“A hammer to kill a fly.”
And with those five words, Benny Tal summed up the case against the finance minister. The CIBC economist was one of a number of people who trotted out from the bushes to tell the nation why it would be a bad idea for the government to stop sanctioning 95% leverage in the real estate biz.
As you might imagine, he’s been joined by others in the business of selling and financing houses. Safe to say they’ll all be dumping on Jim Flaherty from the 54th floor over the days and weeks leading up to the next federal budget.
Do they have an argument?
In case you missed the news, it’s finally come to Jim’s attention we have a housing bubble. Actually that’s not fair. The government knew it long ago. Ottawa wanted a bubble because it was desperate to ignite inflation after our recent flirt with deflation. That was the reason for (a) the home reno tax credit, (b) $17 billion in stimulus spending in eight months, (c) a $56 billion runaway deficit and (d) a central bank rate of 0.25% leading to mortgages at 2% and young couples borrowing their brains out.
But instead of the little bubble planned on, we have a mother of a gasbag. Here is the result:
- Low rates encourage excess borrowing. Purchasers hot to buy houses in a rising market tend to think existing mortgage rates will remain at that level for the foreseeable future, especially first-time buyers who’ve never faced a renewal. Rock-bottom lending rates mean people with below-average incomes qualify for loans they’d simply not be able to service in normal times. This is a time bomb destined to ignite, and the height of irresponsibility by policy-makers.
- They spawn bidding wars and recklessness. When money’s so cheap and measured in monthly payments rather than overall debt, frenzied and inexperienced buyers in a competitive situation (often created by realtors promoting an auction environment) are willing to pay tens or hundreds of thousand extra to ‘win’ the competition. Realtors call such a tactic a ‘bully offer’ – blasting through a bidding war with an extreme offer.
- They making houses more expensive. Obviously. By massively increasing the amount of money people can borrow on the same level of income, low rates and high leverage flood the market with liquidity, allowing sellers to raise prices and establishing new levels of expectations or all homeowners. And while market rates will eventually turn things cold and dampen valuations, affordability for everyone has been dealt a blow.
- Government policies remove lender risk, encouraging less prudent lending. By erasing the risk from lenders who don’t need to worry so much about repayment or the creditworthiness of the borrower, this practice is akin to that in the US when government-sponsored entities Freddie Mac and Fannie Mae backed loans, and along with Wall Street investment banks securitized them.
- These policies skew the market for risk and responsibility. With CMHC standing behind all high-ratio loans, and banks off the hook for default, lenders don’t need to charge a risk premium on loans to dodgy borrowers. That means a young couple with no savings and just 5% down can borrow money as cheaply as the move-up buyer with 80% equity. So much for caution.
- Artificially low rates destroy housing affordability for most families. Perhaps for an entire generation. The legacy of this bubble will be a real estate drought the consequences of which will be long lasting and profound.
- Low rates encourage and facilitate debt. By every measure, consumer debt has raced ahead as the bank of Canada dropped its key lending rate. Household indebtedness increased by 9% during 2009, and mortgage debt is at an historic high. Odds are that all of this indebtedness will have to be paid off at far higher future costs.
- Therefore this sets us up for a massive drop in disposable income. Interest rates will increase, as inflation becomes a destructive force, the US tries to support its faltering dollar, new issues flood the bond market and as central governments move to contain the limit the damage they have caused. As the cost of money increases, so will the debt servicing charges faced by millions of families now carrying bigger mortgages, lines of credit and consumer loans which were encouraged by rock-bottom rates. This drop in disposable income is one of the reasons we are entering into a long period of stagnant growth every investor must prepare for.
- All this guarantees real estate is a spent asset. After every asset bubble, people always reconsider what they have done and this one will be no different. The legacy is a raft of equityless and indebted owners, unaffordable houses, a badly distorted marketplace and the potential for a lifeless economy.
Any realtor who argues against market interest rates, an end to government subsidies for buyers without money or more prudent lending limits is making an argument against their own industry and future.
Mr. Flaherty fuelled this fire. Now it’s incumbent upon him to stomp it out.
Before it incinerates the middle class.
134 comments ↓
You have mentioned in the past that you can see homes fall in value by 10 -35%. Do you see them falling in value faster and sooner now that the finance minister has signalled that he will have lending practising tightened as interest rates are poised to rise?
The key point in my opinion: “They making houses more expensive” (i.e. the exact opposite of what the CMHC’s charter would have you believe).
I still think that there may be another motive for Flaherty putting out these comments: to spur on one last push of the “recovery” mirage before this bubble starts to burst.
Just like with the David Miller Land Transfer Tax, I would imagine that there would be a rush of buying to beat whatever date Flaherty puts on these new restrictions. House prices would continue to peak, sales volumes would keep growing, and the good times keep rolling for this fake economy that Harper/Flaherty created.
I hope that the middle class sat on the sidelines through this insanity (or already owned in 2000 when this run started). It’s the first-timers with 0%/40-yr and 5%/35-yr that will get incinerated.
Garth do you think Mr Flaherty will make those mortgages changes he’s talked about recently, and how soon ? I think this will push some people to rush into buying now before the changes happen thus putting further upward pressure on prices for awhile longer? Having said that some people say there is evidence that things not as rosy as the media is reporting?
Garth, your gloomy forecast obligates me to interject with a cheerful comment.
It is exactly 3 years to the day (December 21, 2012) when the Mayan calendar expires and the world ends. So don’t worry, be happy.
Well said Garth…
The question now, is it to late..has the middle class.. already vanished.. and what remains is the ashes and rumble..
RIP middle class..
I think every buyer considering purchase of a home should spend 300 bucks and fly to Florida. See what is the future looks like. NOT A SINGLE listing by owner, only banks. At best short sale. If anybody does not know what it is look it up on google. Families destroyed, brand new houses sold for 25% from what they were selling 3 years ago. Wide scale disaster. I picked up home in Miami suburb for… HA HA 57grand. It is coming here. And it was so simple to avoid. Along with dropping interest rates should have increased downpayment to 10% at the same time, so simple. Now is too late. 10% of households will not make it with normal interest rates. May be I should start choosing a neighborhood for my next bargain in Toronto?
Hi Garth,great articles as usual and highly informative and insightful.I sold my house 10yrs ago, thinking then, that the housing market was overvalued.Now it is absolutely insane what people are paying for a house.As the old saying goes “Pigs get Slaughtered”
I can’t wait for interest rates to get back to a normal rate.Then the fun will start!!!!
Interesting how the M$M is showing this magical “buble” talk as if it is WOW new news. Just because Jim is talking about how to cool it off and now it is mainstream… but wait… not that long ago they were spouting how we are breaking all these records in sales etc… funny how not ONE of those broadcasts even slightly whispered a BUBBLE…
This country is sooo screwed.
I read some of the comments, the ones that come from the group that somehow feels that house prices in very Bubbly areas like Vancouver and Toronto not to mention the rest of Canada will continue on their upward track unabated. They believe that in the end, people will continue to pay the current absurd prices and they give their arguments as to why. You can give all of the arguments you want but none of them will hold up to the one very real sobering fact, high interest rates will kill housing, PERIOD!!! High interest rates will defeat the most noble argument, it all boils down to affordability and if interest rates head significantly higher, housing will meltdown regardless of the belief by a few that Canada is running out of land.
It’s all about affordability. Edmonton saw house prices skyrocket up until the end of 2007. Than, they started coming down and coming down quite sharply. Why? Edmonton was still at the height of it’s boom, prices should have kept going higher and higher or at least leveled off. Businesses were desperate for workers and were paying whatever they could to hire them. Money was flowing everywhere and recession talk was still a year away. Why did prices peakand than start tumbling? IT IS ALL ABOUT AFFORDABILITY!!!!
House prices at these current levels are affordable at 2.5% floating 35 year mortgages. They will get crushed at what will be considered much higher but historically normal interest rate levels.
Argue all that you want that prices will level off and not fall or at the worst fall slightly, you can argue until you are blue in the face but the bottom line is the bottom line and for Real Estate, affordability is the bottom line.
The low interest rate policy was not intended to solely fuel a housing boom. The government wanted low interest rates to stimulate personal AND business spending.
The housing bubble is just collateral damage (and unfortunately it does not appear that business has stepped up to the plate in a big way to borrow and spend Canada’s way out of the recession.)
This goes to show once again that it is hard to micromanage an economy – there are simply too many things going on to understand how people and businesses will react.
Now if the feds pull back on mortgages and start raising interest rates it could implode the housing bubble and throw the economy back into recession.
Or who knows something else entirely unexpected could happen – you just can’t figure out how humans will react.
Here’s a radical thought: let the market (and the economy) find its own level. — Garth
Unfortunately, Mr. Flaherty’s comments are going to further fuel the RE market in the near term – all those remaining first-time buyers out there are thinking that they better buy now before he changes the rules for down payment and/or amortization.
Right on Garth!
Time for a return to sanity and affordability, where buyers and sellers can function with confidence and pricing reflects fundamentals.
The middle class is dead and it’s our own fault for not limiting the role of government and not participating in our democracy in more meaningful ways. Instead of learning basic budgeting, investing and savings skills, we let the government take care of us. No one will ever be able to retire or expect anything from CPP. We’ll be working until we are dead. The lack of any good investment returns without risk to capital and staying a head of inflation is a thing of the past. We need to let the free market work and people need to be accountable for themselves.
“The problem with socialism is that you eventually run out of other people’s money.”
Good commentary on this situation by Ian McGugan, appearing in today (Monday’s) Financial Post.
http://www.financialpost.com/story.html?id=2368295
Just watched The Lang & O’leary Exchange with Benjamin Tal, Senior Economist, CIBC World Markets talking about these changes. Not a good thing. Forget about the USA and think Canada in absolute terms. Not as bad as the BOC wants us to believe.
Less than 4% of Canadian households “vulnerable” Cdn housing prices are 7-8% overpriced (CIBC)
Average major city 368k up 18% up from 08. Housing market not a big part of our economy Amanda says.
When are you going to be invited on their show?
“Artificially low rates destroy housing affordability for most families. Perhaps for an entire generation. The legacy of this bubble will be a real estate drought the consequences of which will be long lasting and profound.”
I am confused by this statement. By drought do you mean a lack of supply, thus prices increase? This would seem to be contrary to a price correction, making housing more affordable, no?
Here’s a radical thought: let the market (and the economy) find its own level. — Garth
You got to be kidding! Are we darn Switzerland? Next thing you will propose to drop taxes to swiss levels and open banking and telecom for competition or to break up MLS cartel. Come on, Garth, it’s not patriotic at all.
Relax everyone, there is little more the few of us (who follow Garth’s advice) can do for now until the bubble bursts in Canada.
It is to late to let the market work without more intervention for the US and the RE bubble in Canada is by far the worst in the world right now.
I see a huge market correction worse then if the market did it for us whereas YES the middle class could be exstinct as the upper middle cashes in and moves out of Canada.
The smart middle class cash out and scale down (not without pain), while the stupid middle class miss the boat and loose all retirement potential stuck in a home they cant either pay for or use as collateral as RE is turbulent for years to come.
The lower MC are sub primers who will be on the street!
This will be the longest recovery our generation has even seen so there is absolutely no hurry or worry for those cashed in and renting, taking all steps to lower cost of living and protect their families.
What will the GREAT GLOBAL RESET have in store for us after all the manipulation and irrational economics is removed?
Hopefully a better world! A different one for sure!
One more thing you can count on for the USA – there will be more WARS to fight! It will be the last straw for stimulating their economy.
What happens to the 0/40 that bought in October 2008, and has to renew in 2013 with 10/30 in place?
If their house has the exact same value in 2013 as 2008, they may have 10% equity built up, but may not be able to afford the 30 year am.
It looks like the “market” rates in 2011-2012-2013 really will dictate how much S-Hits-The-Fan (the first 0/40′s were offered in 2006?).
I hope all 0/40 and 5/35 focus on paying off as much as their mortgages as possible.
I’m 8/35 but effectively paying as if the am. was 31, and in about a year plan to be paying as if the am. was 25. So thank you to the Blog Dogs for driving home the importance of the am. period and importance of paying down the mortgage.
Yeah, I can see our hero Flaherty going in with a fire extingusher to play hero for the Canadian people. Only thing is when he pulls the pin he probably doesn’t realize there won’t be any oxygen to breathe, causing yet another problem.
These guys are going to stumble from one crisis to another crisis.
It was more or less fine till they came along and fixed somthing that wasn’t broke.
Trying to be heros, when really they are zeros.
Wait for the HOUSE FIRES to start again. During the last drop in home prices in the news were “suspicious” house fires every two to three days. Now that houses are selling the fires have stopped. Soon in the news you will be hearing every two to three days of “suspicious” house fires. The bust is here and it will crush the bubble heads once and for all. POP……….What was that?
For those who think houses can go higher and want them to, let’s see whee the limit would be.
We have really low interest rates, but let’s take it the limit and see what zero interest rates would do.
Let’s say the average new home buyer has a family income around $100,000. (probably low but let’s assume this for now).
Assume 25% of income can go to mortage. (The rule is 30% but that’s including property taxes and heat so let’s use 25%.)
So $25,000 per year in payments, $2083 per month. Sounds pretty standard lots of new buyers take on those kind of payments.
Let’s use 35 year’s amortisation. Remember in this “limit case” or thought experiment interest rates have dropped all the way to zero.
35 times 25,000 is $875,000. Actually not much above Vancouver prices.
So there you have the absolute upper limit on a typical new home has got to be under about $875,000 since even with zero interest rates that is the most a family with $100,000 income could afford.
Maybe a pointless calculation, but I thought it might be an interesting number to calculate.
#13 Eddie: Awesome!!!
Yes no doubt Ill be working until Im dead. I tell the other staff at the hospital Ill be working there in the year 2050, unless I die first. Still havent bought a shack yet, probably will be still paying the mortgage in 2050.
Toronto is experiencing the “Mother of all Bubbles”.
…It will not end well for its citizens.
Beginning next summer, prices will fall in TO by 35%.
…Western Canada will secede after being asked, unfairly, to $$$ support both Ontario and Quebec….Ontario’s mass unemployment, caused by the death of it’s Manufacturing industry and, due to a very mild winter, Quebec’s collapse of its Street Snow Removal Industry.
…Eastern Canadians have no one else to blame but themselves.
Their Centre of the Earth mentality has, for more than three decades caused them to lose sight of Western Canada’s valuable combo of…immense commodity wealth w/ a teeniee tiny population.
…Asians and other immigrant societys did not overlook the hidden value.
Nostradamus jr.
Everyone should be emailing Jim Flaherty to express their support for his proposed changes to CMHC mortgage insurance. Though I am not fond of the monetary policies of this conservative government, I will certainly respect them much more for dealing with this politically sensitive issue.
Send him a short letter. You can bet the mortgage brokers and realtwhores will be expressing their position.
http://www.jimflahertymp.ca/contact_us.html#contactform
Excellent post Garth…..a frightening situation.At a time of a world wide recession curiously enough our powers that be have taken a grave situation and made it worse for us all. Lucky us………we are now on the hook for over 600 billion in guaranteed loans and have to depend on the same people that caused it to get us out of this mess……………now aren’t we just so lucky
Traitors all! Harper-Flaherty-Dodge/Carney-Blackburn are no less traitors than Bush-Obama-Greenspan/Bernanke-Rubin-Summers-Paulson-Geithner. ALL do the bidding for the Banking Elites, not to you or I. All take an Oath to the Elites, not to you or I. All should be arrested for Treason and Crimes Against Humanity, both for their support and funding of Terrorism (lets call it what it IS!), and for their intentional plan to break the economy and the middle class with their engineered boom-bust-cycle (coming soon). Think of todays political ‘system’ like an NFL game …. you vote (buy a ticket), pick a side of the stadium to sit on (Left or Right), and stand/shout when your team scores a touchdown (Parliment). However it matters NOT how loud you shout or scream at the players, coach, or even the owner .. the ‘play’ has been called, and there’s nothing any ‘fan’ can do about it. My suggestion is to learn WHY income tax in Canada is “voluntary” (of course it MUST be) and STOP working for the “taxpayer” .. look up the word “money” in the Financial Administration Act (for some reason “currency isn’t there?), learn to grow a garden, buy a Gun, and invest in Gold (and Silver). Its going to be bloody!
Wow Garth – your blog posts are within a whisker of being manic depressive. Reading your post yesterday, you’re under the illusion (like the majority of your readers) that Copenhagen is about the environment, when in reality nothing could be further from the truth.
Whether its Cap ‘N Trade or “Payments” to Third World countries for repatriation, its simply a tax grab and the establishment of a 4th level of government and ultimately a global power with legal authority to do what it pleases. All of this without representation or democracy.
When world leaders are applauding lunatics like Mugabe – its time to wipe the slate clean and start over. The fact that so many people are blind to this blatantly obvious fact shows how lazy, stupid and uneducated the majority of people truly are.
All he has to do is offer a “homebuyer’s grant”, or some such discount/tax break/stimulus only to those paying cash for a house.
But I much prefer keeping governments entirely out of the marketplace. So, better yet, cease backing mortgages altogether. And stop supporting banks that get into trouble as a result of greedy lending policies.
While we’re at it, let’s also have zero tolerance for home”owners” who find themselves unable to make their payments.
Then the housing market might return to some semblance of normality…
#6 Dmitri on 12.21.09 at 9:54 pm
Agree with you — if more people experienced first hand the reality of the Florida real estate crash, they would be less susceptible to make the bad decisions currently being made in Toronto, Vancouver etc.
#11 JP
It’s all part of the plan……
When people argue that real estate is the saviour of our economy instead of an easy quick fix for a short term feel good strategy, I get really pissed. We want technology and business innovation or at least infrastructure and environment to give people a chance to use some of their disposable income to build some business to replace all of the jobs going away but we have instead handcuffed our youth with massive debt without a hope of disposable income. Shame on these clowns like Benjamon Tal. He seems willing to say anything to get his next bonus cheque. Hopefully, Garth, you will spend some time in a book considering the opportunity cost of all of this cash being funnelled into a place to live instead of better uses. That’s a big challenge for you, there, shooter.
Flaherty really didn’t have anything to do with this crisis. He can only take direction and his boss is trying to find a formula for a majority government at any cost.
Personal greed fuls the fire because most people like the idea of something for nothing and to heck with the consequences.
Now all we need is a real disaster and prices to plummet so I can buy something at 30% of its current price. I’ve got money from my condo sale to spend.
Here’s a radical thought: let the market (and the economy) find its own level. — Garth
There you go making sense again, what are you thinking?!
Hey, next you’ll want to call this novel thought capitalism!
When will you stop this nonsense.
“Interest rates will increase, as inflation becomes a destructive force”
Have you changed your mind about inflation Garth? Recent moves in bond yields and the latest inflation figures from both side of the border have shown that delfation fears are now a thing from the past and that inflation may be the upcoming threat to the economy. Does a housing crash may occur during high inflation? Of course! If general prices go up at a 10% annual pace during the next 3 years and housing prices are flat, it still is a severe correction.
But I agree that nominal prices may go down a bit while economic agents adjust their inflation expectation.
We will have a crash in housing, but maybe not way people may expect. The bottom line is real housing prices are going down a long way.
If low interest rates were designed to stimulate business spending … my question is. What are they spending it on? Jobs? No …Equipment and machinery? Have you been to an auction lately? I have. Machinery is being shipped out of Canada in containers to India, China and other low cost labour countries. If you lost your job in the manufacturing sector, here’s the bad news. You may never work again. The machinery you used is gone!! Are there new machines coming into Canada? We’re buying low quality machinery from China and India ….. They buy our technology, copy it and sell it back to us at prices which kill off the domestic machine builders.
The Government of Canada created this tidal wave of deindustrialization with its reliance on a low dollar oil revenues and resources. Research and development is the life blood of manufacturing and we let it die. The unions didn’t help either. A lot of jobs have been lost because the local collective agreement was the major ineffiency in the plant. These firms were handcuffed and just unable to compete as the value of the Dollar increased. It’s not high salaries which crippled them. The REAL cost is in all the workplace rules, the endless grievances, seniority lists and bans on automation and farming out contracts to more effient suppliers.
Canada is the only country where innovation is a bad word and we have hundreds of thousands of unemployed to prove it.
The last point for your list. Cheap money creates a high level of complacency among existing home owners. I have friends in their mid 50′s to early 60′s who have stopped working. These homeowners believe they will sell their houses in five years, make a killing and move to a beach in Mexico.All their equity is embedded in their homes. If Garth’s is right, then my friends will have to shelf their dreams of Mexico and start looking for work.
“. . . we have a mother of a gasbag . . . What problem? . . . and young couples borrowing their brains out.”
Where is Nero when we need him to fiddle around? Men. Can’t live with ‘em, can’t live without ‘em!
Out of interest, why not have all those high-powered city slickers, preying on sheeple who are gullible enough to suckle at the teat of the great god money, and are giving it away freely to pay all the bills when foreclosure signs start popping up on lawns here?
They already have more than enough moolah to start raging forest fires with along with Carney, Jimbo, Harper and a few others will have no trouble in clearing others’ debts!
——
Opposites attract. First — inflation; second — not gold.
Seems GS and the Treasury have been quietly colluding on further naughty things.
Think govts. are getting ready for trouble from their citizens?
——
War is Peace! says Obama. So much for the Nobel Pissing Prize. South America / China and Russia make deals which are good for all. The US continues with their self-defeating policy of “Might Makes Right, by bombing the crap out of everyone / thing. How long before other countries put up with their garbage policies?
——
One volcano spews more natural, chemically-based hot air than all the lying politicians, cars, trucks and other studmuffins in North America produces in a year. Besides, different stuff is necessary for healthy tree growth and plant life (not necessarily human).
However, the following quote from wrh.com has found a positive use for Al Bore: “Local Kine Kahuna says the best way to keep the volcano from erupting and adding billions of tons of carbon dioxide into the atmosphere is to throw Al Gore into the crater to appease the volcano god!”
Here’s a radical thought: let the market (and the economy) find its own level. — Garth
I’ve been of the thought that the CMHC should be dissolved for some time. Let interest rates, amortizations, and down payments be whatever the market will bear. Just don’t insure them with taxpayer dollars, and swear that no bank is too big to fail. I bet the market would figure out an affordable level not too long after that, non?
Well said Garth!
I have learned long ago that money can corrupt many and the those many are usually in the business of making money.
Thus I expect no different from impersonal banks who love money, fees and lending, and no different from realtors and RE associations who make money from low mortgage rates, lax qualification rules and fees on everything from selling to buying.
Jim is going to come under fire from those above because they want more money (it will never stop), but I sincerely hope he does the right thing, the right thing for Canadians and Canada and puts out the fire.
As for CIBC, we used to have all our money with them, but since they are so “money oriented” rather than customer oriented, we pulled 99% of it and put it into another bank. Removing money from a bank or not buying at any business is the greatest statement a consumer can make of dissatisfaction.
Mike
Einsteinsam Solo,
Just the concept of our sun crossing the galactic equator and the resultant polar shift and solar storms that would drastically change our little green-blue paradise should be enough to scare the living crap out of you.
The Maya do not forecast doom, but rather created a calendar based on cycles of the constellations in the night sky.
Their calendar completes of cycle of over 20,000 years on 21 Dec 2012. On Dec 21 2012, a number of planets from our solar system will be conjunct within a zodiac sign and be aligned with the galactic center. The last time this happened was over 20,000 years ago.
You are so lucky to be here when this phenomenon occurs.
The end and the begining are the same thing.
The hope is for universal enlightenment.
I have been saying for years that the majority of people today are living in la-la land. Debt is at an all time high, folks living way beyond their means, the “here and now” generation where everyone thinks they’re entitled to that 20-room mansion and world cruise, the college/university grad who wants a six-figure income straight out of school, etc… Over the past few decades we’ve developed a really dangerous mentality in this country. Watch out for #1! It’s all about ME! We simply must keep up with the Joneses, we all must participate in that rat-race to the top where everyone shits on everyone else to get what they want… Basically, we demand that we have it ALL and we want it NOW.
And who in the HELL in their right minds would pay almost a million dollars for a house that falls apart in 5 years anyway? Construction and building standards in these new subdivisions are so shoddy, it really leaves a lot to be desired. I know because I’ve seen it myself.
Which brings me to my point: If another major global event were to occur such as a terrorist strike or a declaration of war with say, Iran, or should the US, UK, Dubai, or whoever/wherever should default on their loans, that would be it for the global economy. Banks would shut down, our “money” would be frozen, and I dare say there would be chaos and anarchy on a global scale. Look people, they can’t keep this show going forever. Something, somewhere, sometime is going to give.
Call me paranoid or just plain nuts, but I’ve been getting some REALLY bad vibes about the year 2010. I do not, for one minute, believe there is any kind of real recovery taking place. I don’t see it, and neither does anyone else I’ve been talking too. What we’re seeing now is simply a brief respite because of all the funny money they’ve pumped into the system, but I concur that it’s nothing more than a false-flag recovery.
We have been deceived and duped back into the markets and real estate by the very same people who caused the crisis in the first place! When it comes to being led to the slaughter, we certainly have become a nation of blind sheep…
You heard it here first: 2010 is going to be an interesting year, both here at home and abroad. Buckle up. Are you ready, Mr. Carney?
#2 T.O. Bubble Boy
“I hope that the middle class sat on the sidelines through this insanity (or already owned in 2000 when this run started). It’s the first-timers with 0%/40-yr and 5%/35-yr that will get incinerated.”
Anecdotally, the middle class pre 2000 buyers that I work with all jumped up in scale from their ‘starter home’ (which could have been paid off in a few years from now at these rates) to a mcmansion.
They used their equity from the first house to qualify for ever bigger mortgages and reno their new digs to their hearts’ content. They are far more in debt today than when they started the property game.
In the last 5 years, the more you made, the deeper into debt you were allowed to go so I don’t think anyone is immune. In fact, the no equity crowd has the least to lose – especially if they remember to go bankrupt AFTER the house has been seized.
I truly believe that while the 0/40 & 5/35ers are going to learn a very hard lesson, it’s the middle class that’s gonna get smoked!
Interest rates might rise yes, in about 15 or 20 years’ time. One bogus jobs report out of America and everyone thinks the same thing? Mark my words wait until the unemployment report comes out for December in Canada. The headlines will read interest rates set to fall for a long, long time.
The trap has sprung and many, far too many did not make it to the life boats, you see many thought jumping into Flaherty’s housing bubble was akin to winning a large lotto. The simple fact less is more and the real lotto is having it paid for! Merry Christmas.
The banks will be left holding toxic assets if the bubble bursts, so who gets to protect them and take the heat – JF. If he shuts the market down the banks will save their assets and the the government gets caught. Who’s protecting whom here? As Garth says this should be a market based bubble. The homeowner goes bust and the bank loses its money all because two parties got greedy!
Big changes coming January after the Christmas season turns out to be the biggest bust in years.
That’s why the US Senate was so hell-bent on getting healthcare through before the new year.
They know what’s coming.
“An té a luíonn le gagharaibh éireoidh le dearnaithibh”
++++++++ (Irish Expression) +++++++++++
(If you lie down with dogs, you’ll rise with fleas – i.e., You will get what you deserve you naive, young foolish, financially lazy homebuyers. Educate yourselves and stop taking on humongous debt and ruining the real estate market for everyone else. You are legally bound to pay the debt back in full no matter what happens to you financially. Monthly payments are irrelevant.)
Jim Flaherty is a tough Irishman and means business when he speaks. Look what he did to income trusts. However, and a big however, does he have the guts to go up against the self serving, “old boys” network of the banks, builders, real estate associations, CHMC, and everyone else connected in some monetary way and/or benefits from record high real estate valuations to the Canadian real estate market?
“In Canada generally, people are spending too much money on real estate and forgetting about the liquid side of what they need to put money away for or to live off of in retirement.” (Kurt Rosentreter – Senior Financial Advisor – Manulife Securities Inc.)
When I saw the article in the Globe and Mail yesterday (Cure for housing market carries risk), I thought “Did Christmas come early?”
But more importantly, did you guys see how many comments that article got?
It’s up to 522 and counting. Still front page.
That article hit a nerve with a lot of people all over the country and I for one am glad that people are starting to wake up and realize that we’re in a huge housing mess.
As for the concerns that housing will be made more unaffordable for first time buyers? Come on. I am a first time buyer and this is awesome news.
If you read Garth’s blog you know damn well the opposite is what will happen and this will cause the market will level out. Then saving a 10% downpayment will be much easier because that 450K home will be going for 250K.
Steady Eddie @ #13,
the corollary to your
The problem with socialism is that you eventually run out of other people’s money.
is:
And the trouble with capitalism is that eventually all of the money winds up in a limited number of pockets.
Having gratified our respective ideological urges, where does that leave real people in the real economy, or does that matter as long as it is your pockets that are full?
#43 Emma
I’ve seen the exact same thing. All of people I know ditched their starter homes, bought big new places and renovated. I don’t know their finanancial situations, but I’d estimate they’re going from 100K debt to about 300k as a best case scenario. They stretch it out to 35 years, and the payment isn’t really much different than they had before at current rates.
These are not first time buyers, kids, nor dummies. They’re not low income either. Buy now, pay later with the current interest rates is a powerful attraction to everyone, myself included.
But I’m still one of those pre-2000 purchasers happily in my “starter” home. Nearly debt free thanks to these wonderfully low rates. I can’t wait to invite them all over to my “home free” party in a few years.
Wasn’t 0/40 Flaherty’s idea?
Yup…..
Jimmy is running from The Mortgage IED’s created by him and Carney. At the end of the day… either they take care of it and diffuse it…. or it takes care of itself!!
Kaaaaa Boooommmmmmm!!
http://bit.ly/TheMortgageLocker
Move Along!! Nothing to See Here!!
The mendacity of this government knows no bounds. We must reward them with a majority when they engineer their own defeat to forestall the chickens coming home to roost.
Garth, thanks for having told it the way it is all along. Too bad the Liberals have no use for realists in their own ranks either.
#2 TO Bubble Boy!!
Ha ha!!
Just like with the David Miller Land Transfer Tax, I would imagine that there would be a rush of buying to beat whatever date Flaherty puts on these new restrictions. House prices would continue to peak, sales volumes would keep growing, and the good times keep rolling for this fake economy that Harper/Flaherty created.
Come on Bubble Boy! Think!!
This is the man who changed the Trusts tax breaks back in 2006 without a whisper of a date. He just did it!!
Rip the band-aid off! Less painful in the long run!
it seems to me that the strong RE lobby will prevent any decrease in amortization or increase in downpayments… I hope I am wrong, but in my opinion it really doesn’t matter what the government decides, as the damage has been done. Watch out for the second half of 2010.
Good luck to all and happy holidays!
Garth, will your new book be available in ebook format? I’m trying to wean myself from dried wood pulp as it requires shelf real estate that I’m rapidly running out of.
Cheers,
SL
Wood product only. But you can buy it online here from Jan 15. — Garth
Anyone got a link to The Lang & O’leary Exchange with Benjamin Tal?
Why is the govt always, always, always so late to react when it was obvious their was a RE bubble 4 years ago in Canada. You can’t expect the idiots to be responsable when credit is so cheap.
Chaostrology on 12.22.09
“On Dec 21 2012, a number of planets from our solar system will be conjunct within a zodiac sign and be aligned with the galactic center. The last time this happened was over 20,000 years ago.”
And how does this supposedly bring “universal enlightenment”?
#49 Grey on 12.22.09 at 9:35 am
——————————————–
You’re talking about a 44% decrease (from 450,000 to 250,000). Never going to happen (has it EVER happened in Canadian residential real estate (other than on the west coast)?).
1) Most Canadian households have substantial equity to weather down-turns.
2) Canadian mortgages are ‘recourse’ loans; thus, there is much more incentive to stay in your house and continue to pay the mortgage, even if you’re in negative equity (in the USA, folks can just hand in the keys and the banks can’t come after their other assets). Thus in the USA, a massive snow-ball effect occurred; I can’t see the same thing happening here.
3) Banks have been more prudent here — it’s a fact, and something I’ve witnessed personally, and something that’s been mentioned around the world by international agencies. It took me 2 years and 4 banks to get a mortgage here, whereas in the states I would have been given one right away, no questions asked. For example, I couldn’t get $225,000 from RBC and I had $40,000 in the bank, high level education, no debt, high 700′s FICO, and great job prospects. The problem was that I actually didn’t have a great income at the time. Even though it’s anecdotal evidence, TO ME IT IS PROOF OUR BANKS HAVE BEEN PRUDENT.
4) Some bloggers here need a little perspective; real estate is subject to micro-economic forces (as well as macro), thus Vancouver is not going to behave the same way as Winnipeg or as Oshawa or Quebec or as St. John’s. In my opinion, the bubbliest cities will see a maximum 10-20% correction from here, and it has been mentioned on this site previously that if you had bought 2 years ago that correction will actually put you back to even (not negative equity).
5) There’s a reason why you hear ‘location, location, location’. If you buy a place, even at 0/40 or 5/35, if it’s in a great location (and if you were prudent such as getting a home inspection etc.) you likely will not lose your shirt on the place. Ask yourself: “Did I buy in the burbs, in communterville, where it takes 1.5 hours just to get out of dodge? Or did I buy in a great location that likely will be in demand no matter what the future holds”. Those that are/were smart about their purchase shan’t worry.
Good luck to all, it’s great to be Canadian.
Always nice to hear from realtors. — Garth
# 48 the Vulture
Jim Flaherty a ” tough Irishman ” ? I would describe him as despicable, deceitul, lying s.o.b. out of the mold of our not-so-illustrious Prime Sininster Deceiven Stephen Harper. The fact that Flaherty may be of Irish decent, is only his “good fortune”.
******* Manitoba Expression ********
” there are lion tamers and there are lying bas*tards … and Flaherty is not a lion tamer “
Well I guess I’ll be renting for life, like they do in NYC, Rome, Paris, etc. I guess it’s not so bad – my place is decent enough – bathroom is a bit tired but I can always lay down new floor if I’m there 25 years anyway!
Yay for being “young” in the 21st century.
Garth,
I think we need your analysis on Australia RE market, why they are not bursting, or is it just need a longer time than Canada?? Are they different??
Thanks for the advise
Nobody’s different. The Aussie government has poured huge amounts into the market, but the outcome will be the same. — Garth
Interesting excerpt from an Financial Post article referred to above ( Flaherty Bombs on Housing Bomb):
“David Rosenberg, chief economist at the money manager Gluskin Sheff in Toronto, examined home prices in relation to personal incomes and residential rents. He concluded that prices are between 15% and 35% above levels that are consistent with fundamentals.
“If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing,” he writes.”
Read more: http://www.financialpost.com/story.html?id=2368295#ixzz0aQsZX7TD
Those comments were published here when they were made. Rosenberg gets it. — Garth
If Warren Buffett makes his biggest investment ever in West North America…paying a huge premium…partnering West North America w/ Asia…why haven’t you?
Nostradamus jr.
It is a crime that these boys in ottawa sit around and are doing nothing to rectify the situation,who are they working for?
Hi Garth,
Interesting comments from CBC re: the potential rate hike to cool the market, or kill it?
http://www.cbc.ca/video/news/player.html?clipid=1365728813
Most interesting is the stats that the high risk cat. of 5/35 represents only 4% of mortgages in Canada. I very much hope the market corrects back to rational levels, but doesn’t that risk percentage seem fairly small?
That 4% stat is highly misleading. 5/35s represent the vast majority of new originations. Regardless, when the market corrects, even a small number of people in trouble poisons the equity of everyone. We should have learned that looking at the US. — Garth
We bought a modest bungalow in 1990, high interest rates though, and it’s been a long struggle to pay off, which it will be next year. My husband’s co-workers couldn’t understand why we didn’t go for a bigger house, his dad insists house prices always go up, but we didn’t budge and now, thanks to this blog in large part, we will be better situated to handle whatever comes the next few years, which we don’t expect to be good, when so many people are in denial. Cereal sales are increasing in the US because people there are eating cereal 3 times a day, and living in tent cities! That’s what happens when you’re a sheeple and your government deliberately misleads you. We are not that different from the Americans, especially when our ruling party wants us to be just like the Americans.
I don’t see a problem with a 5/35 or even a 0/40…
I have personally taken on a 5/35, not because I couldn’t afford the payments on a shorter amortization (I could afford the payments on a 15 year) but with interest rates at an all time low why would I ‘invest’ in an asset that will yield me a 3% return when I could invest the money in dividend and income trust stocks in a TFSA that is returning 10%? (Well, that yield will be lower in the future thanks to Flaherty’s Halloween massacre).
When, and if, rates rise take the money from your TFSA and pay a whole chunk of the principal down and you’ll be much further ahead than having paid your mortgage down at these low rates.
There has been an incredible rally in income trusts and stocks producing dividends over the last month, despite the air coming out of the TSX, as per your comments yesterday Garth, on prep for a sideways moving market.
The fact that traders and financial institutions would rather buy up things such as CHL,.UN, RSI.UN and LIQ.UN with the risk of upcoming rule changes, shows exactly where things are.
It is still nice to see the usual RE agents showing up here spewing their RE gisum, however the stock market is starting to tell the real story of the economy and it says we’ve peaked, again.
There is no doubt RE has also peaked, now the only question and arguement is how far down…
Your last couple of posts have been fantastic.
Nice work.
#66 … Nostradamus jr …
Right … “legends” rule. Now … there are lots of things that bring merrit to a “play”. But … that (brand association) is among the weakest. Come on … that’s “weak” homework at best.
Buffet performance against the S&P …
http://ca.finance.yahoo.com/charts?s=BRK-A#chart8:symbol=brk-a;range=2y;compare=^dji;indicator=volume;charttype=line;crosshair=on;ohlcvalues=0;logscale=on;source=undefined
Not to mention the effects of US$ vs. $C impact on real performance … etc.
http://quotes.ino.com/chart/?s=FOREX_USDCAD&v=d12
Follow “THE Donald”! or “THE Garth” for that matter without doing your homework – REAL homework … is … well … sheepish.
lasttoleavetheparty,
that 4% represents TOTAL HOUSEHOLDS not total mortgages, 500,000 households for 5/35.
So like Garth mentions it is very misleading. And there is no mention of the people who bought with 0 down and or 40 years in the window that it was allowed. I wonder where this fits in
Amanda Lang mentions that the number is nothing to really worry about, but I heard the same thing about subprime just being contained to subprime.
If downpayments increase, amortizations decrease, interest rates rise as well taxes in the next year, it is safe to say that anybody who bought with less than 10% down, more than 25 years and at a low interest rate, they got themselves a subprime mortgage.
“That 4% stat is highly misleading. 5/35s represent the vast majority of new originations. Regardless, when the market corrects, even a small number of people in trouble poisons the equity of everyone. We should have learned that looking at the US. — Garth”
Yes, the “Pareto Principle” will kick in.
Re# 68
You say the 4% figure is highly misleading. I don’t understand. 4% is 4%, which is a very small portion of mortgages. 95% Aren’t high ratio. How will 4% bring down the market? If 4% of homes went to foreclosure tomorrow, no one would even notice. How can you compare this to the US market, when they had a much higher percentage of high ratio mortgages? You say it has come to Flaherty’s attention that we have a bubble. That is not what he said. He said he’d step in if prices got too high, which to me, implies he thinks they are not too high (I know, he’s a weasel).
CMHC is on its way to a portfolio of $600 billion high-ratio, high-risk mortgages. Hardly insignificant. — Garth
How about the other side of it, too? I had an appointment at my bank the other day, and despite this not being the purpose of my visit, I was told that:
- I shouldn’t worry about paying my mortgage down so quickly
- I should “have more fun” and spend more money than I do
Although I wasn’t surprised by it, it was strange to me to hear the bank telling me that I shouldn’t be overly focused on paying their money back to them, and that making myself a more risky investment prospect was appealing to them.
The attitude toward credit these days has definitely changed from what it used to be. It seems to now be considered a necessary and structural part of everyday living — that you can’t really live life without it.
In this context, I CAN understand why people DO take on so much debt. If it is accepted up-front that debt is a lifelong attribute of life, why worry about it? If you will never be rid of your debt then there is no point in showing restraint and aspiring to that point in your life when you are free of it… because you expect that it will never come.
Regarding Popeye’s, soldin08, and Tony’s posts, there is much evidence that interest rates and/or inflation will increase.
Perhaps that is why already is Calgary there are more murders increasing in the NW where guys realize they wont be able to soon afford their overpriced shacks. $400K on a shack worth $180K? Come on, please!! Do you pro real estate morons actually believe people are to think that Calgary housing is priced at what it is worth? What kind of crack are you idiots on? Oh, I forgot, Calgary is different. The new median for houses will be $4 million and all non affluent persons will be living in subsidized housing. Right. What a joke. And also the conservative or wild Rose government will run the country.
These pro real estate at any cost posters are a bunch of fools. The person who buys is in control, NOT the seller. Keep playing the violins guys.
#58 lastoleavetheparty …
Could be a bit more and a bit more complicated than 4% … reposting from yesterday …
Back of the napkin …
About 50% of the housing stock changes hands every 5 years including new homes. Basically 10% of the housing stock turns over every year. That means that half of all mortgages are less than 5 years old. Better than 35% are variable rate. Better than 60% are actually for less than 5 year terms.
So we can expect as a minimum … at least 20% of mortgages to come due for renewal each year … with exposure to interest rate adjustment … with better than a third exposed to continual variability.
Soooo … for the next 12 to 18 months we have between 50% and 60% of ALL mortgages under rate pressure.
Pressure on those holding variable rates (about a third of all mortgages) are immediate given the threat of rate increases – all of them regardless of term. Those with fixed term variables having the least ability to move … and the opens being pressured to consider/attempt to fix their rates ahead of a rate increase. The issue for these folks is that waiting until rates actually rise moves the fixed rate even higher. Those with fixed term variables face the added discouragement of penalties for early termination.
Bottom line:
Better than a third of ALL mortgages are exposed to the immediate and substantial impact of rate increases on their mortgage payments regardless of what they do … and moving to a fixed would have an “extreme” impact on their monthly payments. Imagine being on a variable rate at 2.25% … expeiriencing the impact of a 1.5% jump in the variable … with an expectation of further increases and having to weigh the option of fixing immediately at say 7%-ish or waiting to lock in at 8%. Given the impact on payments of a move from below 3% to above 7% … it takes little imagination to conclude that those that have been skinny dipping are soon to be fully exposed.
A little thought leads one (me anyway) to conclude that the majority of CMHC backed mortgages are at risk of complication on renewal or conversion.
Low equity positions that qualified with incomes able to cover only variable rates with extented amortizations – are pooched ! Question for someone in the know … If someone reaching renewal point on a CMHC mortgage can’t qualify for a conventional mortgage and has to renew through CMHC again … do they have to pay the CMHC fees again ????
There is going to be pressure on the skinny dippers to sell.
I suspect that if indeed expectations anchor to a rising rate environment … the popularity and practicality of variable rates as an option and as an affordability “crutch” for the low income buyer will come off the table … removing the marginal first time buyer from the market … vanishing new first time buyers leaves those first time skinny dippers knee deep in the sand … on the beach … trapped.
Haven’t begun to talk about the effects of even a moderate decline in prices.
Its about what’s happening at the margins stupid …
Rate increases, increases in down payment requirements, shortening of maximum amortizations, and or credit tightening around the availability of subprime products … at this point … hits big at the margins – as does any fall off in buyers. And don’t forget we’re into some seasonally soft months for RE anyway.
Does’t mean we don’t have a last push of skinny dippers trying to get in before the tide goes out and they miss the party. Don’t forget … the wildest parties are always at their best … after the last crashers arrive just ahead of the cops.
Luck to all…
Does anybody have stats of how much refinancing was going in past 5 or so years in Canada? It would be good to know if canadians have used their houses as ATM’s just like the yanks.
Hello,
I have been renting in montreal for the last 5 years and have paid the price dearly. Got a second child coming in June 2010 and need a bigger place. I was hoping to get a house but these house prices are relentless!!!!Should I just bite the bullet and buy? When are they coming down? I can’t wait anymore!!!!I am being squeezed in at the top.
#61 Popeye
Actually I’ll bet it can happen.
We were looking into a property in Leslieville in Toronto.
I came across a realtor’s website where I found a listing for a very nice old Victorian Semi-detached home going for 275K.
I thought, today? Impossible.
So I emailed it to our realtor and asked him if it was an old listing (there are realtor’s that leave teaser properties on their website to get you in thinking they’ll be able to get you a property like that too).
Turns out that was a house that sold back in 2005 for 259K.
Houses on that street are now going for over 500K.
So the house appreciated almost 50% in value in less than 4 years.
Let me guess, you think that’s ok and that the only way housing prices can from here on in is up, right?
Please. If it went one way that fast, it can just as easily go back down the other way.
PS – We had similar stats to you and easily got a mortgage pre-approved. You just didn’t go to the right broker. I’ve lost track of how many of my friends bought with zero down.
Investx,
The first step to enlightenment is realizing your own insignificance.
If you want the knowledge, do the work.
The universe is infinitely patient, it awaits your decision.
71 hmmm …
Came across that number recently – maybe yesterday actually … my merky memory recalls something around or over over half … with an average in the mid to high – $20K range being added to principal. I was a bit surprised – expect higher equity withdrawals … but I then thought of all the HELOC’s that are out there that are really a proxy for equity withdrawal – 2nd Mortgage-ish.
Your question raises another question in my mind – When we see mortgage related data that is representing estimations of “equity” … do they or do they not apply HELOC balances?
Makes my head hurt
Sorry all … way past my posting quota for the day and week. I’ll give it a rest for awhile.
Luck to all.
I love you all thanks for being here!
#76 I soooo agree. Lots of debt, is the new:
“In-Vogue”!!!
It is a reflection on a persons witts! to out-smart the system!
Only those , who have the courage, and the cunning! to leverage themselves to the edge of the envelope will be awarded with the “New Canadian Affluence”!!!
Of course if they fail, they’ll wimper like little babbies, hands out for help. “Help me with sympathy, for I meant so well”!….
I’ve found a good economic blog with a Canadian focus and alternative viewpoint:
http://www.americacanada.blogspot.com
It is well reseached and reasoned.
It seems to be run by one Jonathan Tonge. He provides no background info.
Who is this guy–anyone know him ?
He posts here. That makes him wise. — Garth
It won’t just be first time buyers who get incinerated when rates move upward. Look at how everyday, middle class 35+ year olds are living. His and hers Harleys, 4 season cottages (Villas?) with all the conveniences, luxury car dealers setting record sales, high end boats, cruise vacations and $60-85000+ Brontosaurus Suburbans and Escalades. All thanks to those “Canadian” HELOC loans. Just like the loans that the US banks gave out.
I hope they qualify to keep living in their McMansions when it comes time to renew the mortgage. I will feel sorry for them, because I am a Canadian and it is the right thing to do.
But I do look forward to the fire sale prices of their assets in a perverse, self serving way.
The bankers nod sagely and call for ‘prudence’, but, Canadians, being human, take as much as they think they can get.
Check out this gem -
“I inform buyers of the inevitable ‘market adjustment’ soon to come, and most of them give you a nod of acknowledgment and then ask what maximum home they are able to purchase with their pre-approved ultra-low variable rate mortgage.”
http://tinyurl.com/yerbsk5
#79 hmm…
My experience, I’m a lender for a large CU in Vancouver, refinancing either in form of Line of Credits or second mortgage is huge business. Yes people have used their house as an ATM in a very big way.
With all due respect Mr. Tal is a puppet for the banks and has probably enriched himself quite nicely by spewing his probubble rhetoric. I’m quite certain he lives in a very nice house which he has been able to finance by towing the line of his banker bosses and selling you and I short. He should be ashamed of himself and his sordid career based on lies. More like using a rock hammer on an elephant.
“My experience, I’m a lender for a large CU in Vancouver, refinancing either in form of Line of Credits or second mortgage is huge business. Yes people have used their house as an ATM in a very big way.”
_________________________________________
I understand Manulife’s M1 is the equivalent to a home ATM. Rack ‘em up!
social headwinds ?
http://www.atimes.com/atimes/Southeast_Asia/KC17Ae01.html
Bauxite is converted through a toxic process to alumina, the raw material for making aluminum. Known by environmentalists as “red sludge”, the waste product, if not properly managed, can contaminate water supplies and choke off vegetation. For every ton of alumina produced, three tons of red sludge is given off, according to international experts.
Australia, dumps it the dry outback
Vietnam, on the other hand, is wet where will they dump the left over goo?
=============
backlash against chinese workers
Vietnam and India are among the nations that have moved this year to impose new labor rules for foreign companies and restrict the number of Chinese workers allowed to enter, straining diplomatic relations with Beijing.
China’s Export of Labor Faces Scorn
http://www.nytimes.com/2009/12/21/world/asia/21china.html
How much will private and government debt effect the future economy is the elephant in the closet. Disposable income for many people will be diminished effecting our consumer economy which incidentally is one of the corner stones of the so called recovery. Not a very promising future from where I sit.
lenders finally let developers sell for less than the cost to repay their construction loans. The subsequent price cuts continue to dramatically boost sales for new units, unleashing a mini-boom in condo sales in the downtown Miami area.
The trend let developers fend off many of the vulture funds that were circling downtown high-rises, ready to scoop up properties for cents on the dollar.
http://www.palmbeachpost.com/news/2009-brutal-for-south-florida-condo-sales-but-135868.html?viewAsSinglePage=true&imw=Y
Tired of waiting on state lawmakers to pass legislation, condo associations facing near collapse have turned to courts for help to collect maintenance fees from deadbeat investors that were needed to pay water bills, fill pools and keep the lights on.
#19-Bottoms Up
The problem is that 99% of that crowd is NOT accelerating repayment.
What they did was buy the a house that requires the absolute max payment they could make with their incomes….at 2% variable rate mortgages.
The second the rate goes up, they are screwed completely, because they are already maxed on their payments just to meet their obligation; forget any extra. Nevermind the instant negative equity when the bubble bursts.
The gov should hang their heads in shame for ever allowing less than 15-20% down.
This 4% of all mortgages nonsense all fuel the fire of misconception. As Garth noted the 5/35′s are the bulk of new mortgages of houses of over inflated prices. It does not take much o trigger a chain reaction. The US Sub Prime was not the majority of total mortgages either but it was the trigger to what has been a catastrophic wipe out of the US housing market which may take years or even decades to fix. Alt-A and Option Arms are going bust now in the USA. Let not forget the commercial collapse too.
The hypsters and snake oils salesmen keep puffing up the saying that Canada is different, it’s even more so from the idiot west coast in Vancouver and area where it is amplfied rhetoric even more. CANADA IS NOT DIFFERENT! Economics is economics. The global monetary system is flawed and built on a foundation of sand. The hype of RE and the nonsense of people getting rich (easy) off their houses forever is not in line with so called free market ideals. Add the hand of government, its bureaucracy, manipulations and pure greed of the corporate world well you get what we see now in Canada.
Even at 4% of new mortgages, it’s a lie. The collapse of the 5/35′s will create a chain reaction that will fuel the collapse of our RE just like in the USA and Britain to name but two.
The good thing is it is NEEDED. The attitude adjustment over how many Canadians see RE as an investment to become rich needs to be flushed out. RE is NOT and investment, it’s primarily a place to live in. You cannot count on it to make you rich especially easy. The cost of a mortgage, all housing costs, years of taxes and interest along with other fees will match any real growth in property value that you may get over the years.
Sure you may think say I bought my house a while back for $100,000 and in say 25 years (if you do not move up the trap of the property ladder) it may get you say $1million. But the $900,000 you get was paid for by years of mortgage costs, interest, taxes, fees and house maintenance and upgrades. Next if you sell your house for say $1million what are you going to live in? Rent, fine nothing wrong with that but many will want to buy a smaller home, ok how much will this cost you? Say you land a condo for $600,000 in 25 years, take the $900,000 you got from your house sale, take $600,000 and you got $300,000 left over. GREAT! but your not rich you just got back $300,000 of the last 25 years of your costs of owning your previous house?
Ok, that said when our mortgage bubble BURSTS it will then lower the value of your now $1million house, as I said it’s a chain reaction as a bubble bursts. Your current $1million home may only then be worth $500,000 after the crash, you are even less rich now eh?
Not all home owners will or need go bust, but those that do (5/35 by over valued homes) will see houses prices fall in areas over inflated by the bubble. The worst will be the biggest and most desirable cities. Ones in Canada just as it was in the USA, Phoenix, Vegas, Miami, Tampa Bay, Palm Springs etc. all the most desrable places have suffered the biggest bust. So to will the likes of Vancouver, Victoria, Toronto, Calgary, Kelowna and a few others.
Mr. Flaherty is talking about closing the barn door long after the horses have run out, WAY DA GO JIM! Talk about seeing the obvious now. Even at that he still looks through rose coloured glasses by his comments noted, But why not? His master, Harper says that 2010 will be a much better and Canada will be better off as a result, yet he plans to have more stimulus spending (cough cough government using its line of credit to fan the fire of a phony economy based on fiat money policy) so too will the huge deficits.
“Here’s a radical thought: let the market (and the economy) find its own level. — Garth”
BINGO !!!!!!!
Just take a peak south to see where the market has found it’s level. To be paying the money we pay in Canada for a home is absolutely absurd, stupid, insane, mortgaged for life !!!!!!!!!
Garth,
Just checking in, but again, seriously questioning the theory of the collapse.
The numbers are simply not adding up and again, as someone who believed a drop would occur by now, the facts simply to not add up.
I remember about a year ago, you made a comment about not being able to get the actual number of people who pulled out a 35 and 40 year amm. I remember you saying you had friends who told you, but no hard numbers.
Well if the CBC is right than this theory is starting to show some serious holes.
if only 40% of the country has a mortgage, that means 60% doesnt.
In the USA the numbers are 75,515,104 out of 127,895,430 or 59% of the people own their home.
HOWEVER between 2004 and 2006 21% of the outstanding mortgages in the USA were Subrpime or ALT-A
here 4%.
And you know Garth, that the 21% club in the USA were almost all junk with essentially no proof of income. You can clearly see that on the New York Fed site.
Anyway, with 500% more risky mortages being issued in the US than Canada, it is a bit difficult to draw the same conclusion.
after all, why didnt the market fall appart with the government dropped the AM from 40 to 35?
again, I say this over and over, from After the Boom 2014 on, I am a supporter, but this simply seems to be looking a bit more far fetched as the correction drags on.
I have never forecast a collapse, but still mainatin the current market is unsustainable and will correct. It took only a small minority of US mortgages going bad to infect the entire market, and the same potential exists here. The issue is not defaults or foreclosures, but negative equity. A smart guy like you should know the difference. — Garth
>.#58 Soldin08 on 12.22.09 at 10:34 am
>Unfortunately, and as painful as it may be, the rate >picture is unchanged, and remains so for the >foreseeable future.
>Expect Canadian home prices to float upward to match present day Vancouver levels by 2011..
>[STUFFS DELETED]
As for crazy predictions, yours that RE in general will ‘float up’ to match Vancouver – where the average SFH is north of $930,000 – it nothing but realtor terrorism. This will not happen for reasons too obvious to waste space on. Come back when you have something helpful to add, and stop scaring the kids. — Garth
**************************************
Garth, he could well be right. I mean if it can happen in Japan, who is to be so sure that it can’t happen here? And if rates stays at 0 or -1 ? Well, the incentive to buy RE and push prices higher and higher (maybe even past Vancouver’s ?) is just natural. Actually I think rates in Japan are still low even as we speak. That’s like what? Two decades already?? So if Canada is to pursue the same glorious path, we will still be having rates of 0 in 2030. Some of us on this blog could well be still renting at that time waiting for that drop that never happened.
Disclaimer! Garth and the bloggers could well be right too and a crash is imminent in 2010!
Garth,
This is your best post ever, but should still be obvious to most. Still a very clear post.
Thanks
#96 – Habs 76 – 79 …
O.K. I have to violate my posting quota …
Good stuff Habs … varaiable rate mortgages aren’t the only thing that is going to get “traped” in a rising interest rate environment …
Government debt is going out at the short end and a lot of the existing stuff … revolves on a relatively short term basis. When rates rise they rise for everyone … doesn’t just make the cost of new borrowing go up but also jacks the cost of accumulated debt as it comes due and has to be re-financed. The US has actually more old debt to re-finance over the next year or two on top of the enormous new borrowing it has planned. Not enough money around the world to finance all the new treasury issuance and/or the old stuff too. Not much appetite either for zero yield lending either.
Cost of deficits and national debts are heading up with higher rates … and the debauchery of the printing presses.
Our own deficit could come at a hell of a cost.
One more shoe to be droped by the centipede.
Luck to you.
Hello Garth.
Today I met my boss at Tim Hortons for a coffee and we discussed how dead the home construction industry is and the fact that for stair builders such as ourselves there is no work around. I pointed out that its quite likely that everone that can afford a house has one.
If that is the case and we have rock bottom interest rates then look out below. I do mean look out for deflating real estate prices. Prices were inflated slowly but surely since the last depression just like a cheap balloon to the point where it could not expand further.
Only one thing can happen after that and that is for the baloon to pop and return to an insignificant size.
Realtors, banks ,governments and home buyers have over played their hand and must face reality.
They have gone too far and no one is left that can afford their excesses or what ever they are selling.
The above picture. Was that an honest house fire or was it a conveniant lightning strike at the right time and place?
Steven
The really DISGUSTING thing is:
That when the meltdown comes and thousands of houses and condo in Canada come on the market.
Who will be there collecting their incredibly inflated commissions just for putting the house up on MLS and taking 20 minutes to write up an offer?
Your friendly neigbourhood realtor.
They win on the upside and win on the downside.
Vancouver RE will crash.
…Everything is hunky dory in Ontario.
Ontario is not overpopulated, Manufacturing reliant economy.
Western Provinces will go bankrupt before Eastern Canada ever will….someone has to pay for all those Eastern Canadian EI payments.
…Ottawa will pass legislation to kick out anyone who is not a resident of Eastern Canada.
There, You happy Garth?
#100 Jeff Smith
About your Japan comparison, the missing points are:
-After 20 years of near zero rates, where are Japan’s real estate prices now? ( about 1/2 where they were 20 years ago)
-Japan was a nation of savers. Japan was not dependent on foreign countries to buy their bonds. Foreign bond buyers will eventually want higher yields. You can’t exactly compare us to a nation of saver’s and say our bond yields won’t rise
So, even though I generally agree with 90% of the opinions that Garth posts, I have to point out a major flaw in one of the key stats that many people have been referencing. This “average equity as a share of home value” number has been cited countless times by all kinds of news outlets and blogs (including this one).
The quote that I’m referring to is:
“By mid-2007, average equity as a share of home value was down to six per cent — from 48 per cent in 2003. ”
This is based on a chart from a CMHC report in 2008:
http://dsp-psd.pwgsc.gc.ca/collection_2008/cmhc-schl/hn/nh12-198/NH12-198-2008-11E.pdf
If you go to page 5, you can read the assumptions that went into that chart:
“To calculate the accumulation of equity due to making monthly mortgage payments, we assume a 5 percent down payment, a 25-year amortization, and that the home was purchased at the average MLS price in the month of purchase”
In other words, these ‘statistics’ aren’t stats at all, and were completely made up based on a representative example. The bar graph is completely misleading, since it is supposed to show how much equity a random 5% homebuyer would have gained vs. some kind of downward trend in downpayment amounts.
So, not that I don’t personally think that the majority of new mortgages are probably 5%/35-years… I think that the whole market is completely out of whack right now. But – I wanted to correct this one major piece of misinformation.
(and – my apologies to Mr. Jonathan Tonge from http://www.americacanada.blogspot.com, who wrote up that oft-quoted statistic — I love your blog, but that stat is mis-represented)
Hats off to you Garth. This is your BEST post ever. I could not have said it better – you took the words out of my mouth.
The merchants of debt and their RE parasites who have lived like hogs off the excessive growth in debt will do everything to buy off the gov’t to make sure the party isn’t spoiled – of course, it will spoil, but who cares ? That’s not today’s business. I will write an email to the Finance Minister encouraging these changes we need and also telling him to keep the industry at bay. We are headed for sure depression if this debt growth continues as is far above income growth.
As i have said before, the bond market is key. Deflation or inflation, we will have sharply higher rates soon enough. The US treasury market is showing its first signs of distress. I expect a rebound in prices/lower rates from Feb-Apr, but from May-Sept 2010, i really think we will see long term rates explode to at least 6-.6.5 %. The bond market has a noose on the economy. Economy cannot grow fast (who will want to hang onto 10-30 yr gov bonds paying 4 % ? with risks to the currency via inflation?), or slow down too much (who will pay the debt off if the economy is very weak/in and out of recession ? want credit, pay up – everyone including the gov’t is beholden to the bond market vigilantes)…
Anyway, awesome post
JO
Garth,
Calling me a “small guy” is something I would not have expected from you.
A bit disappointed to say the least, as I was mearly trying to rationalize with some solid numbers.
What I thought this blog was about.
take care.
Don’t despair. It was a typo, ‘corrected’ by my WP program into a word I did not intend. The correct descriptor was ‘smart.’ — Garth
ah–
thats better….kind of disappointed me for a second.
Like finally meeting your favorite basketball star and he spits in your face…
will keep buying your books
http://www.thestar.com/news/gta/article/629346
This kind of business is sure to fuel real estate recovery any time of day.
Thanks for your blog Garth,i stop in every day and read your posts and the comments.It’s refreshing after talking to sheeple all day long.Wow it amazes me how some many of the populace have been sucked in by the Harper governments misleading propaganda. 8 billion in bonuses to our bankers and they have the nerve to tell us they never received any bailouts?? life is so good in a no lose business where the taxpayers guarantee their mistakes……..perhaps its time to investigate their twisting of the requirements and prosecute a few of them after all even with the lowest of requirements for a mortgage they even abused that getting that taxpayer guaranteed money out the door?
#62 Robert1
Put Up Your Dukes You Kooks
I take it you don’t like “Jimmy Boy” or his main man Stevie Harper?
Wow, I actually could feel the passion and anger in your words! You speak your mind…you have my utmost respect.
A guy that used to work for me calls Jimmy Boy “Little Runt” all the time. I told him, he may be small but he looks and acts like a street fighter in Belfast. Stand back, way back from his right hand hook.
Jimmy Boy said he would act if the real estate market developed into a bubble. Obviously, he has never heard of David Rosenberg or his recent comments on current home prices. Something like a 15-35% over valuation in asset value.
“That 4% stat is highly misleading. 5/35s represent the vast majority of new originations. Regardless, when the market corrects, even a small number of people in trouble poisons the equity of everyone. We should have learned that looking at the US. — Garth”
Didn’t the US subprime comprise around 20-25% of the RE market? That’s sigificantly more.
US subprimes closer to 13%, and the 4% Canadian number is bogus. Of the 40% of Canadian households with mortgages, more than 12% have greater than 80% leverage. But the real question is the nature of originations in 2009, the majority of which have been 5/35.– Garth
Ok, so you get to live in a house for 25 years and then get all your money back. WTF, that sounds like an amazing deal.
#4 Einsam Solo on 12.21.09 at 9:50 pm
Read wikipedia, the world will not end on Dec 21st, 2012.
http://en.wikipedia.org/wiki/Maya_calendar
Good reading today.
#105 Nostradamus jr. — “. . . someone has to pay for all those Eastern Canadian EI payments.” — See first link.
***
If this is happening down south, when does it start happening here? Is this why Gordon Campbell is slashing social programs like crazy in B.C., and the HST is coming in — to help the feds. out? — EI / Welfare Rolls Could be why the new 10,000-litre water cannons are being built (previous link).
——
A collection of articles in one link. The top centre one is quite interesting, but they all hold something for everyone. From wrh.com: “Can you believe this crap? Even if nobody believes in human-caused global warming these bastards still want to loot your wallets, ostensibly to save other nations from bad weather! Globalism or socialism? Is it possible to have one without the other?” Plus a prognostification from moi: “Winter, although not necessarily full of snow will be long and cold so spring will last a few weeks, then a blazingly hot and short summer!” — BUT — Hold on there! Look — is it a bird, a plane? NO — it’s Sunspots!
——
This decade is finito, so now move on to another decade.
#92 AM,
Yes, I heard about Manulife,they’re all over it. They make it real easy to cash out on your equity. You think 5/35 is bad? Maxed out LOC “is” the elephant in the room. Heck it’s the elephant in the fridge, the footprints are all over the butter cup.
#66 Nostradamus jr.
…If Warren Buffett…
It is a coal pay on North America energy prices. The train deal basically is a coal deal.
Umm, just came across this over at CIBC World Markets.
http://research.cibcwm.com/economic_public/download/dec18_09.pdf
Something in the eggnog at their Christmas party?
#70 Ivan
“When, and if, rates rise take the money from your TFSA and pay a whole chunk of the principal down and you’ll be much further ahead than having paid your mortgage down at these low rates.”
AMEN! This is good advice…if you are the type who can save. But ?Half? may not be capable of this type of discipline with their money. And more than half don’t want to hear it.
But I guess I have to learn that knowledge is best worn like a watch…and only given when asked for. {sigh}
Tom
gosh, i love being right. I searched long and hard on the web over a year ago to find people that felt the same sentiments as me in regards to Canadian real estate and I landed here.
Garth and everyone on here have done a marvelous job articulating my opinion as well as bringing new and in depth information to me
Another well written blog Garth. I enjoy your clarity! You say what has to be said with consise precision.
I think you are finally getting through to the folks in power. They are starting to publicly announce their views which contain the arguments that you have been stating for some time.
You should be getting the credit for their wisdom, not them!
Why does everyone think that prices will rise in the years to come. If they do the right thing and go back to 25% down, 25 yrs, then I figure we have a LONNNNGGGGGG way to go. Typically house prices are like oil tankers, slow to move but when the change direction its hard to change them back again.
“Journalists across Canada, as well as bloggers, can now use the defence of “responsible communication on matters of public interest” as a defence against libel.
However, in order for them to do so, a judge must confirm to the jury that the published material relates to a matter of public interest. ”
http://news.ca.msn.com/top-stories/cbc-article.aspx?cp-documentid=23121830
The judge may also rule out the use of the “responsible communication” defence if the case does not meet the criteria outlined in a checklist issued as part of the rulings.
#104 OMG, dont worry! On the way down knowone will buy as they will spend years searching for a bottom (NO RE Agents) Houses will foreclose and the bank will own them go POS (NO RE Agents). 2nd wave of PRIME underwater, they will hunker down (NO RE Agents)
The gig is up, 90% of all RE Agents will be wiped off the map, will be selling junk as partially employed on Ebay.
The only quick money for RE Agent left is the first 10% of Boomers scaling down & smart upper middle class cashing out and moving from Canada (say less than 2% of homeowners).
We will spend 3-5 years trying to find a bottom!
During this time it will be similar to worse than the USA as Canada really never corrected as it rode the coatails of the US stimulus and cheaper money here in Canada.
Expect huge unemployment numbers, expect huge haircuts in salaries for employed, expect huge taxes and a complete reversal to saving big time!
Expect that there will be no need to purchase homes for at least a decade of sideways muddling. Expect it will be hard to purchase a home base on interest rates and strict lending policies by bank and big brother feds.
(NO RE Agents – Developers – Bank Lending – Brokers and other PONZI specialists)
GREAT GLOBAL RESET! Are you ready?
Preemptive measure is prudent. Don’t wait for the poo
to reach the anus, then start to look for the toilet.
In my opinion, 20/30 is appropriate. Inflation(maybe hyperinflation) is here; with all the money printing
by the world central banks. Higher interest rate is
a given. Can you afford amortisations at 5%? 10%?
15%?
My EI claim got extended from 40 weeks to 55 weeks!!!
Under the”Extended Benefits for Long-Tenured Workers measure”
Are the feds trying to tell me something about my job prospects?
>I understand Manulife’s M1 is the equivalent to a home ATM
Its actually a GREAT idea.. As long as you have the willpower not to spend the money – i dont think i’d trust my wife with it!
#119 … Nostradamus jr.
My point still stands … the “play” isn’t the issue.
Anyway … I’m with you on coal … but not via the rail deal. I prefer the hard stuff – for coking. I prefer producer stocks or a targeted ETF. The thermal stuff is O.K. Most of the US players are predominantly the thermal for domestic power generation. There’s a mad on re: coal. There are a few canadian plays with good Coking coal exporting to China in quantity. Good coal is becoming scarce … the estimates of a gazillion years worth of North American reserves sorta work if you consider anything with an energy content slightly better than … say … granite … and … if you you like lots of sulfer spewing out of your power plants.
Just my humble opinion though.
Good luck.
Home owners in Ottawa are sooo screwed and still they are spending. In the 90′s there was 40,000 Fed layoffs in O-town and this is way worse then then. There was also, a 5% vacancy rate in 95-96 for rentals and this tells the story of what happened in this city after those layoffs. Although, 4 years later we were looking at 0.05% vacancy rate and a RE boom.
Herb @50
The role of limited government is protect citizens against potential abuses by corporations ie.. monopolies. Of course once the line of separation between state and corporation no longer exists we have a fascist state that no longer works to the benefit of it’s citizens ie… the United States.
The United States greatest period of prosperity was during the 19th century. The system worked with limited government while on a gold standard.
Regards
#61 Popeye
Yes it has – between 1988 and 1993 huge detached 7 bedroom Victorians (downtown, West end Toronto). My friend’s mom was a casualty – assessed at $460K in ‘88 and sold for $235K in ‘93. Fabulous home with a basement apartment too! Today, the house across the street is listed at a million, reduced from $1.2M – not worth a million, maybe $560K at most.
I had the opposite stats to you – crap credit, lots o’ student debt, no money (except for raided RRSPs) but with a new fancy job – CIBC offered almost half a million and they were more than slightly perturbed when we took less than half that!
As for equity, “18% of Canadians withdrew equity from their homes over the past year” to the tune of $46 billion – we discussed this Scotiabank report back in November (“Bubble Talk”)
http://tinyurl.com/yfag7ay
#49 Grey
Case to your point – here are two listings in Toronto (W1) right now that should (and perhaps will) be priced around 250K instead of 450K.
http://www.realtor.ca/propertyDetails.aspx?propertyId=8959503
http://www.realtor.ca/propertyDetails.aspx?propertyId=8870950
“Investx,
The first step to enlightenment is realizing your own insignificance.
If you want the knowledge, do the work.
The universe is infinitely patient, it awaits your decision.”
Talking without saying anything.
Emma,
I am curious if you would be able to tell me whi is continuing to offer 40 year ams now that CMHC is no longer backing them? I think any mortgage company would be nuts to do this given the no risk loans they can offer at 35 years. I just saw a note in the Scotia report about that. Section 3A.