Superior

Mac1

Defenders of the Canadian way are predictable.

Without saying so, they always have the same refrain: we’re superior to the Americans.

Used to be that Yanks shot people in anger, while we kept the peace. Not so much now. Or that Americans dismiss altruistic causes such as the environment, while we embrace them. Er, not according to Copenhagen. Or that they apathetically eschew politics, while we take voting seriously. Oops, not after half of us didn’t bother turning up last time. Or how about those lax US lending standards and excessive debts, while we save and be frugal? Pffft there, too.

In fact, this myth du jour has been bandied about a lot recently by those seeking to justify Canadian house prices, and swearing our banks are buttoned-down, puritan, mormonesque, Amish pilgrims compared to those dollar-drenched, easy-credit Yankee hucksters. No subprime loans here!

Of course, this is untrue.

  • Canada sanctioned government-insured mortgages of 100% as well as 40-year amortizations with which virtually no principal was repaid. If encouraging people without money to buy houses is prudent, I’m on the wrong bus.
  • Of course Ottawa saw the error of its way and changed this to a 5% down and 35-year am. So how does 95% state-sanctioned real estate financing in Canada compare with that to the south? I think the following statements are interesting – the first from the US government mortgage giant Fannie Mae, and the second from our own beloved CMHC:

Fannie Mae: “Your lender will ask how much money you have available for a down payment. A down payment of 20 percent or more of the home purchase price demonstrates your commitment to long-term homeownership and provides you with immediate equity in a new home.”

CMHC: “Down Payment. With mortgage loan insurance from CMHC you can own your home with as little as 5% down payment.”

  • As for so-called ‘liar loans,’ a staple of the subprime culture in the US, in which bankers handed over money to people without asking them to verify income, we’ve been doing the same in Canada for some time. Like this, from CIBC:

“We recognize that the self-employed have traditionally faced greater scrutiny in qualifying for mortgage financing. That’s why CIBC has streamlined the mortgage approval process to ensure our self-employed customers receive the respect and credit they deserve when applying for a mortgage. Approval is based on your self-declared income, strong equity and excellent personal credit history. Best of all, you don’t need to prove your income.”

  • Hmmm. And how about those ‘teaser’ loan rates that trapped hundreds of thousands of Americans into mortgages which were destined to reset at higher interest charges? Lenders told borrowers that rising equity would bail them out, but that just didn’t happen. And how were those so different from the ‘Teaser Carney’ rates we currently have in effect in Canada? Are lenders telling people they should borrow only on the condition they qualify under the rate structire we all expect to be in place in a couple of years?

Not according to people posting on this site. From Sunday’s comment section:

“The banks will give a loan to anyone. Just go to the bank and see. The bank wanted to give us $700,000 and we make $115,000 together.”

“Yeah, the bank also wanted to give me $458, 000 and I make $68,000 a year. I walked out of there thinking there is absolutely no way I can carry that big of a mortgage. People I know were all happy for me the bank gave me such a figure, the same people telling me to buy buy buy.”

While the official policy of the Big Banks and CMHC is that borrowers should have mortgage debt service costs no greater than a third of their income, or restrict home loan borrowing to less than four times their annual take, comments like these make a lie of it. When people in Toronto, Calgary and especially Vancouver are offered mortgages equal to six, seven or eight times their yearly household income – at interest rates which can only go in one direction – how can anyone expect anything other than what we have?

There’ll be plenty of blame to spread.

None of it to the south, eh?

26 comments ↓

#1 Weston on 12.20.09 at 9:57 pm

Great post G.

Sticking to your strength. Plase don’t mention or respond
to any gold posts.

Let’s keep this one clean.

#2 Amy on 12.20.09 at 10:14 pm

Lawrence Roberts

A financial bubble is a temporary situation where asset prices become elevated beyond any realistic fundamental valuations because the general public believes current pricing is justified by probable future price increases. If this belief is widespread enough to cause significant numbers of people to purchase the asset at inflated prices, then prices will continue to rise. This will convince even more people that prices will continue to rise. This facilitates even more buying. Once initiated, this reaction is self-sustaining, and the phenomenon is entirely psychological. When the pool of buyers is exhausted and the volume of buying declines, prices stop rising; the belief in future price increases diminishes. When the remaining potential buyers no longer believe in future price increases, the primary motivating factor to purchase is eliminated; prices fall. The temporary rise and fall of asset prices is the defining characteristic of a bubble.
The bubble mentality is summed up in three typical beliefs:

1. The expectation of future price increases.
2. The belief that prices cannot fall.
3. The worry that failure to buy now will result in permanent inability to obtain the asset.

#3 Boombust on 12.20.09 at 10:19 pm

Dumb and dumber makes me numb and you number.

#4 Boombust on 12.20.09 at 10:22 pm

…because the numbers don’t lie.

#5 Blobby on 12.20.09 at 10:23 pm

@Weston : Its funny you say that.. I was tempted by gold recently – for no other reason than all my friends were buying it. I’m not normally a sheep person, but for some reason i was sorely tempted, then after reading here, i did my research – looked at the graphs and realised that if i bought it, i’d be a bigger fool than anyone else, purely because I NORMALLY do my research!

(that was a long sentence – sorry to anyone trying to read it!)

#6 vreaa on 12.20.09 at 10:23 pm

Update regarding the art piece that Vancouver condo marketer Bob Rennie’s installed on his building in Vancouver’s Chinatown that reads ‘EVERYTHING IS GOING TO BE ALRIGHT’:

Irony of ironies, it turns out that this piece was -
1. previously displayed in that other bastion of real estate strength, Detroit,
2. followed in Detroit by a second art piece that stated ‘NOTHING WILL BE ALRIGHT’

Somehow, despite the insistence from some quarters that Vancouver is a ‘World Class City’, I can’t see Vancouver sensibilities being capable of handling all this irony. Imagine ‘NOTHING WILL BE ALRIGHT’ on Rennie’s building in Chinatown? No, neither can I.

For images and comment, see VREAA at -
http://tinyurl.com/yfb2k6r

#7 JO on 12.20.09 at 10:25 pm

For many years now, mortgage “approvals” are a joke. I used to lend money for a living up until late 05…part of the reasons i left were these new 0 down, long amort mortgages -real ponzi schemes.

I keep saying it and will say it again..approval has little to do with affordability. If your article below ends up being on the money and the gov’t increases the minimum DP and shortens the am (as is required), then if the BofC increases rates at least 1% …or more likely, the bond market vigilantes show up at the show and force gov’ts to pay a lot more (already starting in Greece, Spain, with many more to come), the real crash will begin..either of these actions on their own are enough to kill the market by 10-15 % – but both together should easily deliver a 20 % punch to the market over 18-24 months- a much needed hit to bring balance back.

The bond market, especially the US teasury market, will be the one to watch in 2010. It will be a bizarre year. For what it’s worth and in the interest of pure entertainment, here are some predictions for 2010:
1) – Stock markets get at least 2 major scares with 20 % declines at some point in 2010. First one is bottoms between Feb-Apr, 2nd between Sept-Nov. At some point, maybe between May-August, the markets might explode upward to near the Oct 2007 highs as a massive rush of money leaves US treasury market and looks for a new home in blue chips…health care, biotech, weapons and gunds makers, maybe steel companies will lead the way.
2) Several more nations get downgraded and at least a few default – trigerring a hell of a scare and rapidly rising rates across the world…US treasury market tanks hard after May 2010 -raising long term rates to at least 6 %.
3) Oil crashes hard to under 30 / brl…but buy it.
4) Gold hits 1300 but then tanks to 8-900, before exploding back up.
5) Canadian housing declines 15 %.

It’s about time to put an end to this home buying cult that permeates our country. I have never seen such an extreme level of optimism among so many on any asset – it dwarfs anything I say in 1999-2000 during the Nasdaq days.

My crystal balls name is Lucky BTW !
JO

#8 Squeezed on 12.20.09 at 10:30 pm

Two forces at play here….families who have a decent downpayment having to bid on the inflated RE prices caused by the free money made available to many of those who don’t. In this environment, caused by the monetary planners, free enterprise is not rewarding for the prudent, careful Canadian family looking for a decent home.

#9 Oh my on 12.20.09 at 10:30 pm

The black and white approach to forecasting has been bugging me for some time. While I don’t disagree that the bubble is produced by inflated prices, the fact that we are experiencing a temporary situation of cheap debt, the folly of CMHC’s complicity, and the dismal reality that the banks will do anything to get an upper hand in the market and will not be beholden to any ethical treatment at the time of renewal in 4-5 years when the interest party is over. I do, however, think that the sell/rent, lock-in/variable rate advice has been misleading in terms of the thinking person that visits this site. That is, I think that a lot of people at this site have been negotiating, maneuvering this financial landscape for a while and the advice and talk here needs to be at a more thoughtful pitch. Unless this is a space for Nostradamus and the Armageddon bunch, much of the conversation here in the past months has grown tiresome for thinking homeowners. Maybe this site is just for greater fools, a by-product of the bubble …sort of like Fox news in the Bush era.

#10 swm on 12.20.09 at 10:37 pm

There is more to add to the list of our ‘prudent lending standards’ aka ‘same as the states in the peak of the bubble only named differently’

-about 100 year amortization periods available from PC financial and insured by the CMHC. The ‘rainy day’ option as they call it allows you to miss one mortgage payment per year. With a 5/35 that one month missed would cancel just about all principle repayment.

-The ‘rainy day’ option combined with their 5% cash back option, combined with adding CMHC fees for a liar loan (6%) to the mortgage would actually make a 5/35 a negative 6/100

-While the states may have had more of the extremely exotic mortgages, they also had almost infinitely more safe non-ARM’s (rate does not adjust for the entire mortgage life even if 30 years). Almost ALL of our mortgages are risky Adjustable Rate Mortgages. The adjustments are less frequent in some mortgages than others but unless you have a 5-10 year amortization, in Canada you have an ARM (those things that everyone says the states was so crazy for having)

#11 JM on 12.20.09 at 10:43 pm

Garth,

I think you should also have mentioned PC financial’s “rainy day” mortgage. It allows borrowers to skip a payment each year and, therefore, makes infinite amortization a possiblility(at about 4% rates). The 0/40 was downright conservative by comparison.

#12 Calgary_rip_off on 12.20.09 at 11:00 pm

Garth there is much denial in Calgary these days. The tension in this city is almost like an aroma wafting on the cool breezes.

I eagerly await for when Calgary will get levelled. It’s only a matter of when. This ludicrous $400K will likely be at $200K again, as it should be.

http://www.calgaryherald.com/business/real-estate/Economist+warns+homeowners+bubble+trouble/2349155/story.html

#13 Nostradamus jr. on 12.20.09 at 11:20 pm

Friends of Garth,

…Simply drive thru the various Downtown Hongcouver Hi Rise residential neighbourhoods and what do you see?

…Vibrancy…Internationalism…a True Canadian Mosaic….and $$$ Financial Success.

Hongcouver will rise to Par w/ Hong Kong.

…and how much higher is that in %%% Friends?

Centre of the Earth, Ontarians had the opportunity to relocate here at least for more than a decade ago.

…Today, all you Eastern cry babies can only blame yourselves and wish Hongcouverites “bad tidings”.

Visit here and you will move here ASAP.

Merry Xmas to all

Nostradamus jr.

#14 Jay-C on 12.20.09 at 11:20 pm

Bang on post Garth. In every conversation regarding RE, it always seems to come down to those words, “we’re not like them [americans], things are different up here.” Sure they are…it’s a lot frickin COLDER up north!
I’m 27, and 4 months ago, I was on the verge of buying…the constant BUY NOW, or miss out FOREVER had finally got to me. My instincts told me the market was overpriced and due for a correction, but all my friends were either ‘doing it’ or had “done it”. Thankfully a friend showed me this site and my common sense prevailed, I’ll continue to rent and easily sock away upwards of 2.5K a month.
On another note, I was pre-approved for my first ever mortgage at just under $500K. All in, I make just under $90K annually. I thought they were crazy.

#15 T.O. Bubble Boy on 12.20.09 at 11:21 pm

My wife and I are moving towards the “sell and go rent for a couple of years” plan now, but a few months ago we had gone into my local bank branch to get a pre-approval so that we could continue looking around… similar story to the 2 mentioned on this post:

Our combined salaries would qualify for some ridiculous mortgage amount, but we based the pre-approval on just my salary because my wife was soon going to be on mat. leave.

So, here were a few oddities with the process:

1) They didn’t even look at my paycheque — just looked at my bank account to see the last pay amount. How would a bank be able to verify salary without knowing what kind of deductions were on that paycheque? (or if most of it was a big commission amount etc.)

2) They (or course) asked what my wife makes… I said that we’d just be basing this on my income alone. I casually asked ‘isn’t that what you should do if you know you’ll be down to 1 income?’ — the mortgage “specialist” said that everyone would apply with 2 incomes, even if 1 is about to be cut.

3) I had stated that I only wanted a pre-approval for an amount that was about 2.5x my income. They offered a much higher pre-approval amount (4x-5x I believe).

Anyway — nothing illegal going on here, and it was only for a pre-approval, but it still reminded me of just how automatic the whole mortgage process is in Canada right now. Minimal salary verification, pushing to use 2 salaries instead of 1, pushing for the max mortgage amount… it’s all common practice.

Compare that to the average American now — even people with high-paying jobs and/or great credit scores can’t get a mortgage. (or, if they can, it’s at some ridiculously inflated rate)

#16 Anyone on 12.20.09 at 11:46 pm

#2 Amy,
Thanks. Your comments very clearly explain why it did happen in US and why it WILL happen here too:
because the pool of buyer gets exhausted, market saturation, we could say. Gov’ and Central bankers can’t stop it. Ask the US citizens. I never thought that government officials are ignorant, only that they don’t work following “our” logic, they do follow theirs. And they will do whatever it takes to provide for that pool.
All the ponzi schemes end like that: no new entrants.

Why the “Capital” is moving to Asia? There are billions of people for new Ponzi schemes, all of them freshly started. US has only 0.3B peoples; China has 1.32B.
Did you think what happens when, average, each one drinks one coca cola a day? $1.32B a day!!!

#17 Not Garth on 12.20.09 at 11:49 pm

Garth

When does Vancouver start falling?

#18 Expat on 12.21.09 at 12:00 am

One of the drivers in the US was separation of risk from the brokers originating the loans. The loans would be made then quickly sold off in bundles as mortgage backed securities. The brokers would pocket very profitable loan fees and repeat the process as often as possible as long as there was a market for those securities. Didn’t end well, those securities were interwoven into the larger market, further complicated with bankers betting against these securities who also went down when the house of cards collapsed. Remember your RRSP balance last March?

So if I understand correctly, CMHC has stepped in to assume all risk for the current wave of Canadian mortgages, which encourages the banks to make as many loans as possible, giving loans to people they probably wouldn’t touch if the bank was assuming the risk. So, since the CMHC is backed by the Government of Canada, what options does the GOC have if/when this thing goes south, so to speak? Does the BOC just start printing money and handing it out, like Helicopter Ben did?

#19 junius on 12.21.09 at 12:03 am

Good post Garth.

My wife and I found ourselves in this very position 3 months ago. We were considering moving up in the market and went to a mortgage broker introduced to us by a friend. We ended up with an offer 7 times our household salary (which is more than twice the provincial average). We were shocked.

However all our friends here in Vancouver hit us with the usual bubbly baloney such as “housing prices never go down” and “there isn’t enough land” and the ever popular “you just gotta play big to win big.” Fortunately my father (a retired contractor) and my mother (a nearly retired real estate agent) talked us out of it. Shortly after I found your blog.

We are not popular these days at parties for our view on the future of the market but we sleep better these days!

#20 Into the Sunset on 12.21.09 at 12:05 am

I understand Mr. Flaherty is going to reduce the longest amortization available to 30 years !

#1 Weston….re: Gold.

Just to keep this topic clean or unclean, I was talking to some financial friends this weekend involved in gold mining and marketing in Central and South America and I was told the world production of gold is decreasing!!!

May have some affect on price, or does the old rule of supply and demand not hold in the case of gold on this blog?

I thought I would throw this out just for the fun of reading the responses :)

#21 Edmonton_Yahger on 12.21.09 at 12:26 am

I’m glad I’m just saving up for a fat down payment… my wife and I qualified for a 520K mortgage on a combined income of $120K – no thanks. We’ll wait… prices will come down – even in Edmonton.

#22 Virgil on 12.21.09 at 12:29 am

1. You should also mention that in an asset bubble not that many are listing as they believe their asset will increase even more. This will increase asset prices even more.

2. When the asset prices start falling all owners thinking of selling but not listing because of “more latter” are listing in panic and market is flooded with “waiting” properties. This will decrease asset prices even more.

In both 1. and 2. is our herding instinct/emotion playing us. 1. and 2. refers to the seller herd while Amy refers to the buyer herd.

#23 omg on 12.21.09 at 12:46 am

I absolutely hear what you are saying Garth and agree.

But whether there will be a big enough problem in Canada as rates start to rise is the big question.

Banks and governments will do whatever they can to contain the problem and will likely be able to forestall the meltdown if the potential number of defaults are small.

#24 Yury on 12.21.09 at 12:50 am

Actually, it’s just a matter of personal responsibility.
Me and my wife have 92000 combined and no debt of any kind. Nevertheless we were thinking very hard before we decided to take a 196000 mortgage.

#25 Watched Bubble Never Pops on 12.21.09 at 1:05 am

#2 Amy

What is the inverse of the bubble mentality?

1. The expectation of future price decreases.
2. The belief that prices cannot rise.
3. The worry that failure to sell now will result in permanent inability to get rid of the asset.

What should a person do in that environment? Wait, I think I know the answer to this…

#26 Peter Pan on 12.21.09 at 1:21 am

Garth, gotta hand it to you… Brilliant post tonight… You’ve managed to deconstruct the BS which has been fed by the Feds and the Bank Econoflaks to the Canadian public for the past two years… BTW, I’ve never seen the quote from CIBC before for “liar loans”… Gotta hand it to CIBC, they’ve never met a bad underwriting idea they didn’t like… (Latin American Loans in the 1980s, Unsecured Reichman Loans in the 90s, Telecom loans in the 2000s…) The list is almost too exhaustive to compile…