Entries from June 2011 ↓

Could it be the feds are desperately trying to deflate the housing market before it blows up an unsuspecting middle class? Let’s turn this rock over and see what crawls.

This Friday, quietly, the door shuts on cash-heavy, house-horny Mainland Chinese. Citizenship and Immigration Canada is abruptly capping the Federal Immigrant Investor Program, setting a minuscule target of just 700 for the next year – a quota expected to be filled in just days.

Until now, applicants with a net worth of $1.6 million, previous business experience, and enough cash to buy a crack shack in Vancouver stood a good chance of gaining entry. And anyone living in Richmond in the west or Richmond Hill in the east, knows the results. The reason given by Ottawa: to reduce the number of economic applications. The real reason: gasbag.

On Sunday that little devil F decided to spoil the day of anyone who thinks Ottawa has a deliberate policy of cheap mortgage rates just so they can buy a honking big house. “Interest rates,” he told CTV, “have nowhere to go but up.”

And to make it clearer: “We are cautioning people not to assume too much long-term debt on the assumption that interest rates will stay as low as they are – because they won’t. We want to make sure Canadian households plan ahead and know, if they renew a mortgage in the next several years, it’s likely that the interest rate will be higher.”

When will this happen? F probably knows, but he ain’t saying. And when the inevitable comes, it will be from the lips of blog lurker Mark Carney. So the finance minister’s comments make perfect sense, coming just days after the Bank of Canada issued yet another warning that out of control household debt has the potential to torpedo the economy.

Of course, it was Riot Day when Carney traveled to Vancouver to talk about ‘extreme’ valuations in the real estate market. He made a point of saying our housing market has reach a similar point to that at which America imploded. And he added this turgid zinger: “With monetary policy continuing to be set to achieve the inflation target, our institutions should not be lulled into a false sense of security by current low rates. Similarly, households will need to be prudent in their borrowing, recognizing that over the life of a mortgage, interest rates will often be much higher.”

If you don’t know what he means, don’t bend over.

Hey, and here are the animals at Statistics Canada, also weighing into the scaremongering business. Just days ago StatsCan blamed “rock bottom” rates for turning us into mortgage crack addicts. Our collective debt has just clicked to new heights, so we now owe a buck and a half for every dollar we earn – and that’s the average. Just think about how your pathetic brother-in-law stacks up. Said the agency: “Canadian debt ratios are leaving their U.S. counterparts in the rear-view mirror, despite the repeated exhortations by domestic policymakers to rein in borrowing.”

And don’t forget that only 90 days ago the feds murdered the 35-year mortgage, which means home loans cost a little more to carry these days and virgins can afford a little less.

So, add it up. Fewer horny Asians. Rates going “nowhere but up.” Warnings from the finance minister and the central bank governor. Debt alarm bells in Ottawa. Tighter lending. Everything but state-sanctioned locusts.

But will it make a difference? Nah. Not a chance.

To prove it, here’s Charles, who make this blog comment while I was typing this:

I start reading this blog 2.5 years ago. Since then the house I wanted went up 30%. So in the event of an unlikely 20% price down, I would be still 10% up. Houses are still selling and I am behind this computer, outpriced. Time to accept things did not go the way you predicted.

See what I mean? This is Nortel all over again. It’s Bre-X. It’s LinkedIn.

Face it, most people have no patience, no insight and no discipline. They believe, at worst, house prices will dip a little, then resume an upward advance. Even though we live beside a country when 30% of citizens are underwater, house prices basically halved in five years and $5 trillion in equity vanished – a country just like ours – they learn nothing. A house they thought was too expensive for them 30% ago, now looks like a dish.

So, F can mouse on all he wants about higher rates. Carney can pontificate on the danger of debt. Ottawa can nibble at lending regs. And this pathetic blog can bleat without end.

But it’s not until you wake up one morning, roll over and see what you just did, that reality hits.

Twice in the last two weeks, Mark Carney has raised the alarm. The dude in charge of setting interest rates warned house prices are extreme during a talk in Vancouver (the city erupted in civil unrest and rioting as a result). Then he did it again the following week, telling Canadians they are debt addicts.

If you think this does not presage higher rates, you don’t know my buddy Mark. Fun guy. One time, on a Saturday, he actually removed a cufflink.

Of course, some people don’t get it. I get so many blog comments like this, I don’t even bother posting them anymore:

When are you losers going to get it?
Interest rates CANNOT and WILL NOT be rising any time soon. Any references to “reversions to the mean” in relation to real estate metrics are idiotic.
Garth – you are sooooo yesterday.

But there may be a little truth in that. After all, if Europe sinks, the US stagnates, commodity prices wilt and a new recession emerges, rates will in fact stay low. Carney well knows raising them in the midst of chaos and decline would simply exacerbate the situation. But how is any of that good for real estate?

Fact is, a double-double recession, replete with more job losses and shuttered businesses is a death sentence for markets like Vancouver and Calgary. This, remember, is exactly why the American housing market is marking its fifth anniversary of decay. Interest rates in that country are also at historic lows, with people able to get a mortgage at 4.2% for 30 years. That’s right – three decades at four percent. No renewals. No rate roulette. No uncertainty. Moreover, US homeowners can take all that interest and deduct it from their taxable incomes, which makes mortgages even cheaper.

Has cheap money saved housing in, say, Tampa? This was a Vancouver-like boom city between 2001 and 2005, as buyers flocked to snap homes which were destined to rise forever. A house worth $150,000 in 1995 was changing hands for $400,000 by 2005. But that summer, everything turned as public sentiment shifted and housing started to look too expensive to buy.

Since then Tampa prices have plopped 46%, and are still declining. This is 15% more than during the Great Depression – and all the while, rates have been at historic lows, interest deductibility’s been available and the feds have doled out cheques to new homebuyers. Now the $400,000 house is worth $250,000, and on its way to $220,000.

The median house price in Tampa, St, Petersburg and Clearwater is $120,000, compared with $239,600 five years ago this month. Now economists at Moody’s Economy.com are predicting the 2006 price will not be seen again until 2025 – a full twenty years of decline and slow recovery.

In fact, 2006 prices may never return again. Because that was a bubble, when values were based on emotion, desire and public mania, rather than economic fundamentals like household income levels, employment and the cost of money (interest rates).

Worse, if there’s one lesson we should take from places like Tampa, it’s that people come out of a bubble in far worse shape than they were in. Gasbag prices encourage families to speculate in housing, moving up the property ladder until they’re sitting on both massive wealth and bulbous debt. Once house values start to drop (they always do), the debt remains. And this is why a stunning 30% of all house-owning families in America are now under water. They can’t afford to sell. They can’t move to a new city to grab a better job. They’re trapped.

It’s what Mark Carney fears awaits us. People with no equity and a mess of debt, he knows, don’t buy new cars and iPads. The guy understands if he leaves rates low more fools will gorge on it, adding to future risk. But if he jacks, the party ends fast.

However, it’s ending anyway. Cheap money alone will not sustain house prices. Not even horny Asians can do the trick. Or places like Phoenix would be rising from the ashes.

So, Carney will pull the trigger in due course. Everybody will be shocked. Markets will rage a little as dumb virgins try to beat the increase, and then freeze.

I told you yesterday five ways to protect yourself. Now you have one day less.