Entries from December 2009 ↓

A few scenes worth your attention:

• High-powered Bay Street bond traders talked to me this week about what the new year’s likely to bring. They figure the central bank will hold the trigger on a rate increase until mid-year, just so Mark Carkey’s creds are not further shredded, but then let ‘er rip. The first hike will be “at least a half, and probably a full load”. That could raise VRMs overnight by 1% – or a little more than 44%. Ouch.

• But BMO disagrees, at least a little. Senior economist Michael Gregory says the first jump will be more like a third of a point – also coming in the summer – and that by this time a year from now BoC rate will be sitting at almost 1.6%, higher than today by 1.3%. That doesn’t sound like a lot, but it puts the lowest VRM at 3.55% – which increases the monthly on a $400,000 loan by $300. A five-year mortgage would like go for close to 7%. Barn door. Horse.

• Well, that little David Rosenberg buddy of mine, now chief economist at Gluskin Sheff, has sure joined Bubble City here on the banks of the always-fragrant Don River. In a note to clients, and then repeated to the media, Rosy said, “we found that housing values are anywhere between 15% and 35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing.”

And just imagine, as I said last week, if the real estate market in Toronto or Vancouver declined by the amount Rosey has identified. That would take average home prices down by $68,000 to $158,000 in Toronto, and tank the value of a SFH in Van by $140,000 to $325,000.

• So, is that what Carney was talking about in his GTA speech yesterday? You bet it was. It is now obvious that even a mild real estate correction – say 10% – would kick the slats out from under tens of thousands of recent buyers, putting them in tortuous negative equity and perhaps turning the thumbscrews on CMHC. Or, as he chose to phrase it: “A shock to economic conditions could be transmitted to the broader financial system through deterioration in the credit quality of loans to households. In such an event, increased loan-loss provisions and reduced quality of the remaining loans could lead to tighter credit conditions more broadly.”

The BoC will raise rates. The real estate market will be impacted. A ton of households will feel it bad. Consumer spending will take a hit, and just as the HST arrives. And meanwhile Obama readies both tax increases and spending cuts, which will rally the greenback, sink gold, drop oil prices and bring five years, at least, of range-bound markets and investor danger.

This is exactly why a thesis of my new book is that we are in but Act One.

There are two more to come.

America, circa '05: But, of course, it's different here.

Will wonders never cease? CREA’s chief economist has joined the instant cabal of Establishment types now uttering those two words which strike terror into the hearts of 5/35ers everywhere: ‘housing bubble.’

But, good for him. Takes balls. Of course, not wanting to be the David Lereah of Canada is doubtless also a  motivation. After all, CREA’s Gregory Klump is not a bad egg. I remember in the Spring of 2008 when he and a bunch of lobbying realtors came to see me in my Parliament Hill office to pitch for higher RRSP homebuyer limits (they later got them). Klump hung back for a minute, then whipped out his copy of my book ‘Greater Fool’ and asked me to autograph it.

Can a man with impeccable literary tastes be all evil?

As you may recall, David Lereah held the same position with the US National Association of Realtors, where he steadfastly refused to acknowledge the house crash even as it destroyed millions of families. He also wrote a few books, the most famous being ‘Are you Missing the Real Estate Boom,’ published in 2005 when the market was imploding. (Copies of the hardcover are now available through Amazon.com for 2 cents.) A later version of the prophetic bestseller was titled, ‘Why the Real Estate Boom will not Bust.’

Anyway, Greg buddy, welcome. Here, have a hug. Beer?

OK, meanwhile in Milton:

I’ve been enjoying your blog and educating myself on financial matters for some time now. Given how much money CMHC is essentially backing up I am greatly worried as to what will happen when this current housing  bubble bursts.

As far as I know: CMHC has its debt ceiling raised to 600 Billion. CMHC is a federal entity. Our federal govt and CMHC have been issuing bonds on the market to support this. Canadian homeowners are on the hook for the money that is loaned to them for a mortgage. Canadian tax payers support the federal gov’t and CMHC through the tax base.

What could/will happen when such a huge debt becomes unmanageable? Will CMHC start suing people in order to collect on mortgage money that is owed when people go into default? Never mind the paper loss of so much money when these “houses” plummet in price.

Will CMHC have to step in and give people some sort of bridge mortgage rate to keep people in their homes?   (never mind the fact that these people shouldn’t be owning homes in the first place given the 0/40 and 5/35 stupidity taking place)

What will the repercussions be for the federal tax base, the value of our federal bonds, our credit rating and our CAD dollar value?

In closing I know that this is speculation on your part however I would enjoy hearing your comments and then thinking things through for myself.

Secondly I would greatly appreciate being pointed in the right direction as to how I can “short” the Canadian housing bubble when it bursts. Anyone that I have tried on this subject is too busy trying to sell me their own products rather than giving me the financial service I want.

Hunkered Down in Milton

Hey Hunkered: Without a doubt, Canada Mortgage and Housing Corp. Has been playing a giant role in carrying out the feds’ policy of pushing wind into the housing bubble. Yes, it has recently seen its lending limit raised dramatically. Yes it securitizes high-ratio and high-risk mortgages (the 5/35s and 0/40s especially) and then sells those repackaged assets to investors (does any of this sound familiar?). Yes, taxpayers are totally on the hook as CMHC takes the risk away from the banks and lays it on us.

Also germane is the fact that by shouldering this burden, the government body allows high-risk borrowers at the chartered banks and other lenders to get the same rock-bottom interest rates that people who actually have money are offered. Otherwise, of course, this would never happen – since in any housing correction of more than 5%, people without equity and at the end of their financial leashes are the first to fold. Clearly one way the market protects everyone is to charge a risk premium on money lent to those without assets. But, thanks to CMHC, no more.

What might happen if we had a US-style housing crash, Hunky? Probably a US-style solution – shovel more money into the market, prop up CMHC, backstop the losses and protect the banks’ mortgage portfolios. But bailing out individual homeowners? Hardly. Unlike America, this is still a capitalist democracy run by meateaters from Alberta.

As for shorting the housing market, well, I have already made some shocking suggestions for people with houses to sell. And there are a bunch more (equally brutal) in my forthcoming book.

But let me mention a couple of stock plays some people have been contemplating. For example, Canada’s largest realtor – Royal LePage, which trades as Brookfield Real Estate Services Fund on the TSX (BRE.UN). The shares have recently been close to 12 bucks, at the upper end of its 52-week trading range, and currently the company has a P/E of almost 30 – or about three times that of the banks. Draw your own conclusions as to what might happen there if a 74% annual housing sales surge became, say, zero.

And investors might also want to contemplate other companies directly tied to the mood of home owners, like The Home Depot, or Canada’s main boy-toy retailer, Rona (symbol RON). This outfit is also flying high with shares above $15, also close to the 52-week high, of $16.25. But this company has a P/E of just 13 (about the same as the Royal Bank) and with a beta that tells us it’s got a history of being a defensive stock with low volatility.

Of course, Rona actually sells stuff. LePage makes it up.

Hey, Greg. Stop giggling. Beer’s coming out your nose, man.

Garth's latest podcast is here.