The 40-year twitch

Fools in Metropolis

Listed for $779,000, sold in a war for $929,000


The head of the Bank of Canada, Mark Carney, appeared as a witness before the House of Commons finance committee on Wednesday on Parliament Hill. I asked him if the new crop of 40-year amortization mortgages were Canada’s equivalent of the American subprime. Did he worry this might accelerate the busting of the housing bubble here? Some of his comments are carried in this wire story, which moved a few hours later. — Garth.

BoC governor Carney warns about loosening mortgage standards in Canada

By Julian Beltrame, The Canadian Press

OTTAWA – Bank of Canada governor Mark Carney is concerned about the loosening standards in the Canadian mortgage system, particularly the growing popularity of mortgages amortized over a 40-year period.

Carney told a Commons committee Wednesday that the central bank is watching developments in the mortgage lending sector closely to ensure that the abuses seen in the U.S. subprime market do not occur in Canada.

“We have concerns with the increased prevalence of very long amortization and higher value mortgage products,” he said.

“They add to momentum in the housing market and if everyone has a 40-year amortization mortgage, then you just have higher housing prices.”

And Carney conceded that stand five-year mortgage rates for Canadian home buyers had not decreased in line with his bank’s 150-basis point cut in the overnight interest rate to three per cent from 4.5 per cent in early December.

“The costs for the banks have increased and yet there still remains an operating band (for other loans), except for five-year mortgages,” he said. “Its difficult to provide a full explanations” beyond the global problems in the security markets.

Still, the governor stressed that the Canadian housing market is not following the path of the U.S., which went through several years of skyrocketing growth before bursting last summer and collapsing.

Although housing prices have risen aggressively in Canada, Carney said the country has the lowest housing affordability measure among 20 industrialized countries surveyed by the International Monetary Fund, alongside Austria.

“The structure of our housing finance is entirely different than that of the United States,” he said, and the risk of a housing slump could impact the wider financial system “is not possible in our system, to the U.S. magnitude.”

In his first meeting with the Commons finance committee since taking over as governor in February, Carney asked the MPs to support legislation that would widen his powers to expand the assets the central bank can accept in order to lend chartered banks money in times of financial stress.


#1 Lawrence on 04.30.08 at 11:36 pm

Say it isn’t so Garth. You have a reputation to uphold.

Surely Mr. Carney can’t know of what he speaks!! Is it possible that your use of US data to predict the downfall of the Canadian market is misplaced? That there are different national standards, institutions, and regulations and oversight?!! Preposterous.

Only fools will put down a million dollars for housing in Toronto!! On a bidding war! $150,000 over the list! No one else will follow during the peak buying season and chase a property. During a recession! Amidst your predictions of a housing collapse, especially in the GTA! Outrageous! Garth these people need to read your book.

You are right and all these others must be wrong!! After all, you have been prompting book sales based on the opposite result. It is just a matter of time. The sky will surely fall.

#2 Another Albertan on 05.01.08 at 2:51 am

So if you read in between the lines of how Carney was quoted, you kinda get the impression that “we’re the same as the US, but different” ?

I have to wonder about the media cherry-picking the governor’s quotes. These are just mini sound-bites, but as presented, paint an unfortunately ambiguous picture. It would be nice if there were a full transcript of Mark Carney’s testimony.

I would expect the potential impact in the US to be materially different. It isn’t a 1-to-1 linear relationship. Their population is an order of magnitude larger than ours! The rattle in your car that just started and that you think is unique may not be so special to the mechanic that works on a hundred cars every month.

I can concede that you will not likely see much more institutional carnage in Canada, as too much attention has been brought to the banking and insurance sectors worldwide. The powers that be will do what they need to do to ensure the wheels keep turning and that the system doesn’t seize. But they can only cut rates so far for so long before inflation take offs like a scalded dog (providing lending doesn’t remain seized), causing forced rate hikes. And not acting will only hurt your credibility.

So forget about any risk to the “system”… they’re claiming to be addressing that along the lines of “the banks are too big to be allowed to fail”. Unfortunately, the main tenet of risk management is that you cannot eliminate risk and can only transfer it – in this case, spread across the “edge” of the system.

So the question for readers is to determine who will be left holding the bag? Yup. The consumer/homeowner.
There isn’t going to be a big BOOM, followed by a big crater. It will be more like death by thousands of cuts.

#3 redshirt on 05.01.08 at 11:47 am

Another Albertan, once again you make a lot of sense. I have traded stocks for a long time and am fortunate to have benefited from mentors who were consistently profitable traders. One of them once told me, in any given trading situation, the market will do what would cause the most pain to the greatest number of people. I think death by a thousand papercuts would cause the most pain, to homeowners, and people hoping to buy on the cheap. There will be false bottoms but imo it’s going to be a slow leaky Chinese water torture downtrend punctuated by periods of high volatility (both up and down).

#4 tulip-mania on 05.01.08 at 11:48 am

It matters very little what Mark Carney says or does.

Central bankers around the world have abused monetary policy for too long; as a result they have created an asset and credit bubble, largely out of their control now.

Greenspan, (the biggest bubble maker in history) the maestro of the largest economy in the world could not reign in the runaway credit wreck, as he tried to raise short rates in the latter stages of the bubble he created.

Remember the conundrum?

Tick Tock, Tick Tock

#5 David on 05.01.08 at 12:44 pm

Mr. Carney had to say something and even if his comments are only tangentially related to the truth the media still has to report on the comments.
The horse escaped the barn a while back and comments about some ex post facto monitoring of the situation with 40 year mortgages in the breaking bubble environment sound unbelievable at best.
The problem will only be fixed when these albatross debt instruments eventually get marked to market and financial institutions start experiencing massive write downs. This is hardly a pleasant scenario and one could reasonably expect the contraction to be of a prolonged nature.
Did anyone ever ask why the housing market should actually something like a 40 year mortgage product?

#6 Kevin in Winnipeg on 05.01.08 at 3:26 pm

As a 31 year old professional with a single income and no dependents, I am one of those buyers forced out of the market last fall by the 40 year mortgage. Not only am I disgusted at our Government for inflating prices but by the irresponsibility of consumers for falling into this trap. A 24 year old colleague recently bought a $250,000 home with a 40 year mortgage and acts like it is a great investment for him. From what I have seen in Wpg, there has been no slowdown yet so I really see affordability going away here because of 40 year loans and lack of supply. If I stick with my current mentality, I will not be able to afford a home here for years to come. Who would have ever thought someone would ever say such a thing about Winnipeg.

#7 David on 05.01.08 at 4:03 pm

Dear Garth,
Please stick to your guns. The contagion is probably far worse that you dare say. I read the reviews on your book in the National Post and all the comments about non assent from “leading economists” at the University of Western Ontario and University of Toronto.
The real estate bubble has robbed so much future prosperity for an illusory false propersity of the present. Canadian families are assuming huge amounts of 40 year long term debt for craptacular McMansions and Lilliputian sized condos that are purely speculative instruments rather than housing.
Apparently academia can afford the luxury of examining the empirical evidence of other bubbles that burst or maybe never bothered to read the seminal work of Charles MacKay, Extraordinary Popular Delusions and the Madness of Crowds .
The housing insanity robs millions of Canadians of a better future and jobs in more productive industries than real estate and finance.
The notion that housing prices should be a reflection of local wages and rents or should increase in accord with the nominal inflation rates seems pretty quaint these days.
It is really difficult to make a whole bunch of friends by making any attempt to speak the truth or saying anything that does not square with vested interests like the real estate cowboy crowd.
If the Realtor crowd hates you, welcome their hate. When any of these Grade 9 dropouts and innumerate/illiterate dunces who barely passed their Realtor licensing exams can produce one scintilla of evidence that the real estate bubble was beneficial to Canadian families housing needs then all of us should have our ears open.

#8 David on 05.01.08 at 4:24 pm

Kevin, the bubble in the Peg’ is the same as the bubble everywhere.
The bubble will burst soon and you can have an affordable home for many years.
Last month some idiot paid 550K for a 100 year old fixer upper in Wolsely. Can that be in any fashion be construed as sanity? Incomes did not grow by 60 % in the Peg in the last 24 months, but housing prices did.
Your friend with the $250K 40 year mortgage probably does not have enough spare change for gas money this summer to take him to Victoria Beach, since all his spare dollars are supporting his 40 year “investment”.
Did it ever occur to your friend that his job might be around in the next 6 months or that interest rates could skyrocket?

#9 EssGee on 05.01.08 at 9:20 pm

In many parts of Toronto it’s actually much cheaper to rent a place than to buy it. Personally, I think it’s easy to draw parallels between the dot com and real estate bubbles. The problem is that equities, like real estate, are sophisticated investments and are not for the average Joe. As soon as I saw everyone and their grandmother make speculative bets in the stock market, I knew it was time to pull out. Same thing holds true for real estate. When every Joe Schmoe starts acting like Donald Trump and amassing millions in heavily leveraged property, then you know there’s no place to go but down. Too bad there’s no easy way to short the real estate market.

#10 David on 05.01.08 at 11:12 pm

EssGee, it is often the unsophisticated that drive markets and not the cognescenti of finance.
There would never have been a real estate bubble without a hoard of sheeple waiting to be sheared.

#11 awum on 05.02.08 at 3:11 am

Astonishing. Look at this closer: Mark Carney says not to worry, we haven’t had the same rapid rise as thay saw in the US.

Except of course in Calgary, Edmonton, Vancouver, Victoria, Kelowna… some of which hit the top of the charts on the demographia international measures of unaffordability last year.

OK, then, ALL of Canada won’t follow the US example except those markets that have gone nuts. Did we miss that little logical consequence of his comments? By Carney’s logic, expect partial meltdowns, in the hot markets.

But here’s food for thought for those who find comfort in that idea: In the US, price drops started in the formerly hot markets like Phoenix, Miami, San Diego, but within a year they spread nation-wide. Even the Pacific NorthWest (who declared themselves immune) are seeing it happen.

Sub-prime mortgages (i.e. 40 year, low downpayment), unreasonably fast appreciation, and high prices relative to income conspred together to create the situation in places like those cities I listed above. The three chickens are coming home to roost, just as they did in the states. It’s inevitable.

#12 vultur on 05.02.08 at 8:04 pm

Calgary will continue to grow because of its growing appeal to large, international sources of capital looking for politically stable sources of petroleum. Prices there might level off for a while, but that city has huge long term potential.

I wouldn’t touch BC or Edmonton.

#13 David on 05.04.08 at 6:34 pm

Vultur, like British economist John Maynard Keynes once quipped “in the long real we will all be dead”. I never studied lingusitics but my understanding is that the term mortgage is derived from old French meaning obligation until death.
Forty year mortgages might be the perfect vehicle for Canadian kids in middle school who want to have free and clear title once THEIR kids leave home. As for the rest of the Canadian adult working population, this new class of mortgagees will very likely be mortgaged for their remaining adult lives.
At 6.5% the point of intersection on a 40 year mortgage for 400K between interest and equity contribution occurs in month 353, a bit shy of having paid for nearly 30 years. So why rent is your argument? Did it occur to you that these unlucky homeowners are renters as well. They are renting money from the bank .
There is no guarantee whatsoever of a constant 6.5% fixed rate over the life of the mortgage either. A 1% increase in the mortgage rates equals an 11% increase in monthly payments.
The algorithm is quite simple and easily apprehended by anyone who can do arithmetic.

#14 vultur on 05.05.08 at 3:47 pm

The discussion in this lowly forum equates to pissin’ in the wind. This is clearly a faux class struggle by the looks of the responses to my points, but here’s the real truth- I could give a cr*p whether you rent or own. Chances are if you rent then you are or have been a customer of mine at some point. I would benefit more if this country consisted only of renters, believe me. I’m just offering opinions primarily because I like to hear myself talk (so to speak) but also because I genuinely feel that the information contained in Darth Mortgage’s book is as distorted as the insanity coming from the real estate industry. Nothing wrong with a 40-year am for a young couple stretching their finances a bit to start things off. Big problems with johnny tar sands looking to spec-u-vest in a dozen units in Edmonton. Get my drift?

I am the great equalizer as such. Perhaps I should be penning my thoughts…

#15 David on 05.05.08 at 9:40 pm

Vultur, your references to urination into a strong wind bring to mind the term coined by CIA operatives referred to as “blowback”. Needless to say there will be lots of yellow rain blow back from these 40 year mortgages in the near future. It is not quite as simple as rent versus own or some cartoon type vice against virtue scenario. There must be some crude parity between mortgages, rents, wages and savings rates.
The Bush Administration south of the border made a great deal of noise about the virtues of the ownership society and other motherhood platitudes. The ratio of home ownership in 1986 in the USA was about 65%. During the housing bubble 2004-2007, the actual ratio increased to 69%. Thus there is the perverse situation of 4% of the marginal buyers precipitating a huge collapse of an entire housing market and financial system.
When house prices trade at vast multiples of annual rents or median family incomes there IS a problem.
Take a mortgage for 40 years for 600K at 6.25%. Over 40 years the finance charges alone will be over $1 million dollars. The total cost of ownership with interest and principal payments will be well over $1.6 million. Somehow an aging house nearing the end of its useful life will require a huge turnover premium to justify that lifetime of family income expenditure.
If you own rental properties at least you have a certain discipline known as cap rates and can understand that much.
If affordability is the issue, maybe the prices are totally out line with family incomes. The 40 year mortgage is a factitious non solution to a real problem.
The only benefit of the 40 year mortgage is that it provides the marginal buyers with some vague sense that the overpriced McMansions they bought were economically sound “investments”.

#16 vultur on 05.06.08 at 12:22 am


You make perfect sense. Clearly you don’t belong in this forum, :)

#17 David on 05.06.08 at 1:28 pm

Vultur, you probably have the benefit of seeing both sides of the rent versus own arguments. You are in the property rental business, so there is a certain amount of discipline imposed on you when evaluate buying and selling properties. You have to deal with cash flows, occupancy, interest rate fluctuations and sustainable cap rates.
Virtually all of the overpriced condos and McMansions on the market today would show a strong negative cap rate when compared to renting.
It is truly sad that the real estate industry and the banks are selling such a counterfeit product and not being called out for doing so is amazing.
In your case, you will probably be lucky enough in a few years to nibble on the carcasses left over from the real estate bubble as a cash buyer. The folks who unwittingly or stupidly bought into the dream will not be so lucky.

#18 Greg on 05.07.08 at 3:09 am

So if Canada’s banking and mortgage industry is in such good shape, then why is Carney asking to have the central bank do the same as the Fed and trade garbage assets for cash? Welcome to bagholder land – population all of us.

“Carney asked the MPs to support legislation that would widen his powers to expand the assets the central bank can accept in order to lend chartered banks money in times of financial stress.”

#19 David on 05.07.08 at 10:06 pm

Probably because it is called conservative nanny state capitalism. The rewards are private, but the risks and losses are everyone’s business.
It is absurd to think that the central bank would assume assets that can not possibly have anything like an assignable value. One can only hope that there are many sober second thoughts about this in Parliament and the nays drown out the yays.

#20 Islander on 05.25.08 at 5:59 am

What I don’t get, David, is how a guy at ease with finance – and an unshakeable belief in his educational superiority to realtors – has a Grade 3 undestanding of how markets work.

A realtor’s job is to move product. It is not a realtor’s job to decide on behalf of a greed-infested buyer whether it’s intelligent to suffer negative cash-flow on a property bought for “investment” purposes. The buyer, operating on free will, controls the pen that signs the purchase documents.

As for your moralizing about real estate and finance not being productive parts of the economy, well, buying and selling of real estate occurs between willing parties at a mutually agreeable price. Banks lend money to help make it possible and realtors help facilitate the transaction. I don’t see the coercion that you and other professional victims desperately imply.

Nobody is forced to use a realtor. Nobody is forced to borrow money on a mortgage. Nobody is forced to buy real estate.