Entries from May 2008 ↓

From boom to gloom

As published, May 30th, 2008

Leave it to Garth Turner to throw cold water on the notion Canada can achieve a soft real estate landing, when history and the slump south of the border show that is a rare feat indeed.

The personal-finance author-turned-Conservative-turned-Liberal MP for Halton, Ont., was one of the first to warn of the 1990s property flop – albeit several years too early. Now he thinks Canada is facing precisely the same mix of elements that burst the U.S. real estate bubble.

“We are in a monumental denial phase,” says Mr. Turner, who’s book Greater Fool – The Troubled Future of Real Estate was published in March.

“My theses is now reality, we are starting to see substantial sales declines that were ruled out only six months ago as impossible,” he says. “But now people are saying prices aren’t moving down. They will.”

The figures do show a noticeable retreat in the Canadian housing market this year.

Nationally, resales fell 6.1% year-over-year in April, while price gains have slowed to 4% from around 10% in each of the prior five years. Calgary saw sales drop 31.2% over the year, Edmonton, 25.4% and Victoria 14.2%. Calgary and Edmonton also saw prices dips.

According to Urbanation, a condo tracking firm, the condo market has defied the trend and remained fairly steady through the first quarter, even as a several new buildings hit the market.

Mr. Turner says housing markets blow themselves out when prices rise beyond the reach of average buyers. This is what happened in the United States.

“To keep the party going, the mortgage industry, the credit industry, backed by the banks, decided to lower the bar to ownership,” he says. The subprime industry was born and home buyers with scant credit history and skimpy income were drawn into the market, enticed by no-money-down mortgages and interest rates that started out low, then ballooned to unsupportable levels.

Similarly, in Canada, prices have risen beyond the reach of the average buyer, Mr. Turner argues.

“What has been the response?” he asks. “The 40-year mortgage.”

Economists estimate amortizations longer than 25 years now constitute about 70% of all insured mortgage applications and about half of that amount is for the 40-year product.

Mr. Turner reserves his starkest warnings for sprawling suburbs mushrooming around Canada’s major cities. He says many new home developments have mortgage representatives onsite offering the same kind of no-money-down deals that dragged down the U.S. market. Buyers just have to come up with 1.5% of the house value to cover closing costs.

These will become the “particle board slums of the future,” Mr. Turner says, as smaller families and surging energy costs cause the suburbs to fall out of favour.

But the Toronto condo market is heading for trouble too, as overbuilding swamps demand, he says.

“We are classically at the end of a bull market,” Mr. Turner says.

Financial Post

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Into the cesspool

On a day when the Canadian Imperial Bank of Commerce announced it dumped $1.1 billion in shareholders’ money on crap securities based on worthless mortgages, I scooped the above chart from Mish’s Global Economic Trend Analysis. Yeah, I know it’s just a mess of numbers, but they have a stunning story to tell.

This is a chart depicting the financial performance of a pool of mortgages worth almost half a billion dollars, which is in serious trouble. The securitized mortgage-backed security, if you can believe it, is full of loans all rated AAA just months ago. It’s one year old, and in the course of that year, it’s lost $16 million. But that’s just a small early indication of future misery.

Of greater importance – 22% of the mortgages are in foreclosure; 31% are delinquent by 60 days or more; and a further 27% are delinquent by 90 days or more. As Mish points out, this is why Standard & Poors Rating Services just pulled the plug on 1,326 Alt-A residential mortgage-backed securities, slashing their ratings. This affects a stunning $34 billion in residential home loans.

It’s this kind of garbage that ‘smart’ bankers around the world, including on Bay Street, bought into. So, shame on them. Shame on the lenders and brokers who extended credit to people unfit to have it. Shame on the public greed that moved buyers to snap up assets they could not afford. Shame on those who sold them. Shame on the rating agencies who blessed this junk with triple-A ratings that led unwary investors on into the cesspool.

This, by the way, is why the world as we know it is unravelling. The one little half-billion-dollar fund gives a small example of the debt and credit crisis into whose jaws we have but started to descend.