Missing F

CROOKED HOUSES modified

Crooked semis listed on Shaw Street in Toronto: $688,000 each

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Ever wonder why the federal finance minister is such a wuss?

“We do not see the need for major changes at this time,” Joe Owe told a realtors’ convention recently “We will continue to monitor the market and make adjustments, if needed, although none are being actively considered right now.”

And, hey, how could there possibly be a problem? Average single-home prices in 416 and YVR blew through $1 million some time ago, new mortgage debt is piling up at five times the inflation rate, real estate values have detached from the economy, lenders are sucking in buyers with 1.99% quick-reset loans, the subprime market is bloating at an historic rate and buying a median-priced house in Vancouver (even at the cheapest-ever rates) eats 65% of family income.

What would F think?

Two years ago, before his untimely demise, the elfin deity was issuing warnings like this: “My expectation is that banks will engage in prudent lending — not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.” As one political staffer put it (as reported by the Financial Post):

“Flaherty spoke to bank CEOs all the time. I would think he had moral-suasion-type conversations with them on many occasions. And he also intervened in the market dramatically four times. He felt quite strongly that, as finance minister, he did have a fair bit of moral suasion at his disposal that he could use. Much of the time that was done quietly behind closed doors. But it was effective.”

OTTAWA- For national stories- Federal Finance Minister, Jim Flaherty, holds a news briefing for media held in the traditional "lock-up" prior to releasing the 2007 budget.  -Photo by Wayne Cuddington, Ottawa Citizen, CanWest News.  Assign#-82676--Federal Budget 2007

In stark contrast, Oliver says this: “Our long-term objective is to gradually reduce the government’s involvement in the residential mortgages.” And that means, ultimately, privatizing Canada Housing and Mortgage Corporation – if Joe and his party survive the coming federal election.

Now why such a dramatic difference between F and his heir, even as it becomes more evident the housing market is a towering, hulking pillar of risk that could collapse on the Canadian middle class as it did in the States? Simple. Letting people pickle themselves in debt, succumb to their hormones, spend far beyond their means and pull economic activity from the future is a cheap, quick and desperate way to try and rescue an economy in trouble by a government struggling in the polls.

And they’re still at it. This week CMHC made a bombshell announcement which – more than the bank rate cut – is designed to throw Lava Hot Scorpion BBQ Sauce all over the real estate market, especially in YVR. Simply put, CMHC will now count as “income” 100% of the money you received, or might possibly get, from a tenant renting your furnace room or garden shed. Until now only 50% of rental income was added to a mortgage applicant’s total income, which is then used to calculate how much debt can be carried.

What does this mean? Lots, actually.

A couple earning $100,000 between them with $50,000 to put down can qualify for a mortgage of about $420,000. But add in $12,000 a year from a basement suite (based on a rental agreement, not actual cash), and – presto – they qualify for a mortgage of $520,000. That’s seventy thousand more than using only half the potential rental income.

The mortgage guys are eatin’ it up. “The ability to utilize 100% of the rental income to qualify for the mortgage…can certainly make the difference for many homeowners and may move a larger number of homebuyers from condo purchases to a single family home with a mortgage helper,” a broker from Vancouver tells the trade mag Canadian Mortgage Trends – which itself gushes, “CMHC deserves applause for trying to boost the stock of affordable rentals and allowing young homebuyers an alternative to condo living.”

Yes, excellent social policy. Just when prices inflate the most, rates descend the furthest and debt hits new, epic levels, the feds encourage more borrowing and over-spending, making it all worse. Moreover, this throws the door wide open to abuse. The definition of a ‘legal suite’ is hazy, and income from new units (with no rental history) will be accepted at ‘market rates.’

And let’s remember the context in which all of this is happening. Oil’s crashed. The economy has stalled. Jobs are being scrubbed. And the central bank’s rate drop is the ultimate admission of trouble. Is this really the time you want your government loosening up mortgage regs to allow more debt, higher prices and enhanced risk?

“The Vancouver and Toronto housing markets appear to be enjoying a revival of late, in contrast to most other markets in Canada,” economist David Madani warns. “But with labour market conditions set to deteriorate this year and market bond yields expected to climb over the longer-term, they won’t defy gravity for much longer.” The guy is now forecasting a 30% price plop for these two Bubble Republics.

That equals the US crash. Ouch. By the way, homeownership in the States has plunged to 1967 levels. Some people learn lessons. Some people just sell out.

JOE modified

Strong & free

FLATBED modified

Sit down. Somewhere in the world it’s sundown. So pour a scotch. This is thick.

While everything will turn out okay in the long run (I have no doubt), it now seems certain we’re entering a period of confusion (unless you read this pathetic blog daily) and volatility. As you know, the Chinese stock market laid another egg, despite the fact they’ve done everything there but shoot people who are selling. That robbed the commodity market for technical reasons (money being pulled out to cover margin loans) and economic ones (a slower China means less demand for copper and oil).

  • So, on Monday crude prices cratered a little more, and at $47 it’s likely on the way to a new cyclical low. The bottom was $45 back in January, and one year ago a barrel was worth $101. Canadian crude is way sicker – at the $30 mark. The normal discount for the oil sands stuff has widened dramatically, which is about the worst news possible for Alberta.
  • The Canadian dollar is sitting at 76 cents US, on its way to 74, analysts say. This is because of oil, natch, but also because while there’s a 50% chance our central bank will cut rates again, there’s a 100% chance the US will raise them. Goodbye, loonie.
  • Even gold can’t catch a break, which matters because mining and refining is a giant industry in Canada. The latest forecast for the yellow stuff is down to just $800 an ounce – a 27% dive from the current level, and 58% lower than four years ago.
  • And then there’s the Dipper factor. Yikes. A Globe/Nanos poll just published found 47% of people think a federal NDP government would be positive for the economy as opposed to 31% for the Cons and 41% for the Libs. But while citizens of the Socialist Republic of Canuckistan might embrace Muclair, just like the collective known as Alberta did with Rachel Notley, currency markets want none of it. Down she goes again
  • All this has the Toronto stock market bleeding. The composite index is barely above 14,000 now, giving investors a 6.75% loss year/year and a decline of 2.7% so far in 2015. (In contrast, the S&P is up 6.6% in the last 12 months.) Hard hit, as you might imagine, are energy and miners, with even financials slagging. Why? Read the four bullet points above. Commodities. Currency. Rates. Regime change.
  • Jobs numbers are due out after the coming long weekend, and are expected to be ugly. Canada lost 6,400 positions in the last period, and since then the economy has continued to weaken. We’ve had five months of negative growth and the mother of all trade deficits. So it’s a fair bet the unemployment rate of 6.8% will be heading higher now that oil is testing its recent lows.

Now every time I chronicle what’s happening to our economy, some redneck dork from Airdrie calls me a traitor. But this is the world in which Canadians find themselves, so it’s wise to adapt. As I’ve told you, a profound home country bias has persuaded 70% of all investors to keep 100% of their assets in maple – which is also the overwhelming bias of most bank-owned brokerages (someday I’ll tell you why). What a stinker that’s turned out to be.

Of course, investors with a nicely-diversified (40% safe stuff, 60% growth stuff) and globally-diversified portfolio (15-20% Canadian, the rest US and international) need not fret a lot. Sure, monthly valuations will bounce around, but you have exposure to lot of markets that are inflating, protection from rising rates and even a special anti-NDP secret sauce.

But that’s a minority of us. Most people have most of their net worth in a single asset, sadly. With a soggy labour market, a pop in inflation thanks to a tanking dollar, and the certainty of rising long-term fixed mortgage rates, the next year or three will not be the sunshine and ponies they expected.

There you go. Personally I think we should have stayed with puppies.