“Mind your head” From GREATER FOOL BLOG (Real Estate) Builders going belly up?

Mind your head

From GREATER FOOL BLOG

May 21st, 2012 — Book UpdatesE-mail this blog post to a friend

Be happy you’re not a drywall guy in Calgary, expecting to go work this morning for Greenboro Homes. Even being an ‘approved Mike Holmes builder’ did not save this company’s indebted butt.

In fact Greenboro, which has struggled with its Currie Barracks development (estate homes starting at $1.6 million) is part of Unity Builders Group, which went rafters-up over the weekend. That leaves an $18 million hole in the pocket of local trades, who can least afford such an egregious drubbing. Plus there’s another $162 million down the drain for various creditors, including the lending geniuses at Canada ICI Capital, of Calgary (adios, $30 million).

The company went into creditor protection mode, pleading with the courts that it, “now faces a liquidity crisis, the immediate risk of acceleration on many of its credit facilities, and the potential loss of material value for UBG and its stakeholders if individual creditors or partners proceed with immediate steps of enforcement.” The reasons for this failure – the recessionary housing market in Alberta which drastically reduced the value of company assets and caused, “an exhausting draw on its cash assets.” Like paying the guy who actually came to work last week.

Let’s remember this is happening four full years after Alberta real estate hit its bubbly high-water mark, and at a time when oil prices have been near, or over, $100 a barrel for more than twelve months. In other words, when buyers decide to stop buying because prices are stupid, no amount of economic jingoism or marketing hype’s gonna save you.

This is all interesting in light of what’s happening in Toronto, and the unravelling of Vancouver. More evidence of a truth one cannot escape – real estate (like all markets) gets ahead of itself, always corrects and sometimes crashes. Calgary and Edmonton saw housing prices soar by nearly 200%, and since 2008 have been a swamp. The decline experienced after the GFC looks about ready to re-commence.

In VanCity, too, prices surged in the last decade – up 163%. The average house costs 10 times what average families earn. Prices have also roared past rents. As a BMO report last week pointed out, with 10% down, the average family doesn’t even qualify for financing to buy  a crappy $683,000 house (the benchmark price). Banks shut the door when total housing costs (mortgage, insurance taxes) hit 32%. But for those typical Van families, it’s now close to 60%.

That this was unsustainable was evident to everyone not living there. And so it’s no surprise sales have plunged by more than 20%, detached homes are off an average of $100,000 and listings have just surged uncontrollably. This is the recipe for a hard landing.

Says one veteran  real estate player:

“The biggest thing impacting the market and the foreign buyer right now is the need to prove income.  Before, as long as your down payment was enough, the bank would give a loan for the rest.  Now, if you come from outside Canada (or from Canada) – You must have income to support the mortgage regardless of your down payment amount. At the same time, Mainland China buyers are mostly absent now and buying in the US because prices are too high. This is an unhappy combo.”

BTW, that BeeMo report reached this conclusion: “ Simply put, the typical family generally cannot afford to buy a house outside of a condo in the suburbs.” Yuck. Have you ever seen Port Moody? Or Abbotsford?

The bank says if interest rates rise a small 2% over the next two years, and incomes grow by 3%, then Vancouver prices have to fall by 12% just for houses to stay as absurdly unaffordable as they are now. But this won’t happen. Buyers are already voting with their disdain. The standoff with sellers will continue into summer, with prices sticky, until the inevitable takes place – the Calgaryization of our Pacifica Metrosexualopolis.

And what of godless Toronto?

There are 18,379 active listings in the GTA, which has about six million people. In Vancouver, with 80% fewer citizens, there are 36% more properties for sale. You figure it out. Van is toast. Toronto’s not. At least, not yet. But we’re working on it.

The average price (houses and condos) has topped $517,000 in the region as a whole, with a SFH now at $647,692 in the GTA and $835,522 in 416. At these levels, dramatically fewer people can afford real estate, even with 3% mortgages and punch-drunk lenders. Monthly sales numbers are suspect, with up to 20% of all reported deals being pre-sales of condos which may never be built. Bidding wars have seriously faded in the last three weeks, and outside of the kind of frenzy I reported last week with that Upper Unionville project, crickets are moving in.

Real estate is local. Mortgage rates, lending regs, demographics and the economy affect everywhere. But the most important ingredient is sentiment. The head and heart stuff. It’s why this pathetic blog yaks on about hormones, lust and horniness. Without desire, there’s no market.

As they say in Calgary, you get what you geld.

 

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COMMENT :

QUOTE:

Says one veteran  real estate player:

“The biggest thing impacting the market and the foreign buyer right now is the need to prove income.  Before, as long as your down payment was enough, the bank would give a loan for the rest.  Now, if you come from outside Canada (or from Canada) – You must have income to support the mortgage regardless of your down payment amount. At the same time, Mainland China buyers are mostly absent now and buying in the US because prices are too high. This is an unhappy combo.”

TRANSLATION

The SHTF: Banks are actually going back to the old days, and dusting off traditional lending practices.

Or, by reverse extrapolation….this suggests “no discrimination” aka foreign buyers are CMHC subsidized ?   ie ANYONE could put the minimum downpayment under the previous rules and speculate ?

Man ,……this is getting scary.

What I can see is a lot of foreclosures by foreigners,…..all they lose is their downpayment,…and stay in their home country.I doubt they can be extradited and  I doubt the banks go after them. Via the CMHC, Canadian Citizens will be left holding the bag.

QUOTE:

The bank says if interest rates rise a small 2% over the next two years, and incomes grow by 3%, then Vancouver prices have to fall by 12% just for houses to stay as absurdly unaffordable as they are now. But this won’t happen. Buyers are already voting with their disdain. The standoff with sellers will continue into summer, with prices sticky, until the inevitable takes place – the Calgaryization of our Pacifica Metrosexualopolis.

TRANSLATION

Garth does the proper Math, to put things in proper perspective. The key is that many people expected prices to rise. That’s OVER,…… Now other factors kick in that will begin to ambush people. 

 

What we will see in places like Calgary is tradespeople who build homes have also bought homes and now out of work, or having their paycheques bounce via bankrupt builders. Keep in mind the Banksters have also changed the rules via one must show proof of income. This will get very VERY ugly as it snowballs and dominos.

QUOTE

There are 18,379 active listings in the GTA, which has about six million people. In Vancouver, with 80% fewer citizens, there are 36% more properties for sale. You figure it out. Van is toast. Toronto’s not. At least, not yet. But we’re working on it.

TRANSLATION:

If those figures are correct…Vancouver is TOAST.

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