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Subprime contagion about to infect Canada: Turner

 
John Morrissy
Canwest News Service

Liberal Member of Parliament Garth Turner stands to speak in the House of Commons on Parliament Hill in Ottawa February 7, 2007.
CREDIT: Reuters
Liberal Member of Parliament Garth Turner stands to speak in the House of Commons on Parliament Hill in Ottawa February 7, 2007.

OTTAWA – With the subprime contagion spreading around the world, Canadians who hoped their homes would be immune from the carnage are wrong.

The disease is here and coming soon to your neighbourhood, says financial author and MP Garth Turner.

The effects of the U.S.-induced mortgage crisis were everywhere on Thursday – in the crumbling U.S. dollar, in Carlyle Capital’s $16-billion mortgage writedown in Amsterdam, in mounting housing foreclosures in the U.S. and in crashing stock markets in Europe and Asia.

“Absolutely, without a doubt, that contagion is spreading to the Canadian real estate market,” said Turner, the author of a new book on the subject titled Greater Fool, the Troubled Future of Real Estate.

Within 18 to 24 months, Canadian homeowners could see the value of their homes fall by 10 to 15 per cent, Turner warned, saying early signs of a deteriorating real estate market are “all around us.”

Sales of existing homes fell off the cliff in January tumbling six per cent in January alone – or 72 per cent on an annualized basis. At the same time the number of listings nationwide shot up 11 per cent, Turner said, quoting the Canadian Real Estate Association. And prices are starting to fall, in such once hot markets as Calgary and Edmonton.

At the same time, the cost and availability of mortgages is squeezing the market, as Canadians banks are no longer discounting the posted rate, and as companies like Xceed Mortgage Corp. and MoneyConnect Inc., which lend to riskier borrowers, sharply pare back operations.

A big part of the problem, Turner said, is that shaky lending practices that coloured the U.S subprime market are now creeping into Canada.

The availability of that easy money in the U.S. drove house prices to unrealistic levels, which ultimately drove that market into its precipitous retreat.

Both factors are at play in Canada, where prices have risen to lofty levels and have only been supported lately by one thing: the 40-year mortgage, which in two years has come to represent more almost half of new borrowings in Canada, which require very small down payments and which add sharply to borrowers total debt repayments.

“If the U.S. crisis was accelerated by people getting mortgages to let them buy houses they couldn’t really afford, we’re doing the same thing here,” Turner said.

While he is not predicting the 30-per-cent declines that have become common in such hard hit areas as Florida and California, the danger to Canadians is magnified by our inclination to tie up so much of our money in the homes we own.

“I think this is a giant threat,” said Turner, referring to the 80 per cent of family net worth that Canadians put into real estate.

And adding to the threat of an imminent price correction is our aging population, so many of whom will be trying in years ahead to unload the same four-bedroom three-bathroom suburban homes that were the fashion of their time.

“People are gambling that for some reason Canada will be immune to what’s happening to our giant partner to the south and what is happening in other markets, like Britain, where real estate values are falling,” Turner said.

As the declines that began in Canada in January gather momentum, “a lot of homeowners who bought in the last year will find the value of their homes falling under the value of their mortgages,” Turner said.

“We are weeks, maybe more likely only a few months from that.”

Turner’s advice to homebuyers is to avoid 40-year mortgages and for existing homeowners to stop basing their financial decisions on the notion that real estate prices will continually climb.

” I think people should get used to two or three or four years of a flatlining real estate market, at best,” Turner said.

© Canwest News Service 2008

3 comments ↓

#1 SMWhite on 03.14.08 at 12:49 pm

Well its finally nice to see that somebody has wiped the “dirt” off their eyes and started to talk about the upcoming storm on the horizon. In the Financial Post today real estate agents in Toronto are blaming the bad real estate showings in January on all the snow, how silly is that?

Between the addition of 35 – 40 year amortization rates and discount mortgage(Yes we do have sub-prime lending in Canada) brokers taking over Canada.

CMHC, CREA and realtors alike have been pumping the market full of hot air. David Dodge warned Canadians
(http://www.theglobeandmail.com/servlet/story/LAC.20070926.RDODGE26/TPStory/Business)

last fall that we were not immune and nobody listened. Meanwhile the bank of Canada is doing everything in its power to keep our dollar down and in check with the US greenback, lowing rates and just adding fuel to the rather large fire that is about to ensue.

Inflation is here and there are not enough, ipods, LCD televisions and auto financing at 0.9% to make up the difference in CPI or GDP numbers. I’ve done a lot of research on the effects of inflation in the 70’s trying to figure out where the markets would go after the cheap money policies of the US and Canadian governments and why oil and gold shot up in price, and what happened because of it. Didn’t we get extreme interest rate pressure in the early 80’s? Another great point is what happened to the Japanese in the late 80’s and during the decade of the 90’s. I believe that the Anglo-Saxon countries are in for a similar ride…

Two excellent reads I recommend is “Irrational Exuberance” by Robert J. Shiller, Yale Professor as well as “Crash Proof” from Peter Schiff, whom runs Euro Pacifc Capitial.

The conservative governments policy has been too closely inline with the liberal policy and not given the Liberal party of Canada anything to really use against Stephen Harper’s government.

This issue is a sleeping giant… Supply will soon out pace demand as there are minimal families that can afford the average home price.

Look at the Bush government do everything they can to interfere(and make worse) the situation. I just hope that as Canadians we allow the free markets to work their magic and reward those Canadians that decided to use common sense instead of joining the masses in this speculative real estate nightmare.

#2 Robert on 03.14.08 at 1:42 pm

While I commend you for dropping last years synopsis that rising interest rates will do the damage I see very little on how inflation that I noted last year would be the main factor.
Inflation is still low compared to the rise in the cost of living. Big screens might be dirt cheap but dirt to grow corn for cars is getting in short supply.
The credit crunch is really all about consumers ability to keep borrowing and spending which as I noted last September had reached the limit then.
Canada is not insulated as Cdn consumers are just as broke as US consumers when the sub-prime melt started. Europe will be a little behind sharing the pain just as we are slightly behind the US. The strong Euro will insulate the just as broke European consumer but not for long as the global economy continues to contract.

Here`s my suggestion, again.

http://poppavox.blogspot.com/
.

#3 TS on 03.14.08 at 5:57 pm

Should we pay for bankers’ folly?

MADELAINE DROHAN, Globe and Mail Update

March 13, 2008

http://tinyurl.com/34lqru

Tough times ahead that is broader and deeper than just the RE marketplace.