Too big to bail

BIG 1 modified

“I have this question,” says Dave. “With the current landscape as it stands, regardless of how we got ourselves into this mess, are we in a “too big to fail” type scenario with regards to housing?

“In other words, if interest rates start climbing, and housing starts correcting, and people start having problems maintaining these mortgages, do you think the government will have to step in with stimulus programs that ultimately reward the home owners who leveraged beyond their means?”

A fair query. After all, while US home ownership levels fade and American Millennials embrace the freedom of renting, we have seven in ten families yoked to a house. Our kids get horny over bamboo flooring and polished concrete backsplashes. This week we’ve already probed Erinomics and learned why there are 105,000 new condos being built in Toronto alone. People have $1.2 trillion in mortgages and home equity lines of credit, plus another five hundred billion in debt amassed buying crap. Job creation sucks and wages are stuck. If rates rise, we’re pooched.

So, too big to fail?

It’s a political question, not an economic one. But let’s remember the Obama administration spent more than $2 trillion trying to stem the slide of the American housing market, and failed. In the end, people lost faith in real estate, sold it off, walked away, took the hurt. It declined in value 32% nationally. Today, more than seven years later, prices are still 20% below their peak, despite a big bounce-back in major cities. Collectively, the American middle class lost $6 trillion in housing equity, and government was unable to staunch it.

This forms the foundation of what the doomers were moaning about here yesterday. They decry the structural unemployment, the widening gulf between the 1% and the rest, the food stamp numbers, the 77 million citizens with debts in collection and the fact middle-class incomes have declined by a third since the GFC. This is overwhelmingly attributable to real estate.

The Yanks made a big mistake when they let building, selling and fluffing houses account for such a big chunk of the economy. Just like we’re doing now. The recovery period’s been long and uneven. That much is obvious.

Only now are jobs coming back to the US (another 209,000 were announced this morning), with the economy kicking out robust GDP numbers and corporate profits. Consumer confidence is up and the federal deficit in decline. This is why the Fed can finally throttle back on its stimulus spending, turning off the tap that flowed $85 billion a month, seriously enhancing the wealth of those smart enough to load up on financial assets.

The fact this spigot is closing was one reason investors punted stocks and headed for the exits on Thursday. The Dow cratered more than 300 points since it’s clear the economy is ramping up, with inflation and higher interest rates to follow. Of course a default in Argentina, pesky Ruskies and dead civilians in Gaza just made things more acute. But crises flare and fade. Economies move like glaciers.

The bottom line is that real estate destroyed a good portion of the biggest middle class in the world. The US economy is clawing its way back, but for millions of families the future will never approximate the past. They’re done like dinner. The average 50-year-old American has saved only $43,000, while almost 40% of everyone has saved nothing. Eighty per cent of people over the age of 30 believe they don’t have enough to get by in the future. And they’re probably correct.

Now interest rates will go up as the government bond-buying stops because the economy as a whole is growing again. Stock investors will take money off the table and put it into fixed income, where prices are dropping and yields rising. When equities look cheap again, they’ll pile in and make another bundle, as corporations with global sales keep stacking profits.

This is the new reality for Americans. The gulf between rich and poor will spread, but it’s the gap between the wealthy and the middle that’s really opening up. Millions of families gambled their whole wad on housing going up forever, and lost. Thus, an ownership rate of almost 70% has plunged to levels unseen for two decades. Rich people, meanwhile, watch from afar. They’ve always understood diversification is salvation.

Is real estate in Canada too big to fail?

You really want to wait and find out?

127 comments ↓

#1 scamenomics on 07.31.14 at 5:27 pm

The fact that the PMI print surprised everyone demonstrates that economists have no clue what’s really going on in the economy.

These same economists are relied upon to form economic policy.

We are in trouble.

And the Q2 GDP growth is clearly not fundamental economic strength. You are just wrong on this Garth. The US economy may eventually hit a good recovery clip but you are way premature calling it yesterday.

#2 Andy on 07.31.14 at 5:34 pm

Well explained…
Sometime I am surprised when some people mention that Govt of Canada would not let the interest rate go up because the whole society is in huge debt and they don’t have balls to impact such a big number….

#3 Prove Me Wrong on 07.31.14 at 5:35 pm

“The bottom line is that real estate destroyed a good portion of the biggest middle class in the world.” ~ Garth

Really? Still?

At what point do the bears stop analogizing the American experience? 10 years? … 20!?

It happened there, NOT here (and won’t).

GET OVER IT!

#4 totalinvestor.com on 07.31.14 at 5:38 pm

Dow Jones is down 317 could be the start of something nasty.

http://postimg.org/image/o108qmggn/

#5 Dominoes Lining Up on 07.31.14 at 5:40 pm

He won’t have to wait long, Garth.

Discretionary spending in Canada is well below expected levels so far this summer. Friends in retail tell me they expect a disastrous back to school season, and are trying tor educe inventory orders in advance of a similar downturn expected between Black Friday and Boxing Day.

All of this is underpinned by housing indebtedness, HELOCS and the like.

Listings where I travel have really grown, as if people are so dumb that, having missed the spring market, they think they can just push a button and reverse time.

Too late for most sellers already.

#6 Oh Boy! on 07.31.14 at 5:41 pm

Garth, your blog is quite versatile. Replace Canada and Canadian city names, with Australia and Australian city names, and it still stands correct.

Were you (in Canada) ever subjected to slogans as such;

“We have a strong banking system, with sound economic fundamentals, and an unemployment rate the envy of the world”

“We have China”

Americans can hand back the keys

And many more slogans refering to our property prices going into orbit forever.

Your blog really hits home.

#7 soused on 07.31.14 at 5:42 pm

Isn’t the Canadian economy more buoyed by housing than America was before the collapse?

#8 small correction on 07.31.14 at 5:42 pm

Small correction:

“People have $1.2 trillion in mortgages and home equity lines of credit, plus another five hundred billion in debt amassed buying crap”

HELOCs are counted as non-mortgage consumer credit by the Bank of Canada and lumped accordingly in the consumer credit bucket. In Canada, we have 1.24T of pure mortgage debt and 5.25B of consumer debt, a little less than half of which is HELOC debt.

#9 Shawn on 07.31.14 at 5:42 pm

A Swing and A Miss?

The U.S. housing market was torpedoed when too many of people stopped paying their mortgages.

In many cases they never should have been able to get the mortgage. But the pin that pricked the bubble was when too many did not pay.

When the first few stopped paying, lending tightened up and housing prices stopped rising which caused more people who were still paying up (with great difficulty) to stop paying. Which caused further lending tightening and house price drops which cooled off demand greatly and caused more people to stop paying as they realized equity gains were not going to happen.

Then came the Swing and a Miss. The Feds did not help out the borrowers who were having trouble paying. Instead they bypassed those people and bailed out banks and investors.

Later they had some help for borrowers but it was too late.

Had they started out by assisting the borrowers the benefits would have been passed up to banks and investors and much of the crisis might have been avoided.

The Feds simply did not apply the solution a the location of the problem. As a result the fix was very poor.

#10 Exiled on 07.31.14 at 5:47 pm

Sir Garth: Scares the beejeemass out of me!

#11 r1200c on 07.31.14 at 5:47 pm

And it’s definitely different in Alberta… just not for the better:
http://www.calgaryherald.com/business/Alberta+tops+Canada+with+highest+average+household+debt/10079082/story.html

#12 Curious on 07.31.14 at 5:49 pm

Wouldn’t a quick crash followed by a slow recovery in housing be better than a long slow decline over 10 years?

#13 Terrier on 07.31.14 at 5:50 pm

Real estate market is doomed due to obvious economic slowdown. Folks without jobs will be fleeing suburbs faster than rats on a sinking ship. The inevitable rate hike will be icing on the cake.

#14 GARTH VADAR on 07.31.14 at 5:53 pm

The Derivatives time bomb looms. 2O4 nations have agreed to a currency reset. There will be no bail outs the next time around. Short term equities investing is fine but don’t get too comfortable. We are all past the cliff of borrowed time on printed dollars. And the FED continues to print. The bond purchase reduction is a lie. If interest rates rise 1% it’s all over. 124 billion would be added to the debt overnight. 4OO trillion in just interest rate derivatives alone are on the books. Who will go first..? The Euro, Japan or the USD. China’s got some huge real estate problems on the horizon as well. 24 major countries have all backed away from the USD reserve currency regarding purchase sale & trade in oil & goods. We have a major war coming over the resources of the ukraine & a new cold war with Russia…..and so on. Very lucrative times & also very dangerous times ahead.

#15 hmmm... on 07.31.14 at 5:58 pm

It is never a problem for long term housing needs… flippers beware. The case of real estate following US trend is not going to happen. Even if it did, its a 5 year hiatus… No Biggie…

People waiting since 2007 for the real estate to crash will be still waiting come 2020.

#16 Dogman01 on 07.31.14 at 6:02 pm

I always come for the blog entry but stay for the comments.

Seeking information with some integrity; I frequent this Blog but I also figure if the Guardian was good enough for Snowden it is good enough for me.

Our host mentions future tax increases I wonder if they may be applied to the wealthy instead of just us serfs.
The occupy movement faded away, will the “the sheep look up”
http://www.theguardian.com/commentisfree/2014/jul/29/rich-wealth-good-inequality-green-party

For a similar message but funny:
https://www.youtube.com/watch?v=LfgSEwjAeno&feature=youtu.be

#17 Godth on 07.31.14 at 6:14 pm

Time to Reboot
You Can’t Taper a Ponzi Scheme
http://www.counterpunch.org/2014/07/25/you-cant-taper-a-ponzi-scheme/

#18 Londoner on 07.31.14 at 6:16 pm

People should stop quoting derivative notionals when talking about debt. It’s just silly.

#19 Smoking Man on 07.31.14 at 6:18 pm

I don’t know, very weak Batman.. Going to let it ride

#20 Suede on 07.31.14 at 6:27 pm

The Mindset:

rising rates = growing economy

growing economy = investment portfolios increase

investment portfolios increase = cash some out to buy houses.

when will it end? hmmmmmmm

#21 Happy Renting on 07.31.14 at 6:27 pm

#12 Curious on 07.31.14 at 5:49 pm

The slow decline is much better. Inflation won’t make it seem as bad as it is, and any feelings of panic (like from a crash) are bad for the economy.

#22 Godth on 07.31.14 at 6:28 pm

Wolf Richter: How Fracking Is Blowing Up Balance Sheets of Oil and Gas Companies
http://www.nakedcapitalism.com/2014/07/fracking-blowing-up-balance-sheets-old-companies.html

#23 Mark on 07.31.14 at 6:29 pm

As the RE decline of the the past year and a half continues, expect the economic readings to continue to get worse and worse. There’s a reason why the mortgage rates are extremely low. There’s a reason why the economy is sluggish. Certain Realtors will deny, deny deny. They may even fabricate statistics, or focus on the increasingly limited and narrow stats that are favourable to their view (harder and harder each day as pretty much everything now shows decline). But at least the smart people know what’s going on.

“The case of real estate following US trend is not going to happen.”

We’re already a year into decline, and it took the US around 2-2.5 years from the apex (in the USA, 2005-2006, in Canada, last Spring just prior to the infamous Budget 2013 CMHC subprime crackdown) before the market really freaked out.

#24 Mark on 07.31.14 at 6:31 pm

“Folks without jobs will be fleeing suburbs faster than rats on a sinking ship. The inevitable rate hike will be icing on the cake.”

Rate hike — extremely unlikely, especially with such deflationary forces in the economy. But rates certainly can (and will) start to tick up as credit-worthiness starts to increasingly be perceived as issue. With the “equity” machine now in reverse due to price declines, creditworthiness is decreasing, not increasing.

#25 Retired Boomer - WI on 07.31.14 at 6:33 pm

The U.S. housing bubble was goods up by unqualified buyers buying exploding (adjustable rate mortgages) with no, or fraudulent documentation. This was aided by mortgage brokers who did not get paid until the “paperwork” on a mortgage that “looked good” to a buyer of that paperwork committed to financing the purchase.

YES, yes the numbers of the fraudulent mortgages has been discussed ad nauseum, but it was there, and when they went bad the houses were foreclosed, and tried to be unloaded by the bank. Some were wildly overpriced, and didn’t sell until they were stripped, vandalized, and ultimately torn down.

If it could happen here, and Ireland for example, no reason it could not happen in your hood.

Think that’ll boast your property’s value? Think Again.
Nothing like a free-for-all sale in a panic to determine values! Things could rather interesting, but it takes a while to scare the Herd.

#26 R on 07.31.14 at 6:44 pm

The American middle class was already listing heavily to starboard. The tech and housing bubbles were its swan song.

Jobs make be coming back, the they aren’t the same jobs they had before.

#27 Effluence greasy on 07.31.14 at 6:51 pm

#15 hmmm… — “The case of real estate following US trend is not going to happen. Even if it did, its a 5 year hiatus… No Biggie…”

Ahh, critical thinking. In the US, most mortgages were fixed for 30 years, with no opportunity for the bank to reëxamine borrowers’ balance sheets and cash flow as long as the borrowers were current. In Canada, a “5 year hiatus” would allow lenders to give the hairy eyeball to almost every Canadian borrower, and request an equity infusion, a HELOC payoff, or that the borrower find another lender for his next five year term. Biggie.

#28 Mama Papa on 07.31.14 at 7:09 pm

Hey Garth,

I’ve been reading it for quite a long time as a lurker, but really want you to know how much I appreciate your perspective, honesty and writing style.

Every morning I look forward to reading your next post.

Keep up the good work.

Regards

#29 Madashell on 07.31.14 at 7:24 pm

CMHC is sooo close to the 600 billion limit and Genworth is days away from their $350 billion limit. Wonder if joe O and the conservative government will delay the crash by increasing the limit and let the next sucker to deal with it.

#30 james on 07.31.14 at 7:36 pm

#9

“Had they started out by assisting the borrowers the benefits would have been passed up to banks and investors and much of the crisis might have been avoided.”

And why were borrowers unable to pay their mortgages? Because space aliens were abducting them and taking their money? Maybe it was because of other factors, like the fact that high real estate prices mean reduced mobility and lower employment options. Maybe they couldn’t afford those homes. Maybe the housing bubble masked a general reduction in the number of quality jobs, due to outsourcing and offshoring.

Should the Dutch government have started to cover tulip purchases when the tulip bubble started to blow up?

Since when is it the role of government to keep bubbles inflated?

#31 NostyVlad the Snugglebombed on 07.31.14 at 7:46 pm

“Of course a default in Argentina, pesky Ruskies and dead civilians in Gaza just made things more acute. But crises flare and fade.”,
#113 Jim on 07.31.14 at 8:13 am — “What will war with Russia do to house prices?”
— and —
#14 GARTH VADAR on 07.31.14 at 5:53 pm — “24 major countries have all backed away from the USD reserve currency regarding purchase sale & trade in oil & goods. We have a major war coming over the resources of the ukraine & a new cold war with Russia…..and so on.”

The more things change, the more they stay the same. Ah yes, Crises, a fine album by Mike Oldfield but we sure are living in interesting times and therein lies the rub — who has the intestinal fortitude to stay in a liquid, diversified portfolio which pays out monthly, or buy an illiquid asset which acts as a vampire, sucking the life out of one? Choose wisely.

Hmmm. Dealbreaker? Germany – Russia – Ukraine Certainly will be curious to see if Germany chooses to set up shop with the BRICS. Last I saw (can’t remember where, but not too long ago), there were 180 or so countries which had signed on with BRICS, but not too sure of that.

#66 SWL1976 on 07.30.14 at 9:46 pm — “Thanks Nosty for all your links and another point of view for world news” — No trouble!

US – India and India – Russia combined with US – Iraq and Iraq – Russia Good thing they’re all bosom buddies!

#32 Entrepreneur on 07.31.14 at 7:46 pm

I remember when the States started falling business people where interviewed and they all said “let it fall.” Obama bailed out the banks, I think by hoping they would pass the buck to the householder but we know that did not happen. The banks helped themselves.

The whole system is generated by credit/debit whirlwind. Forget the means; who needs the means. We can be rich by borrowing from the banks to get ahead. The housing industry is an easy prey for the banks, they can’t lose. Forget the small businessess, too risky.

Forget the middle class as politicans have our resources. Have politicans ever read the Canadian Charter of Rights or do they care about the middle class? Are not the politicans suppose to be responsible for something? Even my own daughter sees the corruptions and says that the politicians should be accountable.

Is there not a leader amongst us, and if so, please come forth.

#33 takla on 07.31.14 at 7:52 pm

good blog post today garth,some I agreed with some I don’t and lots to be determined..time will tell.
My feeling is the tapper will have to be reversed @ some point,i hope not.Does the market continue to sell off?Winter is around the corner and its become a great scapegoat for stumbleing economic indicators.
many of the great mainstay industries in the states have been off shored and haven’t come back,Automobile manufactureing and sales have been mostly flat.Oboma care is comeing down the pike which will add further costs to the middle class.Lets see what non farm payrolls say and hope for the best,if numbers fall short,will not be good.

#34 Sail on 07.31.14 at 8:06 pm

At the current mortgage borrowing rates, how long until CMHC’s mortgage loan insurance reaches the maximum of $600 billion?

#35 Robbie on 07.31.14 at 8:11 pm

Yes, what will the government do? I remember reading a post years ago (not on this blog) from a homeowner in the States regarding the “bail-out” that was happening with foreclosures. His comment was that he had purchased a small home, lived within his means, paid off the mortgage and was secure. However, those neighbours who had purchased a huge house, lived far beyond their means and had enormous mortgages and debts were now being bailed out with taxpayer dollars. He felt that just rewarded the profligate spenders…and I can certainly see his point.

Will the Conservatives bail out those who put down 5% (and then got cash back for 2 or 3%)? Doubtful as their voter base would feel the same as the person I mentioned above.

Best thing for the housing market and the economy would be a major reduction in house prices. Affordable housing would mean homeowners would have money left over to spend on consumer goods and the lower house prices would put pressure on rents as well. In addition, more people could afford to buy a home if it is affordable and the construction of homes is important to our economy.

It’s all part of an overall cycle that many seem to have forgotten (or were not around in the first place to experience).

Anyone interested in investing in Dutch tulip futures? ~

#36 Greetings from the 1 % on 07.31.14 at 8:19 pm

I’m one of those bad 1 % Guys – and even I can’t afford a house in Vancouver.

#37 Macrath on 07.31.14 at 8:20 pm

#33 takla
My feeling is the tapper will have to be reversed
—————————————————————
Will the Fed reverse course due to a market temper tantrum ? Not this time around Mrs. Yellen has to show world she is in control or all is lost.

Reversal is not an option. — Garth

#38 Edmontonian on 07.31.14 at 8:32 pm

Calgary & Edmonton: An ALberta debt crisis!

I knew we had an over frothy housing market bubble here in Alberta, but I had no idea the we had been soaring into massive debt like we had in ALberta. Average household debt up $50,000 in Alberta this year, as unemployment also rises above 5% in all major cities! Scary… http://www.edmontonjournal.com/business/Alberta+tops+Canada+with+highest+average+household+debt/10079082/story.html

#39 Van Isle Renter on 07.31.14 at 8:40 pm

House prices are set like any other commodity: At the margin. No different than Bre-X or Nortel. Not everyone needs to sell out at a loss for everyone to feel the pinch.

In the US, only 10% of homeowners actually got into trouble, but that was enough to vaporize the value of the other 90%.

Hence the Bearded Prophet’s house to net worth ratios. If the value of your house is only a small to modest portion of your net worth, RE price gyrations, up or down meet bupkis to you then you get to sleep at night.

Me? Balanced portfolio, and the salmon are running. Limited out and fresh salmon on the BBQ as I write this. Renting works.

#40 Linda Mulligan on 07.31.14 at 8:41 pm

In 2011, the average social security payment was $1,180 per month (American’s get social security, Canadians get CPP). Compare that 2011 average to the maximum CPP benefit Canadian’s might get in 2014 – $12,460 per annum or just over $1,038 per month. In order to get that much, you must have worked & contributed the maximum CPP contribution 39 out of 47 years between age 18 & 65 AND waited to age 65 to begin to collect CPP. The average payment to CPP recipients in Canada is less than $600 per month (2013 figures) because few Canadians work & pay the maximum CPP for 39 plus years & even fewer wait to age 65 to collect their CPP benefit. The only way to get maximum CPP without working & paying the maximum into CPP for 39 plus years is to be have worked/paid long enough to get the average benefit & be the widow/widower of someone who also could get the average benefit. So you lose your partner but hey, at least you get the maximum CPP benefit. Whee.
Note that you will not get more than the maximum benefit so if for instance the max is $1,038 per month, you were getting $560 & your partner was getting $560, you do NOT get $1,120 ($560×2) if your partner dies but only the maximum payable which is $1,038.

#41 Mark on 07.31.14 at 8:43 pm

“At the current mortgage borrowing rates, how long until CMHC’s mortgage loan insurance reaches the maximum of $600 billion?”

Its been scraping at the $600B limit for the past year and a half now. Every time its about to breach the $600B, the government tightens CMHC down. There is zero political appetite to allow CMHC to expand further.

#42 small correction on 07.31.14 at 8:56 pm

@Mark

Look, I’m a housing bear as well, but I’m not sure how you come to the conclusion that real estate prices are falling across the country. Certainly Ottawa and all points east as well as Winnipeg and Regina are falling, but not the rest. Teranet shows gains in Toronto, Calgary, and Vancouver. In the case of the first two, you’d have to explain how prices can fall with months of inventory at decade lows.

They will all likely have their day in the sun, but let’s not mislead people with false statements; It’s not happening yet.

#43 Italians love real estate on 07.31.14 at 9:08 pm

Italians have also always understood that diversification is salvation.

That’s why the average Italian owns his home , a cottage , a couple of triplexes and raw farm land.

#44 Mark on 07.31.14 at 9:20 pm

“Ahh, critical thinking. In the US, most mortgages were fixed for 30 years, with no opportunity for the bank to reëxamine borrowers’ balance sheets and cash flow as long as the borrowers were current. In Canada, a “5 year hiatus” would allow lenders to give the hairy eyeball to almost every Canadian borrower, and request an equity infusion, a HELOC payoff, or that the borrower find another lender for his next five year term. Biggie.”

Very true. This is why Canadian banks are extremely safe, while the US banking system was unable to adjust interest rates to reflect the new reality of equity and credit-worthiness. The result was a loss of confidence and hence, an escalation in funding costs.

As housing continues to fall in Canada, expect some of this re-examination to occur with increasing frequency, especially as loans increasingly have little equity.

#45 Mark on 07.31.14 at 9:25 pm

“Look, I’m a housing bear as well, but I’m not sure how you come to the conclusion that real estate prices are falling across the country.”

I just look at the data. It is fairly clear that any alleged ‘increases’ are due to a significant shift in the median transaction. In other words, the sales mix has shifted to the higher end units, while the lower end has fallen as a percentage of the transactions.


Certainly Ottawa and all points east as well as Winnipeg and Regina are falling, but not the rest. Teranet shows gains in Toronto, Calgary, and Vancouver.

Teranet is a lagging indicator since it averages out price changes over a number of years by way of linear extrapolation of individual data points. And the data I’ve seen makes it fairly clear that the declines are in the GTA and GVR as well.


In the case of the first two, you’d have to explain how prices can fall with months of inventory at decade lows. “

Well the FSBO trend has taken off in a significant way as people are trying to come to grips with the falling prices and squeeze another 5% out of their sales. That’s one possible explanation, as I’ve never seen so many FSBO’s at least where I travel. These wouldn’t be counted in your typical MLS-derived “inventory” numbers but still represent inventory nonetheless.

Other economic indicators, including the increasing desperation of the banks to pump out more mortgage product, further support the fact of falling prices in the major Canadian markets.

#46 Mark on 07.31.14 at 9:34 pm

“I knew we had an over frothy housing market bubble here in Alberta, but I had no idea the we had been soaring into massive debt like we had in ALberta. Average household debt up $50,000 in Alberta this year, as unemployment also rises above 5% in all major cities! Scary… “

Horray, my bank stocks are gonna extract from those stupid Alberta debtors most of the bounty of the oilsands. Do Albertans really think those eastern/Toronto bankers will let them get away with becoming rich?

#47 Robbie on 07.31.14 at 9:39 pm

#42 Small Correction

House prices have been dropping in the greater Victoria area since 2007 and are roughly 20% lower since then. Last time I checked we were not east of Winnipeg and Regina. ~

#48 OneMoreThing on 07.31.14 at 9:40 pm

Come on, you will loose either your earning power, spending power or real value of your home slowly as planned. We have always been this simple to manipulate.

In the US it was a bit different as most of the states which had heavy devaluation and losses offered non-recourse mortgages.

Give someone an opportunity to walk away on a sale, they just want to buy more, give the same opporunity on painful debt, they will use jingle mail.

#49 Temporary Foreign Prime Minister on 07.31.14 at 9:54 pm

#9 Shawn on 07.31.14 at 5:42 pm
“….Then came the Swing and a Miss. The Feds did not help out the borrowers who were having trouble paying. Instead they bypassed those people and bailed out banks and investors…..”
=========================

Excellent topic, this evening. For once I agree with Shawn.

Would I expect the Harpocrite ReformaCons to reward disgraceful financial behavior by the Big Six, CMHC, and CREA?

Absolutely. Harper will do exactly as he is lobbied to do.

#50 Sheane Wallace on 07.31.14 at 9:56 pm

So sell stocks, part of the productive economy to put money on the sidelines waiting for interest rates to rise?
As if that is the case, buying bonds now would be a suicide.

The question really is: do you believe bonds will yield higher real returns then stocks in the future?

The answer is: It depends which bonds and which stock market.

It seems we are entering the phase where both the US stock market is down (insignificantly), bonds potentially down big time and inflation rising (so dollar is down) at the same time? It is basically implosion of the US economy except the internationals.

So thank you very much, I will keep my US internationals and specially the foreign stocks. No cash and no US bonds.

#51 small correction on 07.31.14 at 9:56 pm

@Mark

Come on now. You can try to throw the Teranet under the bus, but you’d have to explain away the very strong correlation between MLS months of inventory and 6 month lagged change in Teranet. It’s pretty darn compelling. You’re wrong on this. And I’m sure you are well aware that Teranet is not affected by changing sales mix, as per your first point.

Sure FSBOs have increased. But that’s not one sided. It affects both the supply AND demand. It has no real effect on months of inventory.

Look, we’re on the same team here, but you’re just way off base on this point. Give it time and you’ll get your declines.

#52 JimH on 07.31.14 at 9:58 pm

#40 Linda Mulligan
Some good observations, Linda. Thanks! And, by comparing CPP to Social Security payments you are comparing apples to apples.

It seems to me (correct me if I’m mistaken) that many Canadians think that American retirees are doomed. This is true; some are. Those that have prudently prepared for retirement however, are in pretty good shape.

But Canadians are (at least for now) eligible for additional OAS payments, are they not, and these are strictly due to Government largesse; in other words, they are not tied to contributions and are not “owed” to any Canadian as an entitlement?

The OAS could disappear at a whim, but not without repercussions, granted. But nobody with a lick of sense and a can of Friskies can deny that the benefits could at least be reduced in any contingency.

After Medicare deductions (and Medicare is a godsend to retirees in the USA; I spent 2 days in a cardiac specialized hospital in Kansas City after a suspected heart attack, got the best of care including MRI and ultrasound scans, EGK stress tests and the doting affections of an attentive nursing staff and it cost me zero… $0.00; but that’s another story).

The SS Administration and Canada Pensions worked very well together to come to an agreement as to my entitlements, and I urge any Canadian retirees who have a “split” set of contributions into Canadian CPP and American SS to get counseling in this regard: my American SS administrator worked her ass off to get me a good deal and my monthly combined CPP/SS is over $1,300 USD.

My OAS took a hit because I am a resident of the USA and a dual citizen. (Yes, Virginia, there is nothing stopping a Canadian Permanent Resident in the USA from obtaining dual citizenship.) I had a choice of returning to Canada for 1 year and collecting full benefits, or staying in the USA and getting a 25% reduction of OAS distributions.

Don’t get me wrong; I have no complaint, as at 68 years of age, still in possession a VALID FAA pilot’s certificate and ratings and still with all my marbles (Smoking Man, eat your heart out, you drunken fraud! Microsoft Flight Simulator and RCA’s just ain’t going to cut it!), I still work the markets as an equities and derivatives trader, and enjoy the best of all worlds: good income, moderate cost of living, a winter retreat in Arizona, and a wife and dog, both of which still wag their tails at me, at least occasionally, and if they get everything they want!

#53 Sheane Wallace on 07.31.14 at 10:00 pm

gold was slightly up today…

Creamed in the last 24 hours. — Garth

#54 CJ on 07.31.14 at 10:09 pm

Don’t bother with Mark. I have proven to him on multiple occasions that Calgary prices keep rising. He chooses to ignore and create his own set of “facts”.

#55 Inglorious Investor on 07.31.14 at 10:19 pm

“[…] do you think the government will have to step in with stimulus programs that ultimately reward the home owners […]”

Haven’t they done that already? 40-year ams. Reduced lending standards. CMHC insurance. Securitization. Renovation tax credits. Free money for old people who renovate. etc. etc.

I suppose they can just start giving houses away on the tax payers’ dime. Oh wait, doesn’t the Commune of Toronto already do something like that?

#56 Inglorious Investor on 07.31.14 at 10:24 pm

“[…] Consumer confidence is up and the federal deficit in decline. This is why the Fed can finally throttle back on its stimulus spending […]”

It’s the dollar. Remember, that’s the TOP priority. No, not the actual value of the dollar, but it’s top dog status. The Americans will do anything to ensure the dollar’s continued supremacy.

#57 Smoking Man on 07.31.14 at 10:25 pm

#52 JimH on 07.31.14 at 9:58 pm

You insulting old bastard….

Litinous test for you…

Building 7, inside or out side job..?

Tinfoil or obedience….?

I eagerly await your designation..

#58 Mark on 07.31.14 at 10:27 pm

“You can try to throw the Teranet under the bus”

Not trying to throw anyone under “the bus”. Teranet has a methodology where they take two samples of prices on the same property, x(1) and x(2), the number of years between sales, and then they find the change and average such change out over the number of years.

What this does is attributes some price increase in previous years to the current year. Hence, Teranet will understate price gains when they’re actually happening, and understate price losses when such is occurring as well, especially after a long bull market. Effectively acting as a sort of low-pass filter or integrator/averaging filter.

Nobody is accusing Teranet of dishonesty. But as with any sort of statistical analysis, one has to understand the metrics behind the numbers in order to use them. Merely looking at headlines can be highly misleading.

“I have proven to him on multiple occasions that Calgary prices keep rising.”

No you haven’t. That is a gross misrepresentation of the truth, or alternatively, you’re talking to a different Mark. But what I’ve seen in my time in Calgary over the past year, prices are unequivocally falling.

#59 Mark on 07.31.14 at 10:30 pm

“Excellent topic, this evening. For once I agree with Shawn.

Would I expect the Harpocrite ReformaCons to reward disgraceful financial behavior by the Big Six, CMHC, and CREA?

Absolutely. Harper will do exactly as he is lobbied to do.

The game is well known, rigged as it is. So why not simply invest alongside the big banks, and against the CMHC? Instead of sitting there as many Canadians do and whine like a victim?

Canadian banks will excel in the falling RE environment. Have you seen the acceleration in earnings over the past year? Its no coincidence that such occurred with falling Canadian RE prices.

#60 Inglorious Investor on 07.31.14 at 10:31 pm

The US is increasingly going to become a rather schizophrenic, bi-polar, two-tier nation of haves and have nots. Check the stats. It’s downright scary.

Their national colors may well become red, white, blue and soylent green.

#61 Inglorious Investor on 07.31.14 at 10:33 pm

“[…] an ownership rate of almost 70% has plunged to levels unseen for two decades […]”

Maybe they’re just getting back to normal.

#62 JimH on 07.31.14 at 10:36 pm

#53 Sheane Wallace
“… gold was slightly up today…”
————————————————-
Relative to what? Soybeans?

Gold spot closed at US$:
$1298.80 July 29th
$1294.50 July 30th
$1283.50 Today

After market saw $1284.10, but as of 22:29 EST was settling at $1283.40

http://www.kitco.com/charts/livegold.html

Three years ago it was over $1900.00

Put las pinatas away, gringo! (Buy at $700 – $800 if you insist) Party el próximo año! O más tarde!

#63 And yet you see no crash? on 07.31.14 at 10:41 pm

Reading blog posts like this one would make one believe all this will inevitably lead to a major correction in the housing market, say 30 to 60% on average. And yet fron time to time you state you see only a much smaller correction, spread out over many years. Usually bubbles burst quite fast, as well. So, if I get it correctly, in spite of all the alarming news you post here, you do not see anything like what happened in the US (a crash, right?) happen here, correct? If so, why is that?

#64 JimH on 07.31.14 at 10:45 pm

A good read for long-term bond investors:

http://pragcap.com/rising-rates-the-good-the-badno-ugly

If you’re patient and are getting decent yields, maybe rising rates aren’t all that bad???

#65 Shawn on 07.31.14 at 10:48 pm

U.S. Banks shot themselves in the head

Back in the day the U.S. banks sold 30 year mortgages backed by mostly short-term deposits. Hugely risky but then they sold (at a profit) the mortgages as mortgage backed securities and got rid of the risk.

This was great as it took a portion of 30 years of profit and made it income right now.

They also gave mortgages to risky borrowers. But that was okay as Fannie / Freddy guaranteed the risk. Or the risk was hived off to the mortgage backed securities buyers.

BUT then they turned around and bought many of the same toxic mortgage backed securities that they had sold. Sell it today and book a profit. Buy it back tomorrow at the price you sold it for and there is no gain or loss. Regulators said these things are risk free so go ahead and leverage them up 50 times, or 100 times. They did.

When the mortgage backed securities turned out to be toxic, the U.S. banks basically choked on their own vomit and excrement. (In part because Fannie / Freddy decided many of the loans had not met the proper criteria and so they refused to guarantee them.)

At least that is my understanding of it. (And I am, after all, always right.)

#66 Inglorious Investor on 07.31.14 at 10:48 pm

#35 Robbie on 07.31.14 at 8:11 pm

“Best thing for the housing market and the economy would be a major reduction in house prices. Affordable housing would mean homeowners would have money left over to spend on consumer goods […] and the construction of homes is important to our economy.”

You are referring to affordability in real terms where people have actual money to buy a home. But alas, that’s not how our current housing market works.

The definition of ‘affordable’ has changed in our society. Today, affordability does not refer to the ability to pay for something, like a home. It refers only to the ability to service the debt you assumed to acquire that home. In that sense, Canadian homes have become very affordable.

But that’s the trap.

It’s a paradox, you see. Because as debt/money gets cheaper, affordability seems to improve so demand increases, which drives up prices. The expectation of rising prices spurs further demand, driving up prices even more. Therefore, paradoxically, this kind of notional affordability based on cheap debt actually makes things more expensive.

This leads to waste, misallocation of resources, and an immeasurable loss in productivity that can only harm the economy down the road.

#67 Cerberus on 07.31.14 at 10:49 pm

I am from China, and I noticed a significant correlation between China’s RE market and its stock.

Recently China’s RE market just slipped into a stagnant situation where even the government tries to help selling condos (we Chinese generally think it is in bad situation). And meanwhile, China’s stock market starts to bull up.

Both started to happen almost at the same time, and I can’t help but correlate each other — there is money, lots of money, and if people see the RE market not profitable, the money will be invested else where, almost immediately.

#68 Mark on 07.31.14 at 10:50 pm

“Sure FSBOs have increased. But that’s not one sided. It affects both the supply AND demand. It has no real effect on months of inventory.”

I disagree here, of course FSBO’ing is going to have an effect on inventory. Shadow inventory doesn’t appear in the stats, and there is limited evidence that even suggests FSBO actually works. There’s no big panic to sell (price drops have been very minor to date, low enough to hurt confidence, but not high enough to make headlines!!), so the FSBO’ers are hanging their shingle out, but many of them actually engage a professional Realtor when they are more serious about unloading and realize that they cannot achieve their pie-in-the-sky price.

Also, as has been pointed out, how accurate is ‘inventory’ anyways when houses have been the subject of multiple MLS listings (as discussed here on numerous occasions)? Might a recent crackdown on this by the CREA have the effect of suppressing “inventory” numbers on a comparable basis?

#69 Inglorious Investor on 07.31.14 at 10:52 pm

Shawn on 07.31.14 at 5:42 pm

“The U.S. housing market was torpedoed when too many of people stopped paying their mortgages.”

Don’t forget the massive mortgage fraud that took place.

——————————

“The Feds simply did not apply the solution a the location of the problem. As a result the fix was very poor.”

They put the money exactly where it was needed to serve their aims.

#70 Cow Man on 07.31.14 at 10:53 pm

Sir Garth:
Thank you for the enjoyable read as always. The only question is why did the Perpetual Preferred sector shoot up in price today if interest rates are supposed to be rising; which you say made stocks drop?

Flight to safety. — Garth

#71 wayne on 07.31.14 at 10:58 pm

Creamed in the last 24 hours. — Garth

Not as badly as the markets, but then you have a special hate on for gold. And by you I mean Warren Buffet, since most of your financial musings can be traced right back to this one man.

Once again: I don’t hate gold. I just don’t care. It’s dead money. — Garth

#72 Inglorious Investor on 07.31.14 at 11:01 pm

james on 07.31.14 at 7:36 pm

“Since when is it the role of government to keep bubbles inflated?”

When the alternative is complete systemic collapse.

Not that I agree with this approach, but we’ve dug ourselves into a hole so deep that the only current solution to getting out, without a systemic reset, is to keep digging.

Either you will eventually reach the other side (if you survive going through the core). Or enough of your fellow diggers will die along the way such that perhaps you can pile up the bodies high enough to climb out the way you came.

I think that about sums up or current situation.

#73 Nomad on 07.31.14 at 11:08 pm

It’s always surprising how little of a market drop it takes for people to freak out.

Can’t wait to see what yields will do over the next 6 months, or even the next month.

Can’t wait to see how much REITs react. Are REIT prices going to react more than house prices?

Fun stuff, makes the day more interesting. It’s just money. It’s just a game (but keep enough money to eat).

#74 Vancity D-Man on 07.31.14 at 11:10 pm

No bailout for house horny idiots when housing crashes. They are SOL. Tough luck suckas! Should have listened to Garth.

#75 Red Deer Rob on 07.31.14 at 11:14 pm

#46 Mark

“Do Albertans really think those eastern/Toronto bankers will let them get away with becoming rich?”

Nobody forces people in Alberta to take on debt, they’re doing it to themselves. It’s all sunshine and lollipops, so long as your cash flow covers your expenses.

#76 Guy on 07.31.14 at 11:23 pm

No, real-estate is not to big to fail. The Canadian government has wisely put through regulations that say they will not do bail outs. This may cause the banks to be more responsible in their lending.

The Royal Bank is already selling bail-in bonds. I hope my pension fund isn’t buying into them. They are already preparing for a potential disaster.

The questions of the American economy doing well and jobs being created is being questioned by people such as David Stockman and Bill Bonner saying that the statistics are skewed and unreliable.

Here is an interesting link that explains the problem created by Hot Money created by central banks world wide with such programs as ZIRP and QE.

http://wolfstreet.com/2014/07/22/what-a-storm-surge-of-hot-money-does-to-san-francisco/

#77 John in Mtl on 07.31.14 at 11:25 pm

“… As Keiser observes, “You can’t taper a Ponzi scheme.” You can only turn off the tap and let it collapse, or watch the parasite consume its food source and perish of its own accord.

The question being hotly debated in the blogosphere is, “What then?” Will economies collapse globally? Will life as we know it be a thing of the past? Not likely, argues John Michael Greer in a March 2014 article called “American Delusionalism, or Why History Matters.” If history is any indication, governments will simply, once again, change the rules.” …

Interesting article for interesting times (where’s the world going, financially speaking). The entire article is here:
http://www.counterpunch.org/2014/07/25/you-cant-taper-a-ponzi-scheme/

#78 Ben on 07.31.14 at 11:37 pm

Garth – the UK are still trying to do this. Ultimately they will fail but in the meantime profligacy is rewarded.

#79 WhiteKat on 07.31.14 at 11:40 pm

Having been a home owner for over two decades, I get the allure, and in fact never thought I would actually want to be a ‘renter’ again. But stuff happens, and here I am – a renter and not ashamed to admit it despite the perplexed looks and arguments I regularly get from everyone.

Tomorrow, hubby, 3 kids, dog and cat, are off for a Quebec cottage vacation (rented of course) and then will be back to start packing to move to a new rental house that is much closer to the kids school. Yahoo, maybe I can have a life now instead of driving 3 kids in 3 different directions from the outskirts of Ottawa where there is no bus service. A couple years from now, my better half and I may be down to one kid and maybe then we will buy back into the house market. Renting is great for families whose lives are in flux.

BTW, yesterday, the Alliance for the Defence of Sovereignty announced that it has retained renowned constitutional lawyer Joe Arvay to launch a Charter Challenge against the government for agreeing to implement the American law FATCA in Canada. I am so pumped for this fight!

#80 Son of Ponzi on 08.01.14 at 12:17 am

Interesting excerpt from a G&M expose:
The sheer number of millionaire migrants who have poured into Vancouver is also compelling: From 2005 to 2012, 36,973 arrived in B.C. under the now-defunct immigrant investor program, which imposed a wealth benchmark of $1.6-million on applicants. Before being frozen in 2012, the scheme was the world’s most popular wealth-migration device, with Chinese immigrants planning to settle in B.C. submitting 65 per cent of all applications in 2011. Chinese domination of wealth migration to Vancouver is a statistical fact that belies widespread belief in other reservoirs of rich newcomers. B.C. admitted 30,013 millionaire migrants from Greater China (including Taiwan and Hong Kong) from 2005 to 2012. In that period, there were 242 from Britain and 160 from the United States.
Thousands of the rich have also moved to Vancouver after first arriving in Quebec under that province’s own immigrant investor program. According to Ottawa, 90 per cent of Quebec’s millionaire migrants move elsewhere within five years, mostly to Vancouver. That likely adds 20,000 or more millionaire migrants to Vancouver’s tally in the 2005-2012 period.

#81 POSITIVE tokens of value on 08.01.14 at 12:32 am

‘Money As Debt’ explores the baffling, fraudulent and destructive arithmetic of the money system that holds us hostage to a forever-growing debt – and how we might evolve it into a new era.

What is “cash” and where does it come from? Cash can be the familiar paper stuff, or it can be credit at the national central bank which banks use to settle accounts between banks. “Credit cash” at the central bank is always convertible to “paper cash” upon demand.

So, where does cash come from? Is it just printed by the government as we are shown on TV?

NO. Cash is created out of thin air by the central bank of the country (which is often privately owned). The central bank can just have it printed for the cost of printing, by the government or privately. The central bank then uses this cash it creates out of thin air to buy interest-bearing public debt in the form of government bonds.

Government debt is perpetual and thus interest paid on it is perpetual. Therefore a good definition of cash might be: evidence of public debt on which taxpayers will be paying interest forever.

So what is credit? Everything else that isn’t cash.

Take for example your bank account. Your bank account tells you how much cash the bank OWES you if you demand it. It isn’t cash itself. All those numbers in bank accounts are just “promises to pay cash”, nothing more than IOUs created by banks. However, we typically think of these bank IOUs, or “checkbook money” as “money”.

Little wonder. This checkbook money, especially in electronic form, is much more convenient and secure than paper money. Therefore we can transact all of our business with these promises to pay cash instead of cash itself.

So… are there more promises to pay cash than there is cash to fulfill them? You bet. That is because banks usually make what they call “LOANS” by promising, rather than providing, cash.

With a base of “cash” usually much less than 8% of the total they will “loan”, banks create their so-called “loans” as “promises”. How? It is astonishingly simple.

You, the so-called borrower, sign a document that promises to pay the bank X amount of money over time plus interest on the outstanding balance. Your promise is backed by the collateral you agree to forfeit and the effort you will expend to earn the money. Your promise to the bank is an ASSET to the bank. To balance its books, the bank creates a matching LIABILITY. The bank promises the borrower X amount of “cash” on demand.

The “loan money” that the bank puts in the borrower’s account is not “cash”. It is an IOU. It need never be cash unless the borrower demands cash. And, because we accept these IOUs as money itself, and do almost all of our business trading these convenient and secure IOUs instead of inconvenient and risky cash, banks can safely issue many more IOU’s than there is cash to back them up.

Perhaps the simplest and most “magical” feature of this system is “net” transactions. Only the net differences of transactions between banks need to be paid in cash. In theory, if all the banks are getting as much bank credit coming in as is being withdrawn, all the IOUs balance each other out at the end of the day leaving a net difference of zero. No cash required at all, from anyone! In practice, banks are competing.

Winners can demand losers pay in cash. But that amount is still only a small proportion of the whole amount of credit issued. The exception to all this is coins. They don’t begin as debt. The government Mint stamps them and the government sells them at face value to the banks, no returns. But coins are an insignificantly small part of today’s money supply.

The significant thing about coins is that most people’s understanding of money has not yet developed much beyond the idea of coins, simple POSITIVE tokens of value.

They fail to see how we have been ensnared by a money system based on NEGATIVE shackles of debt. The current system pretends to be “money” but is, in truth, a financial black hole sucking us all in to seemingly inescapable control by our so-called “creditors. The truth we need to see is that WE are the real creditors, because it is WE who produce the real value in the world, not the banks.

Thnak you God and angel@heaven.god

#82 45north on 08.01.14 at 12:40 am

The bottom line is that real estate destroyed a good portion of the biggest middle class in the world.

you take the American rhetoric and substitute the word Canadian for American . Example “Canadian families who have worked hard all their lives and played by the rules deserve help in staying in their own owns.

For politicians this is just low-hanging fruit.

#83 SHELTER THE MONEY NOT THE PEOPLE on 08.01.14 at 12:47 am

#30 james on 07.31.14 at 7:36 pm
Since when is it the role of government to keep bubbles inflated?
____________________________________________

When bubbles keep governments in power, of course.

#84 Cocoabean on 08.01.14 at 1:09 am

“Eighty per cent of people over the age of 30 believe they don’t have enough to get by in the future. And they’re probably correct.”

Wait…follow that statement to a conclusion. What will THAT do to prices? To future house prices? And to future everything prices? And to the availability of goods for sale?

You can bet that prices will have little choice but to adjust downward. Deflation, which will be good.

But not for yield-desperate investors: we’re in for decades of no-growth and low, low yields even if those who believe central bank-manipulated “interest rates” will somehow rise are correct.

Either investors are going to continue playing along, redoubling their heedless-of-risk search for a return, QE will return in some iteration again and again (with all the adversity that entails) or the doomers are right and something besides living standards and government budgets will break.

#85 juno on 08.01.14 at 2:23 am

Its interesting how people doesn’t understand how tightly coupled everything really is.

The buck went up in the past few weeks because the investors were banking on a interest rate hike. (What fools). Poloz doesn’t want rates to go up and wants the dollar to fall.

Now the speculators got burnt an lost out. The buck is at 91.7 cents and probably will fall more as the US strengthens.

What if? the Us raise interest rate and Canada doesn’t
– Bam that will cost

What if US start to grow and manufacturing comes back which is happening now, because industrial real estate is so cheap that firms can easily start up big manufacturing and create tons of jobs. Canada can’t real estate is too expensive. Its like having clips tied to your nuts.

– bam we can see a 80 cent dollar if all the pieces fall in place.
now image inflation if our buck went to 80 cents. Gas goes up and everything we import, even the toys from china.

#86 Sgip on 08.01.14 at 4:27 am

F*35 Apartheid Israel & F*35 @pmHarper who gives them Cdn tax $ to help with the Palestine abuse

.

#87 Nemesis on 08.01.14 at 5:14 am

#TenderTraps&OtherFollies

“Is real estate in Canada too big to fail?” – Hon. GT

Beats me, GT. That said…

Nope. Better not.

[NoteToSaltierDogz: Let’s shift gears for a moment, shall we? It’s been rather a LongLongTime… since OldMan’s posted… Right? I have a VeryJuicy ‘ConspiracyTheory’ about that: http://youtu.be/mkBDSWCQOBM ]

#88 CalgaryHappyRenter on 08.01.14 at 6:25 am

Canadian Real Estate – Overpriced Assets

http://www.steadyhand.com/industry/2014/07/30/a_crack_in_the_tree/

#89 Italians love real estate on 08.01.14 at 6:40 am

Looks like the correction in the financial markets you talked about is on it’s way Garth . 10-15% sounds as good a prediction as any.

Still waiting for the same in GTA real estate.

Me thinks men will be walking on Mars before that happens.. LOL

#90 young & foolish on 08.01.14 at 7:47 am

Yes, it’s time to get on the Housing Bear Train (it was a better idea to have done so earlier) …. too much debt is undeniable, so a correction down is to be expected. But it won’t be even.

Like it was posted here, diversification will protect you from the inevitable volatility of all markets (including RE).
What RE is worth owning today? I would suggest if your property is located in areas where job growth is evident, and where people are moving to (think principle cities), and even better, if it is paying you to own it (rentals), then you may be able to avoid the worst.

From my experience (not that it’s great, but it’s instructive), all the people I know (I have regular contact with many internationals) living around the world in large cities report the same thing: housing, rented or owned is expensive. In many cases folks are being forced to move to urban centers in pursuit of employment opportunities.

#91 Effluence greasy on 08.01.14 at 7:55 am

#68 Mark — “[…] there is limited evidence that even suggests FSBO actually works.”

Classic cartel FUD. Did you know that the reason multi-generational households are so much more common in Asia and parts of Europe is that there aren’t enough Professional Real Estate Agents there? Trapped in their houses and unable to sell without professional representation, generations are doomed to live out their years and die in the same house they were born in.

#92 pbrasseur on 08.01.14 at 8:10 am

“Stock investors will take money off the table and put it into fixed income, where prices are dropping and yields rising.” Garth

You make it sound like investors have been fleeing bonds to seek refuge into stocks and now they’re about to come back to bonds and fixed income.

I think you’re confusing the tree for the forest…

The reality is just the opposit, despite the recent advances stock ownership is sill close to a 50 year low and current rates show that investors still have a near unprecedented interest in bonds, fixed income or cash. (BTW as you know when rates rise bond funds lose value and become less attractive)

Ouside the unsignificant day to day fluctuations (that sure get pundits going…) money leaving stocks for bonds makes absolutely no sense at this point.

#93 mishuko on 08.01.14 at 8:37 am

I went to meet some guy to pick up some equipment in Ajax when I overheard a young couple being swooned by a Realtor.

Here’s what got my blood boiling:
‘Put your best bid forward because if the other people see it they will bid you up. Right now you’re not even on the table so they don’t know you exist’ From our pathetic teacher, I was screaming in my head ASK FOR IT THE OFFER!!!!

Next he asked to produce a deposit… oh dear… On the bright side the couple asked to have 2 conditions (small step in the right direction), being approved and passing a house inspection. Realtor said it’s already in the offer.

Apparently the house had the price lowered and has been on the market a long time. Seems fishy to me that someone is going to bid-up that price if it’s been on the market so long!

My GF after was like he’s just trying to make a living… I had to disagree that there is making a living ethically and making a living being a d-bag. Her response? ‘like you?’ =(

#94 maxx on 08.01.14 at 8:37 am

“In other words, if interest rates start climbing, and housing starts correcting, and people start having problems maintaining these mortgages, do you think the government will have to step in with stimulus programs that ultimately reward the home owners who leveraged beyond their means?”

If it did, it would be the stupidest economic move in history. Repeating a failed strategy would plunge Canada into a global position much farther behind than it’s already slipped.

Idiots who have overspent on housing and crap are overdue for a major dose of reality. And should be prescribed it. This is what recoveries are made of.

Fools need to understand that borrowing money is a serious affair and requires repayment- in full. Consumer proposals and bankruptcy are not solutions for future quality of life. (btw, reverse mortgages used to offer 60% of evaluation- now it’s 50%. In another few years, who knows?)

Money is only as smart as its user, and we have the dumbest money imaginable in Canada. It’s propelled by head fake messaging incessantly dispensed by FIRE, authorized by all levels of government- trickle-down dumb and dumber.

Will dumbest be next?

#95 mishuko on 08.01.14 at 8:38 am

‘Ask for it the offer’ = ‘ask for it on paper’
Realtor said it’s already in the offer => didn’t ask to use their own inspector.

Good thing I’m still asleep!

#96 Capt. Obvious on 08.01.14 at 8:45 am

#91
“BTW as you know when rates rise bond funds lose value and become less attractive”
First part correct, second part incorrect.

#97 rosie "moving forward" in the knowledge that, "this won't end well" on 08.01.14 at 9:21 am

Well, if you’re going to buy a condo in Montreal, might as well buy new. New is always better. Developer clear out sale.They still make a buck. As for the used condo owners, sucks to be you. How many new condos are coming on stream in Toronto?

http://www.cbc.ca/news/canada/montreal/too-many-condos-cause-housing-market-slump-in-montreal-1.2723546

#98 Rational Optimist on 08.01.14 at 9:40 am

9 Shawn on 07.31.14 at 5:42 pm

“A Swing and a Miss?”

This was a very good explanation of one way in which we could learn from the American experience when our real estate market starts to correct.

I’m not sure how politically tenable it will be to offer government assistance to borrowers who are struggling but still interested in making payments. Taxpayers are often paradoxically willing to see spending far away, rather than see it “enriching” their neighbours. It would be easy to paint a picture of freeloading homeowners who are receiving handouts to stay in their homes, many of which will easily be portrayed as too grand for them in the first place.

I hope that governments here take Shawn’s advice and help borrowers to avoid default. But if they do, anticipate a lot of stories in the Sun about people driving BMW minivans whilst getting cheques to pay their mortgages on their McMansions, courtesy of the taxpayer. Expect a lot of letters to the editor featuring anecdotes about neighbours who shouldn’t have been in such an expensive area in the first place and should now face the consequences of their poor choices…

Upshot is that saving the housing market might requires actions that result in political pain for whichever party that has to do it. So, they just might not.

##27 Effluence greasy on 07.31.14 at 6:51 pm: Kudos for perfect (maybe better than perfect) spelling.

#99 Rational Optimist on 08.01.14 at 9:43 am

Further to my comment above, I had not read James at #30. See? It won’t be that governments will not realize that helping borrowers is the most sensible way to ease the pain. It’s that their voters will be blinded to their own self-interest, and will prefer seeing their neighbours losing their shirts.

#100 Inglorious Investor on 08.01.14 at 9:47 am

# 80 POSITIVE tokens of value on 08.01.14 at 12:32 am

Yes, what you wrote is what many of us have been saying on this blog for years.

Bank lending is essentially a skim operation, whereby chartered banks enjoy the legal privilege to take a portion of earned wealth from society without actually earning it.

Essentially, banks literally manufacture their own profits simply by loaning out unearned currency which they create (collectively, via the prime liquidity pump known as the central bank) out of thin air.

Here is a very simplified money creation path:
• Central bank creates reserves (thin air money)
• Bank A uses reserves to make a loan
• Some of that loaned money is deposited into an account at Bank B
• Bank B can use that money as reserves to loan out
• Some of THAT money is deposited in an account at Bank C
• and so on

Therefore, no individual bank actually lent out money it did not have in the form of bank deposits. Yet the system as a whole was able to ‘pyramid’ off of money created out of thin air by the central bank, primarily to buy government debt.

There must always be more debt/currency in the system than actual wealth because the currency comes first and then society creates the wealth, through actual production, to turn that currency into real money/wealth.

As the supply of debt/currency grows, the growth rate of the currency must increase forever because the new currency is needed to service the ever expanding old debts. The result is an ever faster receding horizon of debt repayment. The paradox is, the more “money” we have, the farther away the debt repayment horizon becomes.

In other words, the debt can NEVER be paid off. The only solution under such a maniacal system is default.

We can default in one of three ways:
• failure to pay (either all or in part)
• debt forgiveness
• inflation

The money masters prefer inflation. After all inflation IS the fundamental driver of the entire system. Remember, it’s the source of bank profits. When central banks claim that inflation is too low they are not commenting on consumer prices not rising fast enough. That’s just a symptom. The real problem, in their eyes, is that money/debt is not being created fast enough to keep the entire ponzi system functioning smoothly.

This is why they loathe deflation. Deflation is death to them. Price deflation is good for the people because it makes things more affordable, but in our system price deflation is symptom of monetary deflation. Remember, in 2002 Bernanke declared they must not let deflation happen. He was not talking about cheaper TVs. He was talking about the money supply.

One more thing. I’ve heard it said many times that the current US national debt is 70% accumulated interest. I believe it was Thomas Jefferson who warned that if banks were allowed to control the money supply, they would one day take over the entire country. Prescient?

#101 Keith in Calgary on 08.01.14 at 11:14 am

HISTORICAL PRECEDENT………..

I was a banker in the early 1980’s here in Calgary…………the government came out with a home owners assistance program that subsidized the differential between market interest rates and what some people could really afford, in order to keep them in thier homes and stem the foreclosures.

We’re not quite there yet…………….but government has done stupid things with your money before, and they will again. Count on it.

#102 Bottoms_Up on 08.01.14 at 11:17 am

#100 Inglorious Investor on 08.01.14 at 9:47 am
————————————————-
Central banks (privately owned entities backed by private families and royalty) all meet regularly at the Bank for International Settlements, that effectively is the “Godfather” of the ‘world’ banking system, and this is who really controls inflation/money supply and thus ‘us’:

http://en.wikipedia.org/wiki/Bank_for_International_Settlements

http://www.bis.org/

#103 Bottoms_Up on 08.01.14 at 11:23 am

#68 Mark on 07.31.14 at 10:50 pm
————————————–
Of course if FSBO are overpriced, they won’t get action. If underpriced, they should have used an agent to help them price it right. It is a fact that many agents will avoid showing their clients FSBO houses, they are effectively trying to boycott them. A house in a good location should sell quickly if priced right. If you’re a FSBO and having problems selling of course you should consider using an agent, why limit your potential buyer pool???

#104 Hmmm... on 08.01.14 at 11:27 am

#27 Effluence greasy on 07.31.14 at 6:51 pm
#15 hmmm… — “The case of real estate following US trend is not going to happen. Even if it did, its a 5 year hiatus… No Biggie…”

Ahh, critical thinking. In the US, most mortgages were fixed for 30 years, with no opportunity for the bank to reëxamine borrowers’ balance sheets and cash flow as long as the borrowers were current. In Canada, a “5 year hiatus” would allow lenders to give the hairy eyeball to almost every Canadian borrower, and request an equity infusion, a HELOC payoff, or that the borrower find another lender for his next five year term. Biggie.
————————————————————–

What I mentioned as 5 year Hiatus , has nothing to do with mortgages. I was just saying that in around 5 years, the real estate has re-bounded even after the worst crash. So for long term needs, its no biggie.

#105 Godth on 08.01.14 at 11:27 am

#100 Inglorious Investor

• Bank A uses reserves to make a loan
• Some of that loaned money is deposited into an account at Bank B
• Bank B can use that money as reserves to loan out
• Some of THAT money is deposited in an account at Bank C
• and so on

Not quite. Loans create deposits. Endogenous money creation – Modern monetary theory (MMT)

#72 Inglorious Investor

That about sums it up. We need a couple more planets.

#106 Doug in London on 08.01.14 at 11:33 am

@Italians love real estate, post #89:
I don’t know when GTA real estate will correct either, it seems to keep on defying gravity. Recently Daniel Radcliffe has been in Toronto acting in a movie. Maybe he remembers his levitation spells from his days as Harry Potter!
So will GTA real ever correct? I don’t know, but if we do something really radical and take a lesson from history we remember it took a hit back in the early 1990s, and should consider that it could happen again.

#107 Bottoms_Up on 08.01.14 at 11:34 am

#66 Inglorious Investor on 07.31.14 at 10:48 pm
————————————————
Case in point, 20 yrs ago one could purchase a home and reasonably expect to pay it off in 15-20yrs. People are buying homes today that will take twice as long to pay off. That is decades of lost money circulation through our economy (but great for banks’ balance sheets). Non-essential asset prices will likely stagnate for a very long time (cottages, boats etc.).

#108 Mister Obvious on 08.01.14 at 11:39 am

#81 POSITIVE tokens of value

You forgot to mention how Jesus drove the money changers from his temple.

#109 Nomad on 08.01.14 at 11:50 am

Atrium, Genworth and Home Capital paint a real nice erotic picture of Canadian real-estate business.

How curious.
Bough more Genworth today as it fell 2% with the market. BMO upgraded them to outperform 2 days ago.
Always have your shopping list ready.

Though I bet in the US mortage insurers and lenders were painting a nice picture as well, right before they crashed and soiled the world.

#110 Detalumis on 08.01.14 at 11:57 am

#40 Linda, in Ontario if you didn’t work a day in your life so receive zero in CPP you will still get $1,400 a month in OAS, GIS and Gains. You also would get the Ontario Trillium Benefit and free drugs and health care. So a poor senior is better off in Canada. We also don’t require you to sell off your assets to pay for LTC. In my town the senior geared to income housing is beside million dollar condos with great amenities and you would pay about $420 to live there.

The “greater” fools are the people who worked their entire life for under 40K and have no more income in retirement to show for it to people who did nothing.

#111 Hmmm... on 08.01.14 at 12:01 pm

#107 Bottoms_Up on 08.01.14 at 11:34 am
Case in point, 20 yrs ago one could purchase a home and reasonably expect to pay it off in 15-20yrs. People are buying homes today that will take twice as long to pay off. That is decades of lost money circulation through our economy (but great for banks’ balance sheets). Non-essential asset prices will likely stagnate for a very long time (cottages, boats etc.).

————————————————————–

Not true in cases, at-least in the circle I live. With the ultra low mortgage costs, many are paying the mortgage faster. While the stats might not show that as many people turn around and use their equity for investments to tax deduct their mortgage interest( or for other investments).

The circle around me knows that this low interest won’t last, and they use pre-payments as much as they can to reduce the principle. Most of us have paid off around 50 to 60% of the principle within our first 5 year renewal.

Bad strategy to shovel cash into repaying a 3% debt when the same cash can earn 7-8% in a balanced portfolio. Grow your money, then dump it against the mortgage at renewal. You will be debt-free faster. — Garth

#112 Smoking Man on 08.01.14 at 12:07 pm

#108 Mister Obvious on 08.01.14 at 11:39 am#81 POSITIVE tokens of value

You forgot to mention how Jesus drove the money changers from his temple.
…………

Jesus was nailed to a cross, happens to any one at any time who challenges the machine and has a big influencal following..

He should have invested in some weapons…. That’s where he screwed up..

Law=The biggest gun…

#113 Effluence greasy on 08.01.14 at 12:27 pm

#104 Hmmm… — “What I mentioned as 5 year Hiatus , has nothing to do with mortgages. I was just saying that in around 5 years, the real estate has re-bounded even after the worst crash. So for long term needs, its no biggie.”

If I had a nickel for every real estate owner who bought for the long term but got his nuts crushed when he had to sell at a bad time because of a death, divorce, job loss or relocation, because rates were high and credit tight at mortgage renewal time, or who lived in a city or country where real estate didn’t bounce back within five years, I’d be a lot richer.

#114 Inglorious Investor on 08.01.14 at 12:42 pm

Godth on 08.01.14 at 11:27 am

“Loans create deposits. Endogenous money creation – Modern monetary theory (MMT)”

Yeah, that’s essentially what I said. In trying to be brief perhaps I didn’t explain it properly.

Essentially, a loan from one bank becomes a deposit at another bank. But the banking system essentially operates like one big money pyramiding machine.

This is how individual commercial banks can lend money that was created out of thin air (by the incestuous government-central bank-primary dealer complex) without actually lending out money they themselves don’t have. This satisfies the “loans from deposits” folks. Or perhaps fools them is more accurate. As was stated, it’s all IOUs.

MMT (from what I read) is essentially correct, but I don’t subscribe to how MMT downplays currency value destruction via inflation. MMT proponents keep claiming a government that issues its own floating currency can never go bankrupt because it can issue all the money it wants. This is true, but they seem to forget the risk of bankrupting the people via inflation. MMT seems to forget that there is no free lunch. Currency values ultimately depend on real wealth.

#115 Hmmm... on 08.01.14 at 1:17 pm

#113 Effluence greasy on 08.01.14 at 12:27 pm

So according to you, buying a Home is NO NO…. ok got it.

#116 Hmmm... on 08.01.14 at 1:20 pm

Bad strategy to shovel cash into repaying a 3% debt when the same cash can earn 7-8% in a balanced portfolio. Grow your money, then dump it against the mortgage at renewal. You will be debt-free faster. — Garth
————————————————————–

Agree…
Have been thinking about it and also trying the balance family’s peace of mind with some equity…
Will do it sooner…

#117 CJ on 08.01.14 at 1:36 pm

Here you go, Mark.

30 consecutive months of price increases in Calgary. But, hey, go ahead and believe whatever you want to believe. I stick with facts.

http://www.calgaryherald.com/touch/story.html?id=10082773&utm_source=dlvr.it&utm_medium=twitter

#118 CJ on 08.01.14 at 1:42 pm

More reading for Mark:

http://www.calgary.ca/_layouts/cocis/DirectDownload.aspx?target=http%3a%2f%2fwww.calgary.ca%2fCA%2ffs%2fDocuments%2fCorporate-Economics%2fHousing-Review%2fHousing-Review-2014-06.pdf&noredirect=1&sf=1

#119 Suede on 08.01.14 at 1:43 pm

Insurance trade working out well.

Portfolio down 1%
Trade up 110% in a couple weeks.

https://ca.finance.yahoo.com/q?s=VIX141022C00014000

**do not try this at home**

#120 Inglorious Investor on 08.01.14 at 2:08 pm

Rational Optimist on 08.01.14 at 9:43 am

Governments should stop meddling in markets–and our lives. Period. All that they should do is establish the rules/laws, keep them stable, and then rigorously and fairly enforce them.

Interventionist policies corrupt and distort markets that are able to operate just fine on their own, thank you. Booms and busts are natural. “Seven bountiful years followed by seven lean years.” Busts are necessary to cleanse the system from time to time and allow the economy to move forward and evolve.

Governments should not help anybody except those who can’t (and I mean CAN’T, not WON’T) help themselves. They should not borrow or spend tax payer money to help people keep their homes, or their cars, or their jobs. This ultimately misallocates and wastes precious capital.

Not to mention the moral hazard. Do you want to be treated like an adult or like a child? Surrender the responsibility that you have for yourself and your family to your government and be prepared to surrender your freedom as well.

We are becoming a society of infants. The only reason governments would bail out homeowners is because 80 years of socialist policies have established the welfare state wherein everyone expects to be suckled on the government teat. (And I’m not referring to socialized insurance schemes, such as Medicare, wherein we all pay so we all can benefit.)

So it’s a political problem, not an economic one. But if people had no such idiotic expectations, those who lose their homes will simply go rent; and life will go on. No one to blame but themselves and providence.

#121 Josh Renning on 08.01.14 at 2:58 pm

Housing prices bought with debt that increased 150% 200% in the last 20 years or so destroyed the middle class and especially their children’s future.

An extra $300,000 mortgage and house is costing them big time even with higher housing prices.

Add all mortgage payments, utilities, insurance, H.S.T., property taxes, land transfer taxes, repairs, maintenance, renovations, real estate commissions, lawyer fees etc. plus 5.00% annual compound interest or returns and they have lost big time.

It is a total of about $3,000,000 by retirement in RRSP’s, investments and TFSA’s in recent years.

This is why people in retirement have very little to no savings, investments and consequently low to moderate incomes with the senior, retirement segment of Canada’s population piling on more debt never seen before.

Even if Canadian housing prices stay elevated, they are still poorer in retirement and will have in this case anywhere from $130,000 to $150,000 less income as well.

So the house, condo buyer has already failed financially even if Canadian government gives them crumbs to make a slice of bread like they did in the U.S.

#122 jrochest on 08.01.14 at 3:37 pm

Traveling through Alberta or watching a Calgary news segment is like traveling back through time: lots of ads for No Money Down/Cashback mortgages. I’m not surprised that the debt ratios are up.

Also, Garth, what do you make of this article? The idea that income-linked rents should rise to meet the costs of debt-linked ownership sounds insane to me…

http://www.theglobeandmail.com/report-on-business/economy/housing/vancouver-rents-seen-rising-faster-than-home-prices/article19871202/

#123 dosouth on 08.01.14 at 3:49 pm

On another note –

Boomers out west selling recreation properties…why?

#124 fixie guy on 08.01.14 at 4:04 pm

@#120 Inglorious Investor: Excellent plan. Tell you what, let’s stop the overwhelming lion’s share of market abuse by ending corporate welfare – which institutions like the CMHC exemplify – then attack the problem of nickel and dime welfare queens. Get that rolling and I’ll sign up.

#125 stop lying on 08.01.14 at 4:08 pm

You may want to update the 5 year bond yield picture from the other day… just sayin

#126 Entrepreneur on 08.01.14 at 4:18 pm

#120 Inglorious Investor…”Government should stop meddling with markets-and our lives. Period. All they should do is establish the rules/laws, keep them stable…”

Right on!!!

So, why are our government meddling with our lives? Is it to keep up the ponzi system or is it something bigger? Is it to keep everyone calm, on the quiet side?
Could our resources have anything to do with it?

Been taught to protect our resources but our politicians are so eager to give away raw. What about the people that live here? Should we not set business in Canada so people can have jobs?

In our local paper someone wrote in “So the BC Liberal Government have just inked a deal with China to bring in foreign workers to build the new BC liquefied natural gas industry….This seems to be a great deal for offshore investors who will control our resources and, now their workforce – The HD coal mining mode. Even many of entry level jobs are being filled in BC, by offshore skills. 70,000 at last count…Continuing to support shipping out raw logs, raw gas, raw bitumen and BC jobs.

I think Abraham Lincoln would be rolling in his grave.

#127 Maggie the Tech Writer on 08.01.14 at 5:13 pm

Abraham Lincoln? Why not Virginia Woolf?