When F stands (it’s often hard to tell when this happens) on Thursday afternoon in the House of Commons, what will he say about the housing bubble? Will he murder the 30-year amortization? Announce no more insurance money for CMHC? Or just ignore the whole thing, setting up the country for a crash instead of a fizzle?
Looks like the third door. And it’s the wrong one. We’re surrounded by evidence the system is out of control.
For example, did you read this comment posted here some hours ago?
“I’ve been following this blog for some time, but am a first time poster. 28 years old with a wife and baby on the way. I’ve owned a place in the GTA (not downtown) since the mid 2000?s. It is a nice 3 bedroom townhouse with everything my wife and I will need for at least the next five years. It was and remains well within what we can afford. However, because we are expecting I figured I’d go look at a few places.
“I am a finance professional and will have an MBA done within the month, so I preface this by stating that I understand the concepts of interest and debt well, unlike many others in my age group who may or may not be virgins.
“A mortgage professional I spoke with indicated that the maximum mortgage we could qualify for right now was $1,200,000, with a final purchase price of $1,400,000 considering the equity we’ve built up in our current place and other investments. Imagine the granite we could get! Infinite pot lights!
“Here’s the kicker… I’m still in school – I’ve had ZERO income while I’ve been here. My wife makes well under $100,000. The decision was based solely on credit rating, my wife’s income, and my stated income for a job I have yet to start. No proof of job offer required.”
So a 28-year-old student with no earned income, in a marriage with a pregnancy and a no-income mat leave looming, is offered a mortgage of $1.2 million. At the same time, the Real Estate Council of Ontario (RECO) says it has received about 5,000 complaints in the past year from people caught up in bidding wars – mostly engineered by real estate agents.
Worse, here’s a BeeMo study released Wednesday that should shock F to his elfin core. Fully 43% of Canadians say they’re “unsure” about their ability to afford their homes if interest rates were to rise by 2%. And what are the odds of this happening in the next few years? Yes, 100%.
This may not register in Ottawa where everyone’s obsessed with robo-calls and the hairy new NDP leader, but it should be on your radar. The risks of a substantial real estate correction are growing right along with the unbridled river of cheap bank money which has swept away common sense.
Here’s more: Land speculation in the GTA is fevered again, with prices shooting higher as developers scramble to meet the demand rock-bottom mortgages have created. Urbanation, the industry bible, is telling clients “land prices are going through the roof, we may be headed for another 2009-like credit crunch, and there may be as many as 35,000 new units launch in 2012 (not a typo!).” As for condos, it now looks like the GTA alone will have 23,000 new units added to the housing stock this year alone.
Lax lending standards. Excessive mortgage approvals. Over-extended homeowners. Frenzied bidding wars. A new land rush. Massive over-building, with 80% of new units snapped up by speckers and flippers. And it appears the federal government’s about to ignore it all, letting new bank regs and the drying-up of mortgage insurance deflate the housing gasbag.
Trouble is, the banks won’t get slapped with new mortgage restrictions by the OFSI (their regulator) until the end of the year. And CMHC says no virgins will be denied their 5%-down or zero financing deal in the near term. So, while mortgage rates will be higher by the end of the week, the signal about to be sent out by F and the gang in this budget appears to be: party on!
“We think EXACTLY like the Americans did before the financial crisis,” says the MBA student with the $1.2 million mortgage approval. “Couple this with zero down, low rate mortgages, and all of my friends buying houses that are “better” than the one we just purchased.”
His point is poignant and precise, often made by Americans who come to this pathetic blog to watch us with amusement. The actions our government have taken to deliberately inflate a housing bubble are no different than those taken in the US years ago. Lack of regulation over residential lending. Too-low rates leading to borrowing excess. Government insurance wiping away lenders’ risk. Zero-down financing. Liar loans. Tax credits for homebuyers. And mindless promotion of the cult of homeownership, even as families are forced to commit half or more of their pre-tax income to shelter.
Given this, why would the outcome be different?
Every week I sit across the table from people who ask me to help them with their money. Every time I show the same thing. Markets that soared and then fell back to earth. On the way up, people were frenetic to get in. On the way down, they were panicked to get out. We’re going to do the opposite, I inform them. And we do.
Now tell me, where on this chart should you buy or sell?