Entries from January 2012 ↓

The transfer

Carlyle’s parents sold their semi yesterday. “They should thank their lucky stars, and BMO’s 2.99 special,” he says. No kidding. Boomer rescue. But let’s have a moment of silence for the kiddies who bought.

“Dozens came through to see it over the weekend,” he says of the half-house in the eastern wilds of GTA’s Scarberia.  Sixteen years old, and in need of a new roof. Listed at $415,000, sold for $400,000.  “A young couple, 20-something, ended up buying the house at 96 percent asking. How can twenty-year-olds afford 400k houses????”

More on that in a minute, since there’s a good chance an era’s about to end.

“Anyways I’m happy for my boomer parents (they needed to sell … Dad is almost 68 still driving rigs, mom almost 65). They are going to live at the trailer in Georgian Bay for the summer and then not sure. I’m trying to convince them to retire and do half the year in a Florida RV community during winter the other half at their trailer in summer.  It’s all they are going to be able to afford on their pensions.   Whatever equity they get from the house will be used to pay off debt – most of it :(. Basically they have nothing for retirement except government pensions.  The words on your blog about boomers ring true to me as I see it happening.  My folks are just in the first wave.”

But this isn’t about fool Boomers who blew six decades, putting it all in a house, saving diddly and now must retire to a trailer surrounded by losers. It’s about the fools who come after.

Yesterday this spiritually uplifting blog gave you the latest: federal bank regulators warning of sub-prime lending practices, no-income lines of credit and dangerous condos, while CHMC revealed it’s running out of money. This is big news. Big consequences, maybe.

Now remember the housing bubble is the result of two things. Crazy low interest rates engineered by the government. Plus a federal agency which wipes away risk, allowing lenders to make homeowners out of people too challenged to save. Oh, and that Property Virgins babe realtor’s tube top. Forgot that.

The agency is CMHC and borrowers putting less than 20% down (almost 100% of first-time buyers) must pay a hefty insurance premium. This does not insure them, but rather their lender. So banks can shovel money out the door, secure in the knowledge if their clients default on the mortgage, taxpayers will make them whole. A few things have happened as a result: banks have lowered their lending standards; people with putrid credit get the same low rates as Justin Beaver; and the real estate market’s erupted, resulting in higher prices (and bigger loans).

Something else, too. Banks have been using CHMC to insure ‘conventional’ mortgages as well – ones with a bigger down payment. This makes the mortgages more attractive when bundled into securities, called ‘covered bonds’ which are then sold to investors (does any of this ring a bell?).

Just two banks alone (BMO and Scotia) sold $4.5 billion worth of covered bonds in January, and last year investors snapped up $25 billion of these things – supposedly high-quality, being backed with residential mortgages insured by CMHC.

Ironically, these bonds then help the banks lower mortgage costs, so people can borrow their brains out and force house prices higher (requiring more loans). This is how you get stuff like BMO’s 2.99% fiver which caused such an endorphin rush among the horny.

Still with me? Good. Now we have a problem. Over a year ago CMHC convinced Parliament to boost its insured lending ceiling to a staggering $600 billion – about the size of the federal debt. Seventeen months ago there was $100 billion cushion left. By last autumn it was $60 million and in a few months it will be gone. It means taxpayers are on the hook (between CMHC and the national debt) for more than a trillion dollars. Scarier, CMHC has reserves so small they’d be wiped out if only a small fraction of its high-risk mortgage debtors defaulted.

More immediately, unless CMHC is bloated even further by an act of Parliament, it won’t be able to insure all the loans lusty young buyers and greedy old bankers wish to cover. Kinda like a money drought.

“It may serve to tighten the housing market,” warns TD economist Sal Gulati. In fact, it could do worse. The entire real estate structure now rests on the ability of 20-year-olds without any net worth to buy $400,000 houses from 68-year-old Boomers, thus rescuing them from themselves. It could be history’s greatest wealth transfer. The old guys get cash. The young victims get debt. If things tank, the bank gets the house, the taxpayers get gored.

If Ottawa doesn’t increase CMHC’s ceiling, real estate’s flames will lose their fuel. Prices will tumble and recent young buyers will be in negative equity until menopause. But if hundreds of billions more are added, Canada’s bubble grows more dangerous and the consequences more dire.

What will F do? Odds are he’ll up the ceiling, while restricting credit – eliminating the 30-year mortgage and dropping amortizations to 25 years. That will increase monthly payments for virtually every new buyer. At a time when prices are inflated and local markets volatile gasbags, it will do nothing but hasten, and deepen, the inevitable correction.

Carlyle’s parents may think life in a trailer sucks. But they’ve no idea how profoundly their asses were just saved.

Too bad who’s paying for it.



Brad and Melissa are 26, no kids, three years out of school and would be doing great if they’d ignored their damn parents. “Upon graduation (saddled with tons of student loans for my Mechanical Engineering degree), both of our sets of parents pushed us to buy a condo because ‘It’s a great investment!’  Three years later” Brad says, “the condo that we bought with no money down (genius, I know), is worth 10% less than it was then.”

By the way, this is in Calgary where rising oil prices were supposed to bring cowboys, engineers and the house-horny a real estate windfall. Oil in 2009 was $56 and today it’s a hundred. So much for that theory.

“We just listed our condo for 10k less than what we bought it for, and expect to end up paying at least 15k out of our own pocket to get out of it and pay off the bank.  We’re currently paying about $2,400 a month to carry our condo – a lot more than people told us we’d be paying (cheaper than rent!).”

In fact, B&M could have leased the same place for half what they now pay monthly in financing, condo fees and taxes, plus no $15,000 loss. Let’s see… umm… that’s about $60,000 more to live over three years in the same place. Thanks, mom. Thanks, dad. Remind us not to ask you about birth control.

It’s not just poor deluded Calgary. Add in Edmonton, Victoria, Brampton, Kelowna, London and now Vancouver. January numbers will be ugly, as sales and prices slide while listings pop. “We are starting to see losses on most apartment sale transactions for buyers within the past four years,” says an industry insider in Canada’s fantasy city. “Sellers first deny they are in a loss which creates a standoff and volume slows.  Then they have to chase what buyers there are out there.”

The past twenty-four hours have been a bubblethon in the mainstream media. Did you notice? Almost like investigative reporters snuck into the Bunker and lifted tomorrow’s pathetic blog post from the moistened, sensuous fingers of my Amazonian typist as we slept on the tiles, sated, in a Bacchian swirl of oiled limbs and clothing fragments. Do these people have no morals?

Why here’s Maclean’s magazine, panting. “Yes, Canada’s in a housing bubble, and it could pop soon. The signs of a bubble are unequivocal. At 13 years and counting, Canada’s current housing boom is one of the longest lasting in the world…the real price of Canadian homes has increased 85%… household debt set a new record… The Economist figures the market is overvalued by over 70%… no wonder a recent international survey of housing affordability found Vancouver to be the second-least affordable city in the world!”

And here’s CTV, and the Globe, even the pumpsters at Global reporting on the release of docs yesterday by the country’s bank regulator. As Bloomberg put it in a headline: “Canada’s sub-prime crisis seen with US-styled loans, mortgages.

Here’s all you need to know:

Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the country’s banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.

  And looking all the world like a woman with a $3 million house still for sale in Toronto, BMO economist Sherry Cooper tried valiantly to tank this talk of real estate danger. “With the exception of a few regions, valuations remain only moderately high across the country, especially when low interest rates, demographics, construction costs, land-use regulations and foreign capital inflows are considered,” she wrote in a media salvo. “A dramatic correction is unlikely… the national housing market is more like a balloon than a bubble.”

What to make of all this angst?

Well, I’m sticking with my forecast. Nationally, prices will correct – gently in some areas and violently in others – until the average is 15% lower, followed by a number of years in which prices will just… drift… away. It no longer matters how cheap mortgage rates become. There’s no quick fix for the economy, jobs, incomes or debts. Houses which are stupid inflated will cost less in a year and a lot less in three. Newbie buyers, along with house-heavy Boomers, will wish they’d found this over-sexed site in 2010.

Before then, probably more market silliness, especially in Toronto. Condo  marketers are preparing some desperate pitches, while SFH inventories are low. Sellers will be ecstatic they found that last, great rush of greater fools.

There’s little doubt the growing chorus of media warnings, however, will have an effect. Real estate is the most emotional of assets, bought for the worst of reasons – like pressure from your Boomer parents or sheer house horniness. But when the meme spreads that real estate’s teetering and likely to tumble, that it’s all about danger, sentiment spins. When the buyers take off, prices cascade lower. It can take years to rebuild confidence.

Proof? Look south. Prices have dropped by a third, mortgages sit at historic lows, owning’s cheaper than renting, yet houses linger unwanted and unloved, declining daily.

There are way better places for your money. Just don’t ask your dad.