The Canadian subprimes

From depressing to disaster

US crisis deepens, going into 3rd year. Today’s Breaking News.

‘Fabricating income’ a driving market force

The letter below came to me a few hours ago from Dave, a mortgage broker somewhere in Canada. He expands on my statements and belief that Canada does, indeed, have a serious ‘subprime’ mortgage problem. The consequences could be as far-reaching as those now being lived through by American homeowners. Rest assured, there will be plenty of blame to go around — Garth

I truly enjoy reading your very honest and candid opinions regarding the upcoming Canadian Real Estate market.

I have been arranging mortgages for the last 18 years in Canada, brokering for the last 12 and have seen many changes in the industry.

However, find it absolutely shocking that most Canadians don’t think we even have a Subprime market in Canada.

The introduction of the 40 year amortizations, true no money down financing and stated income programs allowing clients to fabricate their income and purchase with 5% down are truly the driving force in the market. Do I agree with these programs? No…. But these programs have seemed to become acceptable by the Bank’s and the public as the new industry standards.

I honestly don’t think the public even understands what a “Subprime” Mortgage is.

It never gets defined.

Does it only pertain to clients with blemished credit? Or is it the inability to provide documented proof of their actual income or completed tax returns?

Yes I think those qualify and maybe that was where this all started… But I now believe that the subprime market has evolved into a new much more diverse demographic. And what is most discerning is the fact the many consumers may not even be aware that they are now a part of this market.

My own personal definition of a subprime mortgage is one that is detrimental to the financial wellbeing of the end user. Now this may sound very generic, but the following will explain why:

The newest edition to the subprime market is those who are being attracted to allure of homeownership, but necessitate the requirement of the extended amortizations, and extended GDS and TDS ratio’s to qualify.

The Bank’s and Mortgage Insurance companies (CMHC and Genworth) have previously maintained 32% GDS and 40% TD ratios for as long as I have been providing mortgages, since 1990. However there are significant gaps in the credit application which is significantly understating expenses. Back in the early 90’s gas prices were half of what they are today, food cost, income taxes, heat and hydro would have been about 1/3 the cost today. But in recognition to these increases in expenses, what does the Banks and CMHC do?? Increase the GDS on exception to 42% and TD to 45%. Also the banks only require a monthly figure of $100.00 per month for heat as the sole supplemental expense relating to home ownership outside of the mortgage and property taxes and 50% of condo fees. No other expenses are being included. Well I live in a 2000 sq ft home and in the Winter my heat and hydro bills combined are coming in close to $400- $500 per month. Certainly not the $100 allotted by the banks. Now with high priced Cell phone bills, high speed internet, and the latest HD cable, most consumers are faced with a $200 – 300 a month expense, also not included. Car insurance, I know some families with young drivers that are now paying close to $800 per month for insurance or if they have a less then perfect driving record. Finally, the clients commute to work; I had a client who was driving from St Catherines to Toronto 5 days a week. At todays gas prices and parking costs, easily an additional 500.00- $600 per month expense. Again not on the application. Now one can say that some of these are luxury items, however for the majority of people these are real expenses which have to be maintained in addition to the new mortgage payment.

So my first addition to the subprime market is any consumer who has not factored in these additional expenses, is running with a GDS and TDS above the original 32% and 40% and has had to extend their amortization beyond 25 years. In all honesty the Banks and Mortgage Insurance companies in recognition of these neglected expenses should be reducing GDS to 28% and TDS to 35%, this would give people a fighting chance to afford these additional expenses.

I find it amazing that the number of children a family has does not effect servicing. If you have no children or 6, the application is exactly the same. I have 3 children ages 13,10 and 7 and my monthly food bill now tops $1000 per month and yet this expense does not appear on the application. Fortunately I no longer require daycare, but at one point I was paying in excess of $1000 per month for that as well. And yet that expense does not appear either. Families with young children are likely paying out $2000 per month in daycare, food, diapers, clothing that has not been factored in as an expense. Now let’s also look at a parent on a maternity leave who is now receiving usually less then half of the income for a full 12 months…..during that same period of added expense. Guess what, the bank’s will approve a mortgage based on the full income.

So my next addition to the subprime market is the young Canadian family.

The newest stated income program, one example of this is the Genworth “ALT A program”.

Which allows someone with a good credit rating who has been self employed for at least 2 years with conformation of no income taxes owing, can overstate their income to an amount that is justifiable to the bank for the job they are doing. This is a very gray and ambiguous area. If you happen to be a lawyer or a doctor, they will permit much higher stated incomes due to the fact that there are people in those professions making a lot of money. If you are operating a small business at home then their tolerance for six digit stated income is a little less likely. But never the less the clients are being approved based on income that they are not earning, nor have they ever earned that income, and at the same time they are amortizing these same mortgages based on a 40 year amortization, very low payment. In some cases client is more than doubling their actual income. Just because they have good credit, they are permitted to overestimate their income.

So this is my last addition to the subprime market, are self employed individuals who are significantly overstating their actual income to qualify for their current debt loan, plus the new mortgage payment.

Now there is one thing in common with all three of these groups, all three potentially have very good credit. Not your typical subprime mortgage customer. But guess what, over 85% of my applications since January of this year would fall in these categories. All of these clients could find themselves supplementing their monthly expenses with credit cards and or credit lines.

So, is their a subprime market in Canada? Yes and it is growing at a very rapid pace.

48 comments ↓

#1 Dan on 04.29.08 at 12:08 am

This is exactly what I have been saying since my wife and I first applied for a mortgage, “How can they offer to loan us so much?” Before reading Garth’s website and then his book, we were contemplating buying a house. This is no longer the case. We have no debts, but when we worked out everything, the bank was clearly offering to loan us far more than we could afford. I actually phoned President’s Choice bank to explain that we were approved for too much money. The response from a loans rep was that everything checked out okay.

I realized that we simply could not afford a home in a decent end of town (our combined income is over $90,000/year and we live in Winnipeg). We weren’t looking at places like Garth describes [stainless steel and granite]. We were looking at 50+ year old homes, 1000 sq ft; three-bedroom bungalows in need of work, yet the prices still come to over $200,000 when the bidding wars are done. Factor in heat, water, hydro, repairs, taxes, food, Internet, phone, gas, car insurance/maintenance and you end up barely making it each and every month with only a few dollars to spare. Heaven help us if something serious were to break or a job loss were to occur.

We are very responsible with our finances and so we were a little crushed that a house was not in our future. But this made us wonder why we have good jobs (we’re not Doctors, but our incomes are very good by Winnipeg standards), money in the bank, and yet we still could not afford a home. How was it then that people working call centres for $12/hour could buy these homes? Well, apparently the bank is willing to take the risk as these people live pay to pay, just squeaking by. What happens when the economy downturns and one of them loses their job? I guess when that starts happening, my wife and I will then be able to afford a house.

#2 Jeff Riverdale on 04.29.08 at 1:33 am

A few years ago I worked at the branch of one of the Big 5 Banks. A co-worker of mine had a customer walk in looking for a loan. He needed to document his income. No problem my co-worker told him, just bring in your employment letter you used to get a mortgage with our bank through one of our mortage brokers you used. The customer brought in the letter and my co-worker couldn’t believe it. The employment letter was typed up on a Microsoft Word document from ‘Wal-Mart Corporation’ but Corporation was spelled wrong on the header and looked obvious to anyone who saw this(other than the mtg. broker) that it was typed up by the customer himself. When my co-worker phoned the # of the supervisor on the application she was told he was layed off months ago and hadn’t worked there since. My co-worker brought this to management’s attention, and he thankfully didn’t get the loan. He was still able to keep his $300K mtg. though. That mtg. would not be classified as ‘subprime’ in Canada, which makes me wonder how many other mortgages like that are out there? Even if they are not classified as ‘subprime’ they are just as toxic.

#3 Bruce on 04.29.08 at 6:55 am

Hey Garth,

Tick tock, Tick Tock, Tick Tock

This, of course, is the national debt clock counting down our impending and inevitable financial doom. A doom that was brought on strictly by our own doing, the incompetence and irresponsibility of our elected officials, as well as our greedy and illegal monetary system, of which the elite have complete control over. To say nothing of the coming global food riots… But the party was fun while it lasted, eh?

The big question is, when will the clock strike 12?

Kudos for another good article!
Bruce

#4 curious to know on 04.29.08 at 9:30 am

I woud most appreciate if, for those of us who don’t know, you expanded on the acronyms: GDS & TDS ratios.

#5 SMWhite on 04.29.08 at 9:55 am

Just to add to that:

http://money.cnn.com/2008/04/24/real_estate/good_credit_bad_loans/

1/5 of the sub-prime borrowers in the USA with FICO scores between 840 – 900 have gone 60+ days delinquent. These are the “movers and shakers” that were listening to the sweet whispers of NAR’s David Lereah telling everyone this real estate party is going to the moon.

Well sorry to break hearts but sub-prime(lets just call them what they are, liar loans) isn’t just the segment of society that lives in trailers and drives a domestic vehicle, will this affect 1/5 of the “good credit” borrowers here in Canada that signed up for the new and improved borrowing rules perpetrated by CMHC?

I’ve also noticed that Gregory Klump and Bob Dugan have put the pom-poms down as of late, no news is good news?

Let me guess, its the NHL playoffs are the culprits causing the slowdown in housing sales…

#6 Eric on 04.29.08 at 10:56 am

Curious to know,

GDS RATIO (Gross Debt Service Ratio):

The percentage of gross annual income required to cover payments associated with housing. Payments include mortgage principal, interest, property taxes and sometimes include secondary financing, heating, condominium fees or pad rent.

TDS RATIO (Total debt service ratio):

The percentage of gross annual income required to cover payments associated with housing and all other debts and obligations, such as car loans and credit cards.

A few years ago, GDS ratio required is 32%, so if you are earning $5000/month the maximum you can spend for the house (including other expenses related to the house like heating, condo fees, property tax) is 32% of $5000 = $1,600

TDS includes housing + all other expenses like car loans, credit card payments, and is set to 40% before. So 40% of $5,000=$2,000.

#7 Leah on 04.29.08 at 12:35 pm

I know plenty of Bay Street banker types who have massive mortgages for their Rosedale properties. As well as expensive car payments, private school fees, expensive vacations and even second homes.

The bank was going to lend us so much money that we could have easily bought our “Rosedale or Uplands – (in Victoria) mansion”. We would have been up to our necks in debt but it would have looked good.

There is a myth in Victoria that people who are buying million plus homes are not affected by any economic downturn and usually just plunk a couple of million on a home without a second thought. Calgarians were the new rock stars. Our RE agent would actually drool about them.

My husband was on Bay street for quite a few years and those so-called big bonuses don’t always come. We also know many people whose income is directly linked to the U.S. economy.

This mess is going to affect everyone – not just the young couples starting out.

Any comments?

#8 Another Albertan on 04.29.08 at 3:14 pm

The institutional attempts to redefine the edge parameters of “financial acceptability” blows my mind.

And when you try to call out the game, you are met with disbelieve and/or blank looks and/or indignation from the banks, brokers, agents, etc.

5 years ago, I went to my bank to get a line of credit in order to buy a used car. This should have been a relatively painless exercise, given that I had no debt and that I’d banked with this institution my entire life and had 6 personal and corporate accounts with them. After _3_ months of being jerked around, I walked into the branch (which is the main Calgary branch) and demanded to see the bank manager. NOW. (Yes, I was causing a scene… on purpose.)

The bank manager appears a few minutes later and I table my complaints. “Why does it take over 3 months to get a line of credit approved? I have 8x the amount of the PLOC in assets in one account alone.” The bank manager calls out my personal banker on the carpet.

The banker blubbers through a bad explanation that the computer program outright rejects my credit application.

So I pull out all my statements – “So with these numbers and no debt, I can’t qualify for a PLOC? You have got to be kidding me.”

This forces their hand. “Your numbers break the computer model. We can see that are essentially little to no risk to the bank. But because you have no debt and are fully liquid, the computer believes you could be a risk of flight. The computer thinks that if we gave you the maximum for which you qualify, you could extract the whole value of the PLOC and your own assets and flee.”

Huh? The computer believes I’m going to take the money and run because my numbers are essentially a statistical anomaly? Holy cow. And instead of being professional and forthright, you tow me along for a few months until I blow up?

I demanded a resolution to my PLOC application by the end of the day, else the bank risked my accounts being closed and moved.

Two hours later, I get a phone call from the manager. They had to find a senior banker capable of doing hand calculations in order to process my application. What? Sorry. Again? Hand calculations?

This was my introduction to black-box financial models. Few people have any idea of how they work, including people who work for the banks themselves. When they break, they break in horrific manners. And the sensitivity to certain variables may surprise you. This black-box plug-and-chug sausage-maker methodology is global and is what has blown up multiple times in the last year in multiple marketplaces.

The grand irony is all of this was for a line of credit to buy a measly and used second car, never mind a house.

So now when I case around for mortgage options, it is especially interesting to walk in with my own spreadsheets and amortization schedules, asking what products might fulfill those requirements. You can see their eyes glaze over right in front of you.

The current system of granting credit and mortgages is an elaborate game of creating long-term indentured servitude.

#9 vultur on 04.29.08 at 3:19 pm

Hey Garth,

Tick tock, Tick Tock, Tick Tock

This, of course, is the national debt clock counting down our impending and inevitable financial doom. A doom that was brought on strictly by our own doing, the incompetence and irresponsibility of our elected officials, as well as our greedy and illegal monetary system, of which the elite have complete control over. To say nothing of the coming global food riots… But the party was fun while it lasted, eh?

The big question is, when will the clock strike 12?

Kudos for another good article!
Bruce
_______________________
Canada has been running fiscal SURPLUSES and PAYING DOWN national debt for 10 years!

WTF are you talking about Mr. Extremist? Tick tock back to 1987 pal! Canada has led the G-7 in growth for a while.

The housing market will be fine, relax.

#10 Andrew on 04.29.08 at 3:47 pm

so would that be .. gross or net income ?

GDS ratio required is 32%, so if you are earning $5000/month the maximum you can spend for the house (including other expenses related to the house like heating, condo fees, property tax) is 32% of $5000 = $1,600

#11 Allan on 04.29.08 at 3:47 pm

The damage will be done when those locked into a five year or 7 year term of a 40 year mortgage have to renew and the interest rates have gone up. Many of these people can barely afford the home they have and could only do so due to low interest rates and the availability of a 40 year term.Because of this, I am sure that a majority of these homeowners have not paid extra on their mortgage to protect themselves from rising rates in the future. This is a housing market crash in the making! Too many buyers are being lured into the housing market that simply shouldn’t be there.Furthermore, they will have less money to spend on goods which thereby affects consumer spending and the economy. Unless, of course, they buy on credit which creates another credit crisis creating a vicious circle of debt and ultimately bankruptcy. The banks need to wake up!

#12 local fishwrap on 04.29.08 at 3:52 pm

Vancouver Sun publishes puff piece on real estate, gets its @ss handed to it by commenters.

http://www.canada.com/vancouversun/story.html?id=71a98563-db49-4cff-ba72-63710f343804&k=5982

Truly, the gig is up.

#13 vultur on 04.29.08 at 4:00 pm

This mess is going to affect everyone – not just the young couples starting out.

Any comments?
__________________
What mess? The 1.5% of Canadians that have over-mortgaged themselves on housing purchases?

You guys are focusing on micro areas. The reality is that the overwhelming majority of the housing market consists of disciplined owners who diligently retire their mortgages monthly based on 25 year amortizations. Maybe new a lot of the new buyers in the past 12 months- and maybe not a lot of the spec buyers in Deadmonton, but across Canada things are quite stable.

And yes, the banks and the government have a very very strong interest in stable housing prices. Wanna guess why? Hint: it rhymes with ax.

#14 redshirt on 04.29.08 at 6:47 pm

Another Albertan, I had a similar situation happen to me. I have a large amount of liquid assets in the 6 figures, and you know what the amount my bank approved for me for a line of credit? $8000.

Eight thousand dollars.

For a guy with a 6-figure liquid net worth. And when I tried to get it increased I got the runaround.

#15 Bruce on 04.29.08 at 6:58 pm

Vultur,

With all due respect, you’re a prime example of the kind of people the banks and creditors LOVE to hoodwink. You’re also one of the many who seems terribly deluded and blinded as to what’s really going on out there…

Look, my father was a former financial advisor at TD for 30 years… We have been talking non-stop ever since this crisis broke out last summer. I can tell you, this one’s different. Canadians are in DEBT to the tune of over $1 trillion. Average household debt is now around $80k. Students are graduating upwards of $50k in debt, and what do they wind up doing? BS jobs in the service sector making minimum wage… Our credit cards are maxed out, we’ve borrowed all the equity we can from our already over-inflated homes, gas, utilities, food, and the cost of EVERY DAMN THING keeps going up and up, except of course, my paycheck.

You think it’s all going to be OK? We’ll see what kind of shape we(and the entire world)is in by the close of this decade. Go back to whatever it was you were smoking.. I’m sure the Liberals and Conservatives will join in!

-Bruce

#16 Brad on 04.29.08 at 7:17 pm

“The housing market will be fine, relax.”

HA! The unraveling has already started in Toronto. I’ve seen the cost of nearly everything go through the roof over the last year! As Garth himself mentioned, I know people paying nearly $1000/month alone just for car insurance!

Maybe if you’re from oil-rich Alberta, the picture might appear rosy, but here in Ontario, we’re on the verge of being swallowed by the mess in the U.S., and a new report issued just today by TD Financial Group issued dire warnings for Ontario, and the Canadian economy as a whole. Face it buddy. The party’s over. We’ve gotten drunk off the wine of mass consumerism, and now we’re suffering from the hangover. We’ve become a throw-society of made-in-China junk, all courtesy of Free Trade and Globalization. We’ve sent our good paying jobs overseas, and replaced them with BS minimum-wage jobs in the service sector! Is this the economy you’re so proud of?

However bad things get, none of it will surprise me in the least. People today have had it too good for too long. They simply don’t want to accept that they can no longer live way beyond their means, or keeping up with the Jones’. The iceberg is dead ahead, and there’s nothing we can do to stop us from hitting it… Good luck pal.

#17 Brent on 04.29.08 at 7:42 pm

Bruce,

Yes, I know of a few people personally that have dipped into their over inflated house’s and bought themselves $50,000 dollar vehicles to look good in.

#18 Jeff Riverdale on 04.29.08 at 8:22 pm

This was an article I came across from Canaccord Capital’s ‘Morning Coffee newsletter’ that gives a reality check to the Vancouver Sun article mentioned by ‘Local Fishwrap’ in comment # 12.
__________________________________________

Harsh Realty. Our letter to the author of Saturday’s Vancouver Sun cover story “15 Real Estate Myths and
Realities: Confident you understand the market? Think again. Experts found a few surprises when they looked at some common beliefs”…

Dear Vancouver Sun,
A very interesting piece with some strong data points but I find it remarkable that you rely so heavily on the opinion of realtors or their related associations. For example, you appear to conclude that it is an outright myth that “Real estate prices in Greater
Vancouver can’t keep going up, they’re too high already.” The nonsensical realtor’s comment “if the numbers make sense to buy, and you can look out to the downside, buy” aside, you make the excellent point that almost 80% of the average person’s income would be needed to afford the average home. As this is pre-tax earnings, it means that most Vancouver residents could simply not afford to buy their home at today’s prices. But you should have talked about cap rates, which today are often below the risk-free rate of return.
Why does a risky asset yield less than a risk-free asset? Because a) people expect a capital gain, b) most investors don’t bother looking at cap rates, the most basic valuation metric in this asset class. Think of tech stock buyers in 1999 and early 2000. They
bought simply because they expected a capital gain, not because the fundamentals supported the price paid. And no, just because there was demand for Nortel at $124 did not mean it was actually worth that much. Yet, at $124, was it hitherto possible that it would go much higher? Sure it was. It’s just that it didn’t.
Do you realize how horrifically wrong the perma-bull former chief economist of the U.S.-based National Association of Realtors David Lereah was until he was finally fired a year ago? In 2005, he wrote the book “Are You Missing the Real Estate
Boom?: Why Home Values and Other Real Estate Investments Will Climb Through The End of The Decade”, and in 2006 retitled it to “Why the Real Estate Boom Will Not Bust”. If you think he was merely a bit unlucky, know that in June 2000, he wrote “The Rules for Growing Rich: Making Money in the New Information Economy”.
It may indeed be that GVRD home prices will continue to rise but, if the U.S. situation is any metric, realtors and their chief economists will not temper their
enthusiasm until well after prices have turned down.

#19 Dom-GTA on 04.29.08 at 9:20 pm

Jeff-great comment. I am also happy to see that we seem to get less naysayers in the last few days…have the lightbulbs finally gone on?

#20 pulunco on 04.29.08 at 10:16 pm

Quick question comment:

How is Canada’s sub prime scenerio similar to the US’s? I realiize we have 40 year amortization, speculation and 5% down which can cause problems down the road but i don’t remember the interest rate being 1% like it was in the states in 2002. It seems to me that it will not be as dramatic in Canada if we do suffer the a sub prime problem.

American subprimes allowed people who would not otherwise qualify for traditional financing to buy homes, thus keep prices rising to the point where over-valuations ensured an eventual crash. Forty-year ams, and zero down payments have had exactly the same effect in Canada, and it is only reasonable to expect a similar consequence. All booms end badly, and real estate does not go up forever. BTW, US mortgage rates were never 1%. — Garth

#21 David on 04.29.08 at 11:31 pm

What I find so astonishing is that NO ONE wants to tell the truth, hear the truth or discuss the truth about the Canadian Real Estate Bubble. All I ever seem to read and hear is that the real estate market is healthy and that there is no possibility of an American style crash unwinding itself here in the Great White North. The long term pricing correction in the Canadian market is long overdo.

#22 pulunco on 04.29.08 at 11:46 pm

Am I miss reading your book? On page 59 you wrote: “The Fed reacted by cutting the cost of money-eleven times in2001 alone-until, by mid 2002, its federal funds rate had crashed to the 1 per cent mark.

The federal funds rate is not a retail rate. Only banks borrow at that level. You pay far more. — Garth

#23 Peter on 04.30.08 at 2:16 am

Its true that I have seen many people here are taking H E out of their house and spent it all, people (espacially new immigrants) who cant afford a mortgage going ARM for 40 years, many people are leasing their luxury $ 298 / month car while flipping their nice condo’s and house’s..But who will care, while you want to comment on a site, those suckers will crawl out from nowhere and pumped by the press and the govt saying Canada is alright, no problem in Canada, everything is fine…I really wish to ask him/her how many condos did he/she flipped recently and how many newlyweds has been sucked blood from him/her…?

#24 Canada’s in Denial About Its Own Sub-prime Bomb (And When Will It Go ‘Boom’?) « Your Daily Dose on 04.30.08 at 12:07 pm

[...] — canuck99 @ 9:07 am Tags: Canada, economy, Garth Turner, mortgages, real estate, sup-prime [Garth Turner's Blog] ‘Fabricating income’ a driving market force ” [Letter from a Canadian mortgage broker of 18 years] … guess what, over 85% of my [...]

#25 local fishwrap on 04.30.08 at 12:33 pm

…And the Vancouver Sun has now deleted the critical comments on its article. Nice balance!

#26 Andrew on 04.30.08 at 1:58 pm

THE COLLAPSE IN U.S. HOUSING

‘There is no sign of a bottom’
Plunge in home prices deepens; Fed’s campaign of interest rate cutting is expected to slow beginning today

BARRIE MCKENNA

E-mail Barrie McKenna | Read Bio | Latest Columns
April 30, 2008

WASHINGTON — Conditions at the epicentre of the credit crunch are getting worse as Ben Bernanke and the U.S. Federal Reserve Board appear poised to slow their aggressive drive to cut interest rates. Home prices are falling faster in virtually every major U.S. city and foreclosures are on a pace to double over last year, according to two reports released yesterday.

There is also mounting evidence consumers are feeling the squeeze from slumping house values, rising gas prices and lenders increasingly wary of financing their high-spending ways.

This latest grim economic news comes as the Fed, where Mr. Bernanke is chairman, is expected to announce today that it’s lowering its benchmark lending rate by a quarter percentage point to 2 per cent, and then may not cut again for a while. The Fed, which winds up a two-day rate-setting meeting in Washington, is leaning toward a pause in its rate cuts as it assesses the impact of its efforts to fix the credit crisis, economists said. The U.S. central bank has already cut its key interest rate by a total of three percentage points since the start of the credit crisis last summer.

The decision comes as the heart of the credit mess – housing – continues to be a major source of trouble for investors, lenders and homeowners. House prices fell 2.6 per cent in February, and are down nearly 15 per cent from their July, 2006, peak across the country, according to the Standard & Poor’s/Case-Shiller index of the 20 largest cities.

Print Edition – Section Front
Enlarge Image

“There is no sign of a bottom in the numbers,” David Blitzer, who heads S&P’s index committee, said bluntly.

Prices were down in all but one of the markets surveyed – Charlotte, N.C. And out of the 20 cities in the survey, 17 reported record annual declines. Miami and Las Vegas, which experienced a burst of speculative building during the housing boom, led the way with annual declines of 22.8 and 21.7 per cent, respectively. Prices are also down sharply in California – Los Angeles (off 19.4 per cent), San Diego (19.2 per cent) and San Francisco (17.2 per cent). Particularly worrying, the pace of home price devaluation is picking up. Prices fell 2.6 per cent in February, compared with 2.4 per cent in January.

Prices have now retreated to where they were at the end of 2004, the 20-city index shows. That means that a growing number of homeowners owe more than their properties are worth.

“The deflation trend shows no signs of turning, let alone ebbing,” agreed Michael Gregory, senior economist at BMO Nesbitt Burns.

The combination of slumping prices and a wave of mortgages resetting to higher rates is proving toxic for the most indebted homeowners.

The number of U.S. homes heading toward foreclosure more than doubled in the first quarter from a year earlier, as weakening property values and tighter lending left many homeowners powerless to prevent homes from being auctioned to the highest bidder, according to RealtyTrac Inc. of Irvine, Calif.

The foreclosure problems closely track declining home prices. Nevada, Florida and California are experiencing the worst foreclosure rates.

Across the United States, 649,917 homes received at least one foreclosure notice in the first three months of the year, up 112 per cent from 306,722 during the same period last year, RealtyTrac said. Lenders also repossessed 157,000 homes.

RealtyTrac monitors default notices, auction sale notices and bank repossessions. One of every 194 households is now in some stage of foreclosure.

The problem left few parts of the country untouched. Foreclosure filings are up in all but four states.

The deepening housing slump is also showing signs of hitting consumer sentiment, and behaviour.

The U.S. Conference Board reported yesterday that American consumer confidence fell to the lowest level since the start of the March, 2003, invasion of Iraq. The index fell to 62.3 in April from 65.9 in March.

MasterCard chief executive officer Bob Selander told investors on a conference call that it’s seeing evidence that more consumers are putting food and gas charges on their credit cards, while fewer are buying luxury items.

Meanwhile, executives of Wal-Mart Stores Inc. pointed the finger at lenders, who they say are increasingly unwilling to extend credit to maxed-out consumers.

“People don’t have as much access to credit as they used to,” said Wal-Mart USA CEO Eduardo Castro-Wright, speaking at a Lehman Bros. retail conference broadcast over the Internet. “Clearly that is having an impact on how consumers behave.”

And without easy access to credit, he said, consumers are finding it has become more difficult to splurge on non-essential or big-ticket items.

http://www.reportonbusiness.com/servlet/story/LAC.20080430.IBHOMES30/TPStory/?query=

#27 Crikey on 04.30.08 at 3:36 pm

Andrew, it’s great to link to articles, but PLEASE don’t just cut and paste articles in their entirety.

*Make sure you have a position. There’s no point in posting an article if you don’t have anything to say about it. The majority of your post should consist of your opinions.

*Do not post the entire article without written permission. It is illegal. To figure out what you should include, keep in mind that most news sources use AP style, which recommends the “inverted pyramid” method of writing. This means that the most important information is contained within the first few (3-4) paragraphs of an article, so editors can cut off the article when there is limited space.

*Cite your source (author, title, location) and/or post a link (which you did, thanks). This prevents plagiarizing, gives your credibility, and allows users to read the article in full (since you hopefully will not include the entire article again).

#28 patriotz on 04.30.08 at 4:03 pm

The reality is that the overwhelming majority of the housing market consists of disciplined owners who diligently retire their mortgages monthly based on 25 year amortizations.

Well no it doesn’t. The market consists of the people who are buying and selling, not the people who aren’t. And the new buyers are overwhelmingly turning to toxic mortgages.

#29 David on 04.30.08 at 4:20 pm

The Canadian real estate bubble was driven by the same irrational exuberance, cheap credit, nothing down mentality, weak fundamentals and negative savings rates. There are a whole bunch of soft landing theoreticians in the banking and real estate sector expecting more yet more glorious years of housing price inflation. So far I still see the realtor crowd driving around in Hummers promoting housing like it is the best investment a family will ever make. The housing crisis in Canada is still very much in the incipient stages. At some point denial will no longer be an option and millions of Canadian families find themselves with upside down mortgages.
People forget what happened in Alberta during the oil price crash in 1985. The housing market collapsed and financial institutions started to receive jingle mail from underwater homeowners. Two major banks and numerous independent trust companies failed as direct result of the bubble breaking.
The Canadian real estate bubble circa 2010 is most likely going to be the Alberta 80’s bust writ large.

#30 Eric on 04.30.08 at 4:37 pm

Andrew,

That’s Gross income.

so would that be .. gross or net income ?

GDS ratio required is 32%, so if you are earning $5000/month the maximum you can spend for the house (including other expenses related to the house like heating, condo fees, property tax) is 32% of $5000 = $1,600

#31 SMWhite on 04.30.08 at 8:54 pm

local fishwrap, I was having a hell of a time trying to find the comments on that article you had mentioned earlier. Its typical censorship from a newspaper conglomerate that isn’t much more reliable then “Weekly World News”.

All you have to do is flip through a Sun newspaper and see the large amount of advertising for RE to figure out they have a vested interest in helping prop up this big fat bubble. The fact the comments were removed is disgusting and should be a warning sign to all.

If Derrick Penner doesn’t have the raisins to accept criticism for his addition to the real estate version of “Grimm’s fairy tales” he should stop writing fiction and stick to facts and common sense.

CREA & CMHC were coming out with press releases every couple of weeks provided the slant was in their favor, now they have “select” media outlets coming out with biased articles filled with weasel words to help in their cause as they can’t produce the results they want the herd to see anymore.

The only people spouting that 40 year mortgages is a good idea is CMHC. Ted Tsiakopoulos is in denial, he continues to state “incomes” are growing. The CAW was happy with a three year wage freeze, what does that tell you? Federal public servants get 3% a year, corporations divvy out the same or worse, so much for middle class…

http://www.thestar.com/Business/article/408925

60% of new home buyers are using 40 year mortgages?

So since its inception approximately 40% all mortgages were 40 year terms. That isn’t just new buyers, that includes the speculators aka greedy pricks, I mean, why pay the extra couple hundred bucks on that mortgage when your just going to sell the property for a quick and tidy 20% profit. It saves on your cost if you have to hold the place for a extra month or two, right? Canadians have 80% of their total investments in housing, SMRT.

I liked Jeff’s plug off the “Morning Coffee Newsletter”, there is so much risk to purchase housing that will bite the innocent hard in the next 5 – 10 years.

At least with the crash of a stock bubble you can sell, albeit at a loss, but if you have to make a house liquid it can become a long rotting cancer. You either stomach it out until your mortgage term is up or wave the white flag and claim bankruptcy. Yeah the banks have an interest in it all, they won’t lose in any event, don’t worry, when foreclosures start the just take the keys, thank the previous owner for their 5 years of rent/mortgage payments(90K -120K) and find somebody with CREDIT to take over.

The economy isn’t stable Vulture, if it was the Bank of Canada wouldn’t be tanking the rates.

#32 wayne on 04.30.08 at 10:57 pm

I wondered why I couldn’t find the critical comments on the Sun article.

Does anyone know for sure if this vultur character is a nut house inmate? Seems entirely possible. I have to hand it to you all, you’re much more tolerant of him/her than I would be.

#33 Re-diculous on 04.30.08 at 10:58 pm

Yep, the Vancouver Sun removed all comments to their “15 Myths RE advertisment”- I suspect out of utter embarassment. As of last night, there were about 30 comments posted, and 27 were very negative – some quite clever. But don’t fear, they’re all been rescued and posted by “Santa’s Helper” on the Vancouver Condo blog at:
http://vancouvercondo.info/2008/04/reader-comments-on-15-myths-story-missing.html
Some of them are quite good…and worth a read

#34 vultur on 04.30.08 at 11:25 pm

SMW, the BOC is trying to rescue the slumping manufacturing sector. But the resource and commodity sectors are on fire. The GTA is starting to weaken a little, but it’s so diversified.

What do you think is in store for the Toronto housing market? 10% correction? 20% correction?

I say flat prices for a little while overall but a drop in new condo prices and a huge drop in new sales. Market is dominated by specuvestors.

#35 vultur on 04.30.08 at 11:29 pm

While 40-year mortgages may have extended Canada’s real estate boom, most economists don’t foresee an imminent U.S.-style bust.

“There’s no evidence that house prices are set to decline in Canada,” says Ted Tsiakopoulos, a CMHC market analyst in Toronto.

“Incomes are growing and we feel that’s the most important factor that will support price growth.”

The forces behind Canada’s last housing crash in 1989 – high inflation, high interest rates and speculative buying – don’t exist now.

In particular, says Alexander of TD Bank, you don’t see house prices decline without significantly higher interest rates.

He predicts Canada’s economy will slow until late 2009 and the Bank of Canada will cut rates by 1 to 1.5 percentage points.

“Falling interest rates are not consistent with the housing market running into major problems.”

So, prepay your mortgage now if you can. Then, you’ll have some equity to fall back on when interest rates go up again in about two years.

#36 David on 04.30.08 at 11:44 pm

Sub prime mortgages are symptomatic of the affordability problem in the housing industry. A 40 year mortgage with minimal down payment sounds like the recipe for an impending disaster. Few if any of these mortgages have much more than a minimal equity component. The owners do not have much skin the game, as it were, and when the market eventually does goes go south the leverage factor will be working quite powerfully in reverse gear.
The first signs of the breaking bubble will be an excess of listings to sales and a credit contraction. The halcyon days of everyone who could breathe and fog a mirror making money in real estate should be officially declared dead.
The dot bomb crash of the likes of Northern Telecom on the TSE will look quite benign in comparison to the prolonged agony of a deflating real estate market that takes a decade or more to correct itself.
Talking about the fundamentals that are so misaligned gets a lukewarm response. Speaking out is dismissed as miserable renter schadenfrude. If houses are selling in most markets for vast multiples of annual rents or family incomes or the equity/debt ratios are 2/98 and buying decisions are predicated on unbounded asset inflation there is a huge problem awaiting down the road.

#37 local fishwrap on 05.01.08 at 12:42 am

the comments were saved and posted on vancouvercondo.ca by a diligent poter named santa’s helper.

Peruse the comments. I think they are remarkable in that they are nearly unanimous in their skepticism around the current housing market (in marked contrast to the blandly pollyanna take of the Sun), and cogently take the Sun to task for a) lame reporting and total lack of balance and b) a lack of ethics in basically asking the real estate industry what it thinks of real estate.

The kicker then is allowing comments, then deleting them. It’s just downright weird.

#38 SMWhite on 05.01.08 at 10:36 am

Vultur, I can’t say what will happen in Toronto because it would be a guess right now, the market continues to defy gravity and common sense, people are will to sign their life away just to get a very small slice of the shrinking pie. If you’ve moving out of a property into another you’re really not gaining; maybe losing a little as you sign up for a bigger/extended mortgage. If you have no equity and your dropping 5% into a new home on a 40 year mortgage I believe your just giving the bank your cash, you’d be better off investing in certain equities and renting.

I agree 100% with your comments on the condo market but we must remember a condo is shelter as is a house. The over speculation in the condo market can and will drive down the prices of detached and similar properties. I’m no longer factoring what will be the percentage lost on real estate, it will always come back but when? Its the length of time to correct that is my new concern because that will be the time your “stuck” to you RE investment.

Japan took over 15 years, I’ve mentioned before here in Ottawa prices dropped from 1991 – 1999 but it took 13 years(2003) to get back to the same level as 1989 -1990(as you stated there was a lot less speculation in real estate in Canada in the late 80’s); the Ottawa market is different from any in Canada because of the federal government’s presence, it won’t go up as fast but won’t dive bomb either.

Toronto has become Tokyo. Affordability has vanished even if rates keep going down it makes no sense to dump one red penny into real estate in Toronto whether your a billionaire or Joe Lunch-pail. Simple math using the 5% number of the average real estate gain and factoring in the rise of the average Toronto home from 2000 – present should give you a gauge of how long it will take to work affordability back in the picture.

#39 SMWhite on 05.01.08 at 12:21 pm

Vulture, did some quick math on Toronto RE statistics:

http://www.randi-emmott.com/market.htm#sales%20ytd

The AVERAGE price of a home in TO has gained approximately 5% since the market caught up to itself in 2002-2003(or so says Remax). That’s along the lines of the historical norms, that’s good.

What is an ominous sign is there is a 20% downturn in sales across all of Canada and increasing inventories in the major centers including TO. To many people trying to be “The Donald”. That will put downward pressure on current prices, that’s bad.

I still see trouble ahead for those that have purchased a home with no equity in the last couple years and have to renegotiate their mortgage in 4 – 5 – 6 years time when they have an inflated principal still to pay off. I personally would rather have a small principal versus lower interest rates at today’s prices because nobody can predict where the rates will be in 5 years time.

Canada is the last of the western countries standing. Hence the importance of using the 25 year vehicle for your mortgage… Whether you like him or not Garth is right on the 40 year mortgage, its a time bomb.

I applaud Australia for raising rates sooner then later, instead of putting the pain off, Canada doesn’t have that luxury if we want to keep any sort of manufacturing sector and be able to sell goods and services to the USA. Slippery slope! Do we force ourselves into a recession and pay now or do we continue to prolong and pay later, we should have never dropped rates to the levels we did after 9/11.

You’ll see an election ASAP before we start uttering the “R” word and the purse strings have to get tightened.

With that in mind its interesting to see what the USA(G.W.Bush, remember him bragging in his last election about the amount of new home owners) is doing to help alleviate pressure on the system whether it be through their $600 rebate or interest rate reduction, again a la Helicopter Ben. Is it for the good of the people or the good of the grand old party, a little from side A and a lot from side B.

I’m wondering if the wheels fly off the USA after the election…

#40 Bob on 05.01.08 at 6:39 pm

It’s ridiculous that the banks are offering 40 year mortgages with 0% or close to 0% down. If people only did the math and saw how much more interest they are paying versus a 25 year mortgage. If you have to take out a 40 mortgage to buy a house, maybe you shouldn’t be buying a house. Don’t these people realize that the mortgage is only one part of the total cost of owning a house. You have to pay property tax, utilities, furnishing, plus you probably have to eat and drive to/from work. Maybe the 40 year mortgage is one of the reasons house prices in Winnipeg are steadily climbing.

It’s hard to believe that the average price of a house that sold in March here was over 200K, when the median family income in Winnipeg is around 65K. Where is the logic in that?

#41 Brad on 05.01.08 at 7:42 pm

“It’s hard to believe that the average price of a house that sold in March here was over 200K, when the median family income in Winnipeg is around 65K. Where is the logic in that?”

You said it all. I’ve been saying for years that I don’t know where the hell people are getting all their money. It all started back about 10 years ago when I saw all these huge, beautiful new homes going up, especially in my city where the average median income is roughly $65k. It’s only logic and common sense that a person earning that kind of money simply can’t afford a half-million dollar house! Have you noticed that everything is money today? The standard 40-hour work week is now obsolete. We’re now working 60-70 hours week to pay on house we’re never get to enjoy. Damned if I can figure it out…

#42 David on 05.01.08 at 11:49 pm

Back when the Winnipeg housing market operated on some vague concept of fundamentals the market was deemed “stagnant”. Apparently selling a 53 year old home in Tuxedo for $450K is a sign of a robust market. That actually happened last year. Homes do not deteriorate they get better with age and neglect and increase in value no less.
I so miss the Winnipeg of its ethnic neighbourhoods and its kitchen gardens and picket fences.The Winnipeg of its lovely graceful Victorian homes. The Winnipeg of its comfy bungalows in Windsor Park and St Vital. The Winnipeg of going to the family cottage on Victoria Day weekend and acting totally rowdy.
There is much to lament and the loss has been huge.

#43 vultur on 05.03.08 at 4:55 pm

There’s no magic to it, as much as Darth Mortgage would love you to believe. Yes, banks make more money off you by keeping it out longer *SHOCKER*

Flip side is that you have more money in your pocket to invest in your business, pay off other more costly debt (credit card, auto, etc.) or perhaps use to invest in low risk mutual funds or equivalent.

I’m not advocating any of the above. Personally I believe that all personal debt is bad and should be eradicated as quick as possible, particularly in Canada. However, I don’t see anything particularly evil about the 40 year mortgage either, especially given that in the first 5 year term (the most common) the principal amortized is so low to begin with.

Darth Mortgage has an agenda- to peddle his paperweight of a book- not to help average canadians. He’s also really bitter that he has to spend so much time in dreary Ottawa and his thus incredibly envious of people who get to live in more interesting places.

#44 wealthyrenter on 05.03.08 at 11:00 pm

“Flip side is that you have more money in your pocket to invest in your business, pay off other more costly debt (credit card, auto, etc.) or perhaps use to invest in low risk mutual funds or equivalent. ”

“I’m not advocating any of the above.”

Classic Vultur doublespeak. Here is what you should do, but don’t do it. It doesn’t take a financial genius to figure out that the whopping $285 you save per month (signing for a 300K, 40-year mortgage @ 6%) will not go very far. The same mortage taken over 25 years will result in 200K of interest savings, and 15 fewer years of principle payments.

How likely will it be that somebody so strapped for cash that they need $285 monthly to pay for a car, service their credit cards / other debts, will use the $285 for lofty goals like investing in a small business?

Unless somebody is rocketing through a career path with predictable income gains, 40 year mortgages are poison.

#45 David on 05.04.08 at 12:34 am

Vultur, there is a whole lot wrong about 40 year amortisation periods. One does not need a so called agenda or an MBA parchment to see the inherent risks to the people using these financial instruments to pursue the dream of home ownership. People signing up for these mortgages are essentially signing their lives away to participate in the glowing real estate market of today. The unfortunate truth is that a large number of the newly originated mortgages are 40 year mortgages are signed by people fearful of being forever locked out of the McMansion and condo market. Building a nominal amount of equity would take about 30 years and lacking a 25% down payment means paying an extra 3.7% for mortgage insurance to the house price.
You mention using other money to invest in other things. How about money left over for food, cars and sending the kids to college?
A lot can happen in 40 years for example job loss, sickness, technological changes and consumer demographics and not to mention the obvious potential for a bursting bubble and an inverted mortgage.
Pure and simple today’s housing prices are out of line with economic fundamentals.

#46 John on 05.11.08 at 4:42 pm

A friend of mine re-negotiated his mortagage on a house in Toronto waaaaaay back in ’02 or ’03. He did so with Exceed Mortgages — apparently all he had to do for income verification was fax them a letter stating his income.

The “income” he stated was based on what he expected to earn through a combination of precarious contract work and a newly hatched self-emplyment scheme that never took off.

If this isn’t an example of “subprime” lending, I don’t know what is.

#47 Malcolm on 06.05.08 at 10:48 am

Just read through this thread, and a couple others just like it. So here is my 2 cents.

I love the 40 year mortgage, I love the no money down home decor credit lenders, Credit card companies, and I love every business that is giving the average Joe the ability to buy what they can’t afford.

Why do I love them? Because I don’t use any of these products, unless they give me a better return. I’ve wiped out my debt, increased my savings.

I’ve also paid very close attention to the market slow down’s.

All finances cycle, up and down it’s the players that change.

So with all that in mind, the average Joe will find the Bank wants the money, they didn’t have, back and when the turn there pockets out. I’ll be there to take the advantage.

“Greed is the governance, ignorance is the fuel.”

Enjoy your day.

#48 Robert on 07.19.09 at 2:17 pm

as a single dad that raised four children alone for fourteen years
I know what poverty is
people judge and your lazy and your this and that
single parents are looked at as crack heads

I had four children with the same woman
feminism destroyed her and she thought she could do whatever she wanted
I got the kids in COURT
we have nothing and people dont give a shit
not even heros like Garth
neighbours live on half million a year
and ignored us when we couldnt even afford hydro

so WELCOME TO THE NEXT DEPRESSION
and all you idiots with money

I CANT WAIT TILL YOU LOSE IT ALL
second timothy chapter three
http://www.infowars.com
http://www.henrymakow.com

http://www.goodnewsaboutgod.com