Samuel Inc. and brokerage Douglas Elliman Real Estate. The number of homes for sale at the end of December tumbled 31 percent to 2,232, the fewest since the firms started keeping the data in 2008.

The sales market in Brooklyn, the city’s most populous borough, is moving in the opposite direction to Manhattan’s, where rising supply is offering buyers more choices and the option to walk away from listings they view as overpriced. Manhattan’s median home price dropped 8.7 percent in the fourth quarter to $1.05 million as sellers awakened to a slowdown after years of holding out for all they could get, the firms said last week.

“You have a disconnect with sellers in Manhattan, and Brooklyn is poaching some of that demand,” Jonathan Miller, president of Miller Samuel, said in an interview. “Overall, it’s generally a lower price point, and affordability has been a big issue the last couple of years.”

Seems that "Bridge & Tunnel" is starting to have a nice ring to it.

China’s tighter overseas currency use impacts Canadian real estate landscape

The heavy exodus of the Chinese renminbi from mainland China put pressure on the country’s economy. In an effort to stymie the outflow, the Peoples Bank of China (PBOC) enacted new rules that are meant to help it exert more control over its currency…and that could spell trouble for the Canadian real estate market!

A CANADIAN REAL ESTATE “BUBBLE”

It is well known that the global financial crisis of 2009 was precipitated by a housing “bubble”in the United States. Real estate analysts south of the border, and even some local market watchers here in Canada, have long been predicting a similar bubble of sorts brewing in Canada. However, the Canadian “bubble” seems to have a much different origins.

The Canadian Perspective

It has long been suspected that the booming housing “bubble”, in great Canadian metropolitan cities like Toronto and Vancouver, was partly inflated as a result of foreign buyers. Predominant amongst those foreigners were property buyers and investors from China. Desperate to diversify their investments, and find better use of their capital outside the mainland, Chinese buyers are rumoured to be piling into real estate in large cities like Vancouver and Toronto.

According to industry analysts, home prices in British Columbia increased from 6.6% year-over-year in 2014, to 20.5% in 2016; while Ontario saw increases from 5.2% to 11.6% over that same period. Clearly, by some definitions, this is a bubble in the making.

The Chinese Perspective

Every sovereign nation wants to (in fact must!) have maximum control on its currency, and China is no exception. However, once currency is converted into foreign exchange and sent out of jurisdictions influenced by the country, “control” becomes even more difficult to exert.

The large outflow of currency from China is a concern to the authorities there – and they
decided late last year to do something about it. Among some of the exchange control measures include:

• Making it harder for individuals and institutions to convert renminbi into other currencies


• Enforcing greater restrictions on transferring money from the mainland to other international jurisdictions


• Requiring more transparency on the intent and motivation behind foreign exchange transactions


• Mandating greater punishment for individuals and institutions who run afoul of the new rules

While large Chinese corporations and global real estate players may still be able to skirt around these new regulations, it is expected that a large amount of property investment transactions by individuals could be impacted. As a result, Canada, and especially hot beds like Vancouver and Toronto real estate, should brace for potential fallout.

MORE THAN A CHINA CONNECTION

While China’s new forex rules will definitely put a damper on many Canadian real estate companies business plans, there is more bad news for the industry – largely emanating from within Canada. Both at the federal and provincial levels, governments are concerned about facing similar repercussions as that seen by our southern neighbor because of housing bubbles faced there. As a result:

• In February 2016, the government of British Columbia implemented a new tax rate of 15% for properties sold in excess of $2-million; while also mandating collection of more data on foreign buyers


• At the same time, the BC government also empowered municipalities like Vancouver to tax “empty homes”– mostly foreigner-owned investment properties that are vacant; waiting to be sold at a huge profit


• On October 3, 2016, the federal government imposed more stringent rules for mortgage insurance, raising the barrier for high-ratio borrowers to qualify for loans


• Additionally, through that same legislative move, some loopholes in Canada’s tax code, which were being used for preferential tax treatment by foreign buyers and non-permanent residents, were closed

All of these moves are billed as initiatives that will ultimately make housing more affordable in hot markets like Vancouver and Toronto. However, their impact will be far-reaching in terms of broader impact to the nation’s real estate market.

Early Signs

It is too early yet to tell whether the new regimen will have any impact on Canada’s housing industry. But based on early reports from B.C, it does look like they are having a
cooling effect, at least in the Vancouver area.

Since the new Canadian/B.C rules took effect, there has already been a marked decline in foreign investment recorded in Vancouver. According to the B.C government’s information, foreign purchases in Metro Vancouver, which also includes Chinese purchasers, accounted for roughly 3% of the region’s residential real estate transactions from June 10^th to October 31^st, 2016. This number has dropped well below the 13.2% rate for similar
transactions prior to the new legislation.

WHAT THE FUTURE HOLDS

The end game for China’s new currency export policy is to detract its citizens from annually spending an estimated $15 to $20 billion overseas. But China-analysts seem to think that, even though the country’s new forex laws are tightening the noose around real estate investors who may be contemplating Canadian investments; such transactions will likely not decline substantially – at least not in the immediate future. New ways to get renminbi out of China will evolve within months of old ones being shut down!

Canadian real estate industry analysts however seem to have a different take on the issue. According to Canadian property market watchers, the number of resale homes projected for resale in 2017 across Canada are expected to fall by around 11.5% (compared to 2016); with B.C leading the pack (-23.8%), and Ontario (-10.5) declining by double-digits.

This one-two punch, by federal and provincial jurisdictions, to the real estate market doesn’t bode well for the real estate industry, but especially for property owners. Researchers believe that the collective impact of the new housing regimens – both from China and from within Canada – will contribute to much slower increases to property values.

Researchers forecast that on a national level, the average Canadian home’s resale value will increase by only 1.6% in the New Year, compared to a robust 9.5% increase in 2016. Ontario homes are set to post their weakest rate of increase in over 8 years – at 3%;
while B.C home prices will rise by 1.9% (compared to a staggering 20.5% in 2016).

With not much information available as of yet, about the impact of the policies discussed here, it is hard to predict what impact they are having on the country’s real estate industry. One thing is definite though: None of the steps implemented so far, by both China and various jurisdictions within Canada, seem “investor friendly”.

---

Bank Of Canada Lays Out In YouTube Clip How The Economy Could Tank

As MacLean"s Jason Kirby points out, the Bank has taken to YouTube to warn Canadians about the dangers of too much debt and unrealistic house price expectations. He wonders, however, whether anyone will listen as one after another real estate bubble form in Canada, a nation whose household debt ratio has never been higher.

As BMO pointed out, when the latest household debt ratio data was released, the upward trend in household debt goes back for the 26 years for which it has records and is showing no signs of slowing down.

"While it looks as though the Vancouver housing market is cooling after the foreign buyers" tax was implemented, the Toronto market remains very strong, and others are showing signs of improving as well," said BMO senior economist Benjamin Reitzes.

Meanwhile, none other than Canada"s central bank has ramped up its warnings about heavily indebted households and the unreasonable expectations driving the housing market, yet all indications are that Canadians have stuffed cotton in their ears.

In Toronto, for instance, house prices are up nearly 15 per cent since the summer when Bank of Canada governor Stephen Poloz warned that price gains in the city were “difficult to match up with any definition of fundamentals that you could point to.” In the more than 15 years that the Teranet-National Bank House Price Index has tracked property prices in the city, there’s never been a six-month period when prices rose that fast. Meanwhile, the latest figures released by Statistics Canada showed the household debt-to-income ratio broke yet another record in the third quarter.

Now Canada’s central bank is trying a different platform to get its message across: YouTube.

In a video posted Monday on YouTube, in conjunction with the release of the Bank’s semi-annual financial system review last Thursday, Bank of Canada senior policy adviser Joshua Slive sketches out how Canada’s dangerous brew of debt and inflated house prices could combine to devastate the economy.

Here’s the scenario that worries the Bank.

1. As the Bank has pointed out already, households are highly indebted and house prices are rising at an unsustainable rate, though as Slive observes, people can often cope with these vulnerabilities for an extended period.

2. That is, until an economic shock triggers a negative chain of events. For instance, a severe recession would lead to “a sharp increase” in unemployment.

3. A lot of households, especially those carrying the heaviest debt loads, would have trouble meeting their debt payments. As a result, some households would start to default on their loans, and in turn, banks and trust companies would foreclose and try to sell those houses.

4. At the same time, with the economy slowing, new buyers would delay house purchases until the economy improved. Given the challenges already facing the economy, this could “cause a large drop in house prices.”

5. If house prices fell, it would push down household wealth, which has received a huge boost from the housing boom, and that could curtail consumer spending, which itself has become a primary driver of growth. The added stress on the financial sector would also weigh on the economy as lenders cut back on making new loans. Slive doesn’t use the term, but what he’s talking about is a credit crunch.

There is good news, Slive says. Stress tests show Canada’s big banks will be just fine even with a large drop in house prices (stress tests also showed that both Belgian Dexia and Spanish Bankia were perfectly solvent just months prior to their respectively failrues). It’s also important to note that the Bank, in its financial system review, said there is a “low probability” of a sharp correction in house prices. But there’s no getting around the immense damage such a scenario would have on the economy.

The video is a break from regular fare on the Bank of Canada’s YouTube channel, which is largely made up of speeches by top Bank officials. And even if Slive’s delivery is trademark central-banker dry, the message is stark, and shows the Bank is desperate for Canadians to heed its warnings on debt and rising house prices.

If there’s one quibble to be made, it’s with the initial domino that the Bank sees setting everything in motion—a severe recession leading to job losses. Since the U.S. housing bubble popped and that country went into its long, dark funk, a chicken-versus-egg debate has raged over whether the housing collapse triggered the U.S. recession, or whether something else, like soaring oil prices, brought on the recession and turned the housing slowdown into a total collapse. What’s beyond debate is that America’s housing market reached its frothiest in mid-2006, and then began its decline, one-and-a-half years before the recession began.

Whatever the case, the Bank’s video should be another wake-up call for Canadians, but "not that anyone’s listening" as Jason Kirby laments.

Here’s the video in full.