Carneynomics

carneynomica

If Mark Carney doesn’t want to be Alan Greenspan, the dude knows what to do.

That was the word this week from some notables, including the New York-based chief economist for Societe Generale, Stephen Gallagher. The reason, adds C.D.Howe Institute economist and former Bank of Canada advisor David Laidler, is simple – a puffy housing bubble.

Of course, perfect hindsight tells us it was rock-bottom mortgage rates following Nine Eleven that led more or less directly to the American housing love-in. Then Fed boss Alan Greenspan was trying to do what Carney is now – keep recession at bay, goose demand and stoke the fires of inflation. Of course, the US real estate market overheated, spewed lava over the entire world, incinerating trillions of dollars and fried the American middle class.

The dangers of Carneynomics have been pointed out here often. And this blog has presented all the evidence little central bankers should need to know the people are smitten once again. Multiple offers. Condo madness. Surging prices and sales. No-condition offers. Two per cent mortgages. 5/35 euphoria. Vancouver princesses. The works.

Carney is the only central banker on the planet with the stones (or the lack of them) to tell people how long interest rates will stay in the dirt. That has fuelled a buying boom as folks scramble to purchase homes they could never afford otherwise. The fact they’ll probably not afford them in the future seems moot. The bubble grows.

So, here’s the news: Economist Gallagher estimates Carney has no choice but to raise rates in 2010. By 1.25%.

What does that mean?

Let’s take the average Toronto home now selling at its Carneynomics price of $450,000. With a 5% down payment ($22,500), plus mortgage insurance, the debt would be $437,500. At the current VRM rate of 2.25%, it would take an income of $68,500 to carry the monthly of $1,905. At a VRM of 3.5%, the income needed jumps to $79,200, as the payment rises $300 a month.

With a 5-year closed loan now at 5.59%, the income needed to carry the monthly of $2,700 is $97,200, and with a five-year mortgage at 6.84%, the required income rises to $108,765 as the payment increases, also by $300.

That may be worrisome to some buyers on the edge, but not a disaster to most. However, that’s just next year’s increase. You should assume there’ll be another 1% a year added to the prime for the next two or three, which will get us back to a ‘normal’ rate of about 8% or so by 2014 – renewal time. At 8%, that same house will need a family income of $122,400 with monthly payments of $3,400. Plus taxes and utilities, of course.

This is the danger of keeping interest rates too low for too long. People who don’t have enough money tend to buy things only because financing costs are so damn cheap.  So, somebody snapping the average T.O. home in 2009 with an income of $70,000 or so might find in 2014 he or she needs to be making $120,000. The odds of that happening given what lies ahead – higher rates, higher taxes, government cutbacks, persistent unemployment, the HST – are nil.

But, that’s not the biggest concern. Instead, it’s what relentlessly rising interest rates over the course of a few years will do to the real estate market. Obviously given the above, as rates go up, fewer people can afford to buy homes, eating into demand. This will happen (as I have explained a tiresome number of times) as the Boomers start turning 65 in 2011 and think about cashing in their chips so they can take up bowling and early-bird dinners, as well as buy new electric wheelchairs, oxygen canisters and Rolling Stones downloads. In other words, the demand-supply overload we have experienced will turn into a supply-demand tidal wave.

So, what happens if the real estate market tweaks down a little in 2010? Say, 10%?

Well, the average $450,000 Toronto house bought with 5% down ($22,500) would then be worth just $405,000. That’s negative equity, since the mortgage on the place would be $437,500 – or $30,000 more than the property was actually worth. Worse, the poor owner would have also coughed up $12,000 for mortgage insurance plus $10,200 for land transfer tax, meaning at least $46,500 went into the deal. The true loss in that case – with just a 10% market correction – would be well over $75,000, or 17% of the asset value. Isn’t leverage fun?

And if the equityless owner decided not to feed a mortgage (even at its low emergency rate) bigger than the value of the house, and bailed, it gets worse. After real estate commission of 5%, a three-month mortgage penalty, and paying off the principal, the owner would need to cut a cheque for $58,750 to get out on closing day. Add the cash put into the deal, and the loss on this house is $105,300 – or 24% of its value.

This is how bubbles hurt average people.

carneysmall And why you’d swear a smart guy from Goldman Sachs would know that.

In the news: He does it again.

126 comments ↓

#1 Daystar on 12.07.09 at 8:27 pm

Sadly, Mark Carney does know this which leads one to ask a simple question. Who does Mark Carney really work for?

#2 ralph on 12.07.09 at 8:40 pm

Garth, I think he knows it……but since this is a family blog I’ll leave at that.

#3 greyhound on 12.07.09 at 8:46 pm

Here’s an arresting quote from Sprott Asset Management: “all five Canadian banks are levered at an average of 31:1…. This implies that if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out…”
Source: http://www.sprott.com/Docs/MarketsataGlance/11_09%20Dont%20Bank%20on%20the%20Banks.pdf

Part of the problem in RE south of the border is that US banks are reluctant to lend because their capital ratios are still impaired. Is that banking condition coming here? What effect would it have on housing prices if folks suddenly have a lot more trouble getting a mortgage loan?

#4 GregW., Oakville on 12.07.09 at 8:47 pm

Hi Garth, FYI artical, by William Sweet

(From Dec 2009, IEEE spectrum mag.)

What to Expect From the Copenhagen Climate Confab

Success or at least a perception of success may be critical, but how is success to be measured?

http://spectrum.ieee.org/energy/policy/what-to-expect-from-the-copenhagen-climate-confab

#5 ManfredSteyn on 12.07.09 at 8:48 pm

The Baby Boomers start turning 65 next year? I suppose the prescient ones will starting selling their detached suburban megaboxes fairly soon, but there will be a whack of older folks who will be hit hard by this.

Perhaps its no coincidence that the new Cadillac commercials seem to be targeted at younger adults. Could it be that Detroit automaker -for once- isn’t blindsided by a trend?

#6 Claudius Emeperor on 12.07.09 at 8:54 pm

Goldman Sachs.

#7 My_view on 12.07.09 at 9:01 pm

The “perfect storm forecast” is just that, a forecast. I have heard this tune before, the demise of the 0/40, x2 LTT, and yes cause of crazy Carney’s rates, it stays afloat. Time will tell, one thing for certain and I think most on here will agree is inflation is a commin and what is someone to do?

A 1.25% rate hike or 10% market correction is hardly a shower, let alone a storm. — Garth

#8 Concessionman on 12.07.09 at 9:08 pm

It’s starting..my dad, who hits 65 next year and has one of those McMansions in Caledon, said today “We’ll be putting the house up for sale in the spring and downsizing, just too big for our needs now that I’m retiring next year…”…more likely he like most took a beating on his retirement saving over the past year and is going to need that McMansion coin for retirement…..our pops are going to make it pop!

#9 David on 12.07.09 at 9:10 pm

Carney has done a pretty good job to date. I remember when he was appointed you and several on this blog really took some cheap shots.

If the little guy purchased a home and thinks interest rates will stay at their present rate had no business purchasing in the first plce. It never ceases to amaze me how some people feel they are saving people from themselves.

#10 JB on 12.07.09 at 9:17 pm

Great article Garth….just exactly WHAT is Carney trying to do? I look with horror at what is supposed to be an essential “roof over one’s head”, that Canadians need to live in, being run up in a circus-like no-holds-barred crapshoot. Thanks for a bright future Mark, with no money left over for the kids!

#11 Kurt on 12.07.09 at 9:18 pm

Daystar: Carney works for Steven Harper, regardless of all the noise about “arm’s length” and “independence.”

#12 Slice on 12.07.09 at 9:20 pm

Remember the movie Cape Fear? At the end, when a possessed Robert DeNiro is tied the the sinking houseboat, and as his head is about to go underwater, he starts chanting

“beazlebumblee-oo haha horhor yambadablodooerrgghhh?”

…and then his head goes under and all you hear is the rain .

It’ll be another two or three years and then you’ll start to hear this strange chanting outside…

#13 Mad Max on 12.07.09 at 9:45 pm

Dastar #1 asks “Who does Mark Carney really work for?”

Answer: New World Order

#14 unbalanced on 12.07.09 at 9:45 pm

Garth – Perfectly written in plain English ! Everybody reading this should show it to their kids who havent bought yet.

Keep up the great work, as I know alot of people appreciate it.

How do we order the new book? I WANT one before I go on holidays. I leave January 31.

Thanks again.

‘Money Road’ available here mid-January. — Garth

#15 dave99 on 12.07.09 at 9:46 pm

Everyone is expecting the BoC to stand pat tomorrow. I’m not convinced, and if I had one vote to cast I’d pick a 0.25% increase.

#16 Nostradamus jr. on 12.07.09 at 9:48 pm

Correct Garth…Carneynomics cannot support Toronto’s ridiculously extravagant high Real Estate prices.

…Toronto has no economy to support these high prices.

…At least Montreal can rely on its yearly Snow Removal Economy for its citizens.

…and Vancouver’s Real Estate prices will continue to rise because it is now the new Centre of the Earth…Finance, Trade, Culture and Leisure.

Nostradamus jr.

#17 T.O. Bubble Boy on 12.07.09 at 9:59 pm

So, if Alan Greenspan described the dot-com boom was “irrational exuberance”, and the housing bubble was “speculative excesses”, what will Carney’s phrase be for $500k 1-bdrm condos in Vancouver and $800k teardowns in Toronto?

Maybe he can be honest, and simply call the Canadian RE Bubble as the “Flaherty/Harper Economic plan”?

#18 eddy on 12.07.09 at 9:59 pm

i get the feeling that harper and carney are on a mission to crash the economy. harper, on tv in china referred to our hot real estate markets as examples of economic recovery, he really believes it, but that’s all he has.

first time buyers are essential to any real estate market and i think they are being used like sacrificial lambs. without them, the higher priced property drops and boomers watch equity disappear. i blame carney, dolt on e-guilty, and david miller equally for TOs bubble. who does Carney work for? the international money masters. So does Candaharper , that’s why we are in Afghanistan.

#19 Iain on 12.07.09 at 10:05 pm

Garth, you mention the ultra low interest rates but another critical factor in this State side mess is the no money down “miracle” you’ve frequently criticized here in Canada. If you’re buying a $400k home with 10% down you need $40k. Fudging your income, debts and expenses to a bank won’t get you far when you need $40k to come to the table. Right now, only 12.5% of loan modification in the States are getting approved because (drum roll) you actually need to furnish the lender with proof of income.

Something about a horse… a gate… closing the gate… and no horse.

#20 Cody on 12.07.09 at 10:12 pm

Thanks for the link, greyhound. I did not know how extensive the Canadian bank bailout was.

In any case, when the CMHC insures and subsequently purchases and securitizes new mortgages, our banks take on little risk, so a downturn in home prices will just mean higher taxes for the rest of us as defaults rise.

Garth, are you aware of any looming CRE problems here in Canada? If not, what else might cause our highly-levered banks to implode?

#21 Tony on 12.07.09 at 10:17 pm

I’ll be buying 30 year bonds just before the next Canadian unemployment report. My estimate is Ontario alone will shed 75,000 jobs for the month of December. The chances rates will rise in America and or Canada next year are zilch or zero.

#22 jmcanuck on 12.07.09 at 10:30 pm

So now after the “Climategate” stink up they pull this crap…the band is still playing but the ship is going down. What a bunch of hypocrites.

Copenhagen climate summit: 1,200 limos, 140 private planes and caviar wedges

http://www.telegraph.co.uk/earth/copenhagen-climate-change-confe/6736517/Copenhagen-climate-summit-1200-limos-140-private-planes-and-caviar-wedges.html

#23 BAD on 12.07.09 at 10:40 pm


GregW., Oakville on 12.07.09 at 8:47 pm wrote:

Hi Garth, FYI artical, by William Sweet

(From Dec 2009, IEEE spectrum mag.)

What to Expect From the Copenhagen Climate Confab

Ah, the Global Warming, Cooling, Climate Change…

I can ask “outrageous” questions like that because I’m not dependent upon government money for my livelihood. From the witch doctors of old to the elected officials today, scaring the bejesus out of the populace maintains their status.

The Fiction Of Climate Science

As ancient Romans would say:
Sub sole nihil novi est.

Well, I’m all for reducing pollution and emissions of toxic waste. However, this immense focus on carbon dioxide, which is actually needed for plant growth, may be a bit misplaced. Unless, of course, the main objective is to “scare the bejeseus” out of the populace (Climategate and some other comments – American Thinker: Understanding Climategate’s Hidden Decline).

Meanwhile:

Low interest rates fuel Metro Vancouver home sales in November

And Carney’s promised to keep’em low to prevent deflation and resume economic growth. Then he’ll fight the unintended side effects.
Let’s be thankful that he’s not a doctor. If he was then he would cure the disease all right, even if the cure’s side effects kill the patient.

#24 homeless on 12.07.09 at 10:45 pm

Why a person under water would sell his house and write $$$$$ cheque ? This assumption is only true if a person loses his job and no income to pay his mortgage but then why the heck he would write a hefty cheque when he can not even pay his monthly mortgage payment.
Garth, while you talk about average income versus RE price fundamentals, what about immigrants bringing cash money to buy homes in Canada.

#25 Confused on 12.07.09 at 10:59 pm

Wow – first Toronto now Vancouver; can’t wait for this to happen in Calgary…

http://www.theglobeandmail.com/news/national/british-columbia/in-vancouver-camping-out-for-condos-is-the-norm-once-more/article1392003/

Why won’t Carney get a brain and realize poor Calgarians like me are burning in this overheated housing market….oh, yeah that’s right he doesn’t cater to the needs of the poor!

#26 Kash is King on 12.07.09 at 11:03 pm

#10 Kurt, the Bank of Canada is owned by the “Crown”. That is the Crown Temple in the Statelet called the “City of London”. Vatican City is another example of such a Statelet. These are independent “countries” within other countries.
The City of London is obviously within London England (sorry, Area K, EU), but is ruled by a committee of 12-14 Banker board members. They are headed by “The Lord Mayor” who is appointed by the House of Rothschild. Roth-Schild is old German for Red-Shield btw.

So, it is The Lord Mayor who is ultimately Mr. Carney’s boss; certainly not whichever PM happens to be in office.

People have to learn to quit directing their frustrations at the PM. He is utterly powerless in matters financial.

If matters financial were “democratized”, I suppose we’d be able to elect the Banker committee of 12-14, and the Lord Mayor directly.

The truth shall set you free, but it will piss you off a little bit first.

#27 Dan in Victoria on 12.07.09 at 11:09 pm

Post #8 David. Maybe those people who purchased needed a little education. They are all not stupid, just uninformed/gulliable. I can tell you I wish I could have had access to the info on this blog when I was growing up. Do you take delight in anothers suffering? Even Alistair Sim learned.

#28 Psst, Garth... on 12.07.09 at 11:16 pm

You might want to register moneyroad.ca before someone else does.

whois moneyroad.ca
[Querying whois.cira.ca]
[whois.cira.ca]
Domain name: moneyroad.ca
Domain status: AVAIL

% WHOIS look-up made at 2009-12-08 04:04:30 (GMT)
%
% Use of CIRA’s WHOIS service is governed by the Terms of Use in its Legal
% Notice, available at http://www.cira.ca/legal-notice/?lang=en
%
% (c) 2007 Canadian Internet Registration Authority, (http://www.cira.ca/)

#29 jess on 12.07.09 at 11:35 pm

reposessed ski lifts
900k sell for 200k

http://www.idahostatesman.com/business/story/997491.html

#30 Michael Motorcycle on 12.07.09 at 11:37 pm

Book Title is Money Road? You should put ‘Twilight’ in-front of that, then you’d sell.

Seriously though, don’t like the title.

#31 Adam on 12.07.09 at 11:43 pm

Buying 30 yr bonds is a huge risk unless you plan to sell them quickly. Interest rates could easily rise to 20% or higher within 5 years. The money supply is hugely inflated. Once the money velocity recovers, there’ll be a tidal wave of price inflation.

Asia is dumping dollars and buying up commodities. You might want to do the same.

#32 $fromA$ia ( :PY ) on 12.08.09 at 12:01 am

#10 Kurt on 12.07.09 at 9:18 pm Daystar: Carney works for Steven Harper, regardless of all the noise about “arm’s length” and “independence.”

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Mr. Harper was out there saying that to forget the Green house gases.

Mr Harper said, ” if my economy turns and our housing drops, I am out of a [email protected]#$ing Job!!! Save me, I am just in it for myself”!

#33 Gord In Vancouver on 12.08.09 at 12:07 am

Excellent post, Garth.

I agree that many people will be crushed WHEN Carney raises rates. I won’t be at all surprised; however, if the federal government brings in policies to rescue overextended home buyers – you know it’s going to happen.

#34 kc on 12.08.09 at 12:15 am

this from yesterday’s post….

166 never mind on 12.07.09 at 7:25 pm Garth, does it ever bother you that some of the comments just seem jealous, the advice sometimes ridiculous? who are you gearing to? who is your average reader? what’s their average education, class, income?
Just curious…

You start. — Garth

Something about this made me laugh, then after I thought about it something made me want to shed a tear. We can all hide behind that little name we use at the top of our posts. We are only words pounded into the keyboard, and for that matter an image of who we are or who we can pretend to be.

True, some of the comments are for pure fluff and a poke here or there; many thou are very insightful and full of meaning with knowledge. Many of the names that post on regular basis have been around for a long time and we know from ourselves who we are.

you ask about who we are, the reader, the poster, guess what… we are all the same, we are the melting pot that make up a community here that is held together with wanting to learn, and share knowledge, ideas, and even other points of view that might seem way out there… asking for how many $$$ one makes truely has nothing to do with the persons’ perceptions of the world around them. Their thoughts and ideas are just as valid as the next poster.

If I was to say that I came from a family of millionaires would that change your idea of who i was in here? or what if I was to say that I don’t even own a computer and use the net from an internet cafe, would that also change your perception of my comments?

If I was from a family of millionaires would you even believe me anyways, as I do hide behind this keyboard and I can type anything I want to.

Is perception of class, education and $$$ a reason to ask a question that bears no bearing on these webpages? you asked “who are you gearing to? who is your average reader?”

all i can say to answer this question is look in the mirror. Then ask yourself the simple question, Why do I go to that site. We are all the same. Garth judges no-one here and he tells it straight.

Now what are your reasons and credentials?

cheers

#35 conan on 12.08.09 at 12:20 am

Lets see interest rates go up a bit first .

I see little movement until the banks and brokerage houses (that lost trillions) re-earn it back.

How long can it take when you can borrow money at .25 % and lend it out to credit card slaves at 19% +?

Garth why is it again that we are not going to just play out Japan part II again?

#36 hal smith on 12.08.09 at 12:33 am

It’s simple. Housing crash = economic crash. We would be devastated like the U.S. They will keep this bubble inflated forever if they can.

#37 nonplused on 12.08.09 at 12:37 am

Carney will not raise rates until the Canadian dollar is $0.80 US and unemployment is headed towards 5%. And all the while the US will be attempting to devalue their dollar too, making the $0.80 target a moving one. From here on in the “first” world continues it’s experiment with currency devaluations only on steroids.

#38 Internal Exile on 12.08.09 at 12:52 am

Warning: the following Vancouver Sun RE article may cause projectile vomiting:

http://www.househunting.ca/buying-homes/story.html?id=f74b7294-7440-4142-9ae2-631cd9a297be

#39 Nostradamus Le Mad Vlad on 12.08.09 at 1:30 am

“Carneynomonics — a smart guy from Goldman Sachs would know that.”

The populace of this continent is being set up to have our bums fondled. Take me — I’m yours, you whore!

Think these (all involving Copenhagen in one way or another) are joined at the hip? — A Woman created CDS’s (apparently). So I was right; generally, women ARE smarter than men.

The survey said . . . Carney used to work with Hank Paulson at GS, which is why Obama has okayed spending more on less. Now — GS again. At least somebody else is taking responsibility (maybe). Copenhagen Derivatives and Total Incompetence
——
Tiger’s new job?

#40 ruraldude on 12.08.09 at 1:55 am

Yes Garth compound interest it’s the 8th wonder of the world. When your making money and it’s working for you, well lets just say party hardy and let the good times roll. Probably as close to heaven as some might expect. But alas the real world, the demons rear their ugly heads and yes as you might expect there is a hell and I expect a lot of 5/35 are going to think their living it. History has shown time after time that bubbles end bad for most people.

#41 Ghost of Tom Joad on 12.08.09 at 1:59 am

Nice blog post today as per usual Garth – thanks.

People sign petition to “increase inflation to 100%” to purposely cause hyperinflation:
http://www.youtube.com/watch?v=vJtS9CuyuaU&feature=player_embedded

#42 Thetruth on 12.08.09 at 3:10 am

If the market does correct…(which i do not believe will happen), then,

Everyone will have to join together to stop the damage caused by falling house prices. Even people saying we have a bubble now that will pop WILL PAY VIA HIGHER TAXES (CMHC/Govt has the debt). Thus, present non-homeowners will pay if the bubble pops. Government programs to help homeowners in such an event would raise everyone’s taxes.

So relatively speaking, who really benefits if a bubble pops? Homeowners or Non-homeowners?

For all you young people out there, the government WILL Socialize losses and Privatize profits. Look south of the border at what happened. Difference is BoC/CMHC/Govt will launch a preemptive strike.

The people posting about an impending bubble popping ARE the ones going to be paying proportionally more for the losses if the bubble were to pop. I know this may make some peoples blood boil but that is how our system works.

But, like I said…I don’t think prices are going down…so everyone can keep on posting.

#43 Garth Vader on 12.08.09 at 3:17 am

There seems to be alot of harping at Mark Carney on this blog. Isn’t it the BoC’s primary role to control inflation, not moderate the Canadian real estate market? Don’t get me wrong, I fully believe we are sitting in a bubble, that has somehow gone well past its burst point. But I can’t see the BoC modeling itself to control RE prices. It just isn’t what it’s there for.

Off topic: This gem deserves a look. I don’t believe it’s 3500 sqft, anymore than I believe it was built in 2010. But, in Vancouver, who cares about the specifications of a property? It’s RE and it can only go up – right?

http://www.realtor.ca/propertyDetails.aspx?propertyId=7842266

#44 Mike (Authentic) on 12.08.09 at 3:33 am

When I read “So, here’s the news: Economist Gallagher estimates Carney has no choice but to raise rates in 2010. By 1.25%.” I said, YES, FINALLY Carney is doing the right thing for Canada! I imagined little Canadian flags waving and the national anthem being played as hands clapped.

I’m excited about the prospect Carney was raising rates for the good of the country, then I read “Economist Gallagher estimates Carney…” and while I realised Carney didn’t do anything yet, hopefully the fanfare and parade is coming around the corner. :)

There are soooo many people who learned from others mistakes and DIDN’T BUY. Now we are left with those who only learn from making their own mistakes.

Game on.

Mike

#45 kc on 12.08.09 at 4:18 am

108 Dan in Victoria on 12.07.09 at 2:42 pm Post # 103 into the sunset. I can’t find the link right now, but a good story of Canadian manufacturing is the story of Hayes logging trucks. They were built in BC in the early thrities? and were a fixture in the logging community.

Dan, are you collecting info about these trucks that are still in use? and looking for pics to add to that web site? I know of a few that are still used. :) and they are TOUGH especially the off-roaders!!

#46 Rob in busted bubbleland on 12.08.09 at 4:21 am

it seems that very few well paid economists are on Garths side, here’s the Fed (the Fed of all people) had to say why Canada’s housing bubble didn’t bust.

http://www.clevelandfed.org/research/commentary/2009/0909.cfm

btw I don’t have the links but more and more people are expecting interest rates to increase starting next year. 8% prime is unlikely but ZERO percent won’t stay much longer

#47 Rob in busted bubbleland on 12.08.09 at 4:24 am

found it

from the UK

http://www.moneyweek.com/news-and-charts/economics/why-the-next-banking-crisis-could-be-even-worse-94916.aspx

was a simular one about the US but seems I deleted it.

#48 Rob in Onterrible on 12.08.09 at 5:05 am

Garth, Mark Carney is in a corner. He needs to raise interest rates to cool the housing market but that would raise the Loonie and kill even more manufacturing jobs. He has to follow the US interest rate policy which will be our undoing…

#49 DaBull on 12.08.09 at 5:48 am

#12 Mad Max

Dastar #1 asks “Who does Mark Carney really work for?”

Answer: New World Order

I didn’t know Carney was a professional wrestler?? Does’t look much like a wrestler.

#50 jimmy on 12.08.09 at 7:22 am

Christ!! I have a date with an RE agent next week! Don’t be offended when I don’t mention your name on the 1st date!

#51 Erikson on 12.08.09 at 8:22 am

It is possible to switch from 5%/35Y to 25%/25Y without increasing rates to cool the bubble.
Why not?

#52 David Bakody on 12.08.09 at 8:28 am

First I doubt Carnery gives a rat’s “A” just like Greenspan they will continue to live the good life and spin the blame down on the working class. They both will still be invited to the Wall Street/Bay Street Christmas/fancy-dancy Balls.

Second …. should/when housing prices drop and many people decide to sell a 10% drop turns into 15% and of course then more as people become home shy looking on a street or a Condo with multiple listings Right and

Last ….. we all pay…. BIG TIME!~

#53 Herb on 12.08.09 at 8:43 am

“… you’d swear a smart guy from Goldman Sachs would know that.”

The only thing a smart guy from GS knows is how to get max pay and perks and how to generate enough BS to secure them.

It’s the smart guys in government who must know which ends are apropriate and which means serve them, and here we are screwed.

#54 Evangeline on 12.08.09 at 8:47 am

#33
((asking for how many $$$ one makes truely has nothing to do with the persons’ perceptions of the world around them. Their thoughts and ideas are just as valid as the next poster.))

Yes, it is true that everyone’s thoughts and ideas are just as valid as the next poster’s and we can all learn from them. However how much $$$ one makes truly DOES affect a person’s perception of the world around her. Seeing the world through poverty, wealth, struggle, security or debt all give very different perceptions of the world around us.

#55 David Bakody on 12.08.09 at 8:52 am

32 Gord In Vancouver on 12.08.09 at 12:07 am

Ditto.

wrt rescue, not sure Canadians would go along with it and just how many rabbits are left in the hat. America is not even close to being out of their slump (suspect 2015) and of course could care less about Canada unless a buck is to made. So …. I suspect many will be thrown to the wolves and the CON spin will begin. ( It’s all the Liberals fault ya know)

12 Mad Max on 12.07.09 at 9:45 pm

As mentioned the NWO is close to their 40-20-20-20 plan … word from Europe is some countries are trying to fight back demanding less part time jobs which is the the 2nd and 3rd 20 at different levels.

Divide and conquer has been a winning war strategy for centuries and now NWO has imposed it on both the professional & working class.

Senior Boomers ….. a whole new ball game, not sure what their plan is yet but I suspect it will in-tail service charges of all sorts coupled with high drug costs.

#56 Evangeline on 12.08.09 at 8:53 am

#47
((Garth, Mark Carney is in a corner. He needs to raise interest rates to cool the housing market but that would raise the Loonie and kill even more manufacturing jobs. He has to follow the US interest rate policy which will be our undoing…))

I am very confused about why interest rates are raised. Is it to make the dollar go up and down thus affecting our trade relationships, to stop bubbles, to reflect inflation, or to make government bonds more competitive and attractive to buyers. What is the real reason?

#57 mike on 12.08.09 at 9:29 am

http://www.bloomberg.com/apps/news?pid=20601068&sid=aYVuIVpuwo4I

Well put

#58 $fromA$ia ( :PY ) on 12.08.09 at 9:40 am

#12 Mad Max
Dastar #1 asks “Who does Mark Carney really work for?”
Answer: New World Order
I didn’t know Carney was a professional wrestler?? Does’t look much like a wrestler.
~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Actually, there was no such thing as Marc till the Turd came along. Marc is the scape goat/sheep. The Turd wears the gumb boots.

#59 Nostradamus jr. on 12.08.09 at 9:43 am

“”Bank of Canada to keep rates down

Jeremy Torobin
Tuesday, December 08, 2009

Ottawa — The Bank of Canada kept borrowing costs at a record low 0.25 per cent Tuesday and reiterated they will probably stay at that level through the middle of next year, while expressing cautious optimism that global economies are on the mend.””

…I repeat…

Place half ur net worth in U.S. Dollars

Gold will be sold for food by China and India

Ontario has no competitive economy of scale to support its citizens.

Western Canada will secede

Vancouver will become the next Centre of the Earth, Trade, Financial, Culture and Leisure.

Nostradamus jr.

#60 Soldin08 on 12.08.09 at 9:50 am

Beware y’all:

http://paul.kedrosky.com/archives/2009/12/the_next_bubble_1.html

#61 smw on 12.08.09 at 9:52 am

#41 Thetruth

You’ve got your head so far up your keester your looking out your mouth.

So you say look what happened south of the border, RE: socializing the loses, yet you close your eyes to what specualation and too low of a bank rate eventually did to the housing market in the US.

UPDATE: It destroyed the market and took down a lot of people that could actually afford their mortgages, until the market over shot the other way. The Truth.

Keep dreaming “your truth” and contradict yourself some more.

One thing you are right about is a popping of the housing/credit excess, it will be more like a slow PAINFUL leak, worse than the 90’s, and this time borrowing and accumulation of debt won’t be able to help milk GDP, cause we’re maxed out.

Freddie & Fannie + Treasurey & Fed = CMHC + BoC & Ministry of Finance

#62 Jayman on 12.08.09 at 9:52 am

#17 Eddy
How can you blame David Miller for the Toronto bubble? Perhaps because he’s leaving his post next year? No other reason. He’s assisted in the destruction of the city and increased, car tax, land transfer tax, garbage collection, big raises to unions etc. That is reason for many to want to leave the city.

I have trouble accepting some of the comments re Carney and the BoC. The focus is on inflation/deflation and the economy overall. Increasing rates could result in an increase in the CAD, decrease in GDP, deflation and higher unemployment numbers. One could argue that it is short sited and will have consequences. However, should the BoC be only focused on the housing bubble alone?

#63 smw on 12.08.09 at 10:00 am

Garth, what are the odds that the current bubble being perpetuated by the BoC is to seriously endebt Canadians, thereby driving down our dollar.

Is this the only way that the BoC can compete in the world of competetive currency devaluation? Blow a hole in CMHC simalar to Freddie and Fannie thereby driving down the loonie?

That ought to add a sizable chunk to the Canadian debt and relieve upward pressures on the loonie.

#64 Grey on 12.08.09 at 10:31 am

There was a great post by Mimi in the last blog comments that (#120) where she said:
Yup, another annoying 30-something that earns a decent wage here, well above average. But what does it matter if we can’t afford a house that isn’t a total dump in T.O.? We are stuck in a cycle of renting because we refuse to break our rules of 25% down, must be supportable by 1 income.

I just wanted to let you know, you’re not alone in that feeling. We too feel this same way, are in the same age bracket and can’t believe the mass hysteria going on around us.

When I heard Carney’s term “Prudent” I thought, not people I know. I’ve lost track of how many people I know that bought homes with 5% or nothing down. All of whome have 35 year mortgages who look at us like we’re the idiots.

There are days where this gets very hard to take as we’re so beyond priced out of the market. There was also a great comment in a CBC article on housing (I regret I don’t remember who wrote it) but it said something along the lines that we have retired senior citizens living in big houses with backyards they have no use for and their children are living in shoebox condos with their growing families.

This is essentially the big picture of what’s going on.

And I am sure we’ve all read the news that Carney is leaving the rates as is by now at 0.25%. So. Nothing changes and more younger families get screwed because they either go into severe debt, or they are priced out of the market.

#65 Dean on 12.08.09 at 10:35 am

Garth, I’ve said it before here. Those numbers that the banks trot out as to what you can afford based on income are a fairytale. Unless you don’t have children, drive a car, or do anything except sit in a old lawn chair in your cold and dark living room staring at a blank wall, thinking about your lack of retirement savings all day.

The other thing is that if you buy a house when you’re 30, with a 35 year mortgage, pay it off until you reach 65, then sell it to retire because you need the money, so you can rent somewhere the rest of your life — haven’t you really just been renting the whole time? So why bother with the hassle of owning?

When I get my house paid off in about 5 years (17 years in total), I’m having a huge party. That mortgage payment is a big portion of my bills and it’s nowhere near the numbers you’re throwing about.

Anyone who digs themselves into a 35 year mortgage anywhere near the number the banks throw at them is making a mistake. And it’s not because of any investment reason. It’s because that they’re going to have to live a good portion of their lives during that 35 year period.

#66 regularman on 12.08.09 at 10:37 am

Hi Garth,
I am the one that waiting for the housing bubble tobe pop.
When do you thing it will be happen when let say interest start to go up by mid of 2010. Is it the crash will happen in 2010, 2011 or probably 2015??

My wife could not stay for to long to buy a house.

thanks for your advise in advance.

Real men don’t blame wives. — Garth

#67 Grey on 12.08.09 at 10:41 am

PS – #45 Rob in busted bubbleland

Great link!!

#68 Jim on 12.08.09 at 10:43 am

The Bank of Canada is not raising rates, they are keeping them at record lows. Even when they raise them, people will pay 10 percent more in their mortgage. Most people will do everything in their power to come up with the extra 10 percent rather than selling, which will stabilize markets. So basically what you are saying now is that there is no imminent housing crash, but the market will gradually deteriorate, meaning that those of us on the sidelines may have to wait another 4-5 years before housing becomes affordable.

I did not say that. You did. — Garth

#69 Kurt on 12.08.09 at 10:50 am

#42 Garth Vader: what is inflation? Inflation has been narrowly defined to be the growth in prices of consumer goods, specifically excluding real estate. However, for the construct to be truly useful it must measure the underlying mechanism: on-going devaluation of fiat currency. Inflation of financial assets such as real estate have been explicitly excluded, even though bubbles are inflation just as surely as increases in the price of groceries. The reasons given are various, but the honest reason is that the asset-owning classes *want* them excluded so that excess money may be created and funnelled into their pockets at the expense of peope who do *not* currently possess significant financial assets. People should not be sniping at Carney, they should be crapping all over him, just as they should have been crapping all over Greenspan for virtually his entire tenure, for being in the pockets of the financial industry.

#70 JET on 12.08.09 at 10:56 am

I love how the picture of the little kid with the middle finger seems to be pointing at the little picture of Carney! Love it!

#71 Onemorething on 12.08.09 at 10:57 am

Garth hits the nail on the head with the catalyst being Boomers. Dont think our government financial and economic advisors havent factored this in with keeping rates low for now.

Once boomers start selling property it will be at an alarming rate and with potential major windfalls right now, the first will win.

The government will cash in on the next purchase via HST, higher taxes and will start clawing away at pensions and RRSP’s earlier than you think.

This last years run up in equities is just about to be enough for the boomers to recovery enough net worth to bail, especially in the USA.

Canada with it’s unprecidented RE bubble may take a little longer however our bubble is likely the largest on the planet right now so when it pops, it will be at a pace that will make your head spin.

Government will spin it to show boomers as the cause of the RE spiral and tax they hell out them as you cannot get blood from a stone (0/35-5/35….subprime all the way to 25/25 prime) when your RE is underwater.

#72 Ken on 12.08.09 at 11:04 am

I cannot help but wonder whether Gov. Carney is competent or who he really works for.

#73 zaza on 12.08.09 at 11:04 am

I live near subway station Eglinton West in Toronto. I’m monitoring at least three homes in our neighbourhood that sitting with “on sale” signs for at least a month now.

#74 Repatriated Expat on 12.08.09 at 11:11 am

You gotta love the two side by side headlines on the globeinvestor.com page this morning:

Bank of Canada to keep rates down
Housing starts hit 2009 high

Nah, there can’t be any connection there.

#75 Kurt on 12.08.09 at 11:24 am

#55 Evangeline: central bank policy varies from time to time and country to country. The policies are generally set with the intention of managing the countries’ economies. The currently-popular policies in Canada and the US are to manage inflation into a range somewhere around 2-3% (IIRC). This is believed to be the rate of devaluation of fiat currency that produces the highest stable long-term growth of the economy. Changes in currency valuations can have spectacular effects on international trade and hence the economy and (finally) inflation, and so currency movements are occasionally factored into the rates, though the central banks generally ignore any movement that they believe to be speculative. As I wrote earlier, inflation has been defined to explicitly exclude asset prices, so the central bank does *not* attempt to manage bubbles. Finally, the government must compete in an open marketplace to sell bonds. Any attempt to manipulate that market through bank rates would be extremely transparent, resulting in a loss of investor confidence and would cause far more damage than it was worth. It’s far better for the government to just set what the mark feels is an appropriate price and coupon for the debt they want to sell.

#76 Kurt on 12.08.09 at 11:26 am

#69 typo: “market”, not “mark”

#77 BAD on 12.08.09 at 11:42 am


#55 Evangeline on 12.08.09 at 8:53 am wrote:

I am very confused about why interest rates are raised. Is it to make the dollar go up and down thus affecting our trade relationships, to stop bubbles, to reflect inflation, or to make government bonds more competitive and attractive to buyers. What is the real reason?

Here’s some information on the monetary policy and its effects.

Bank of Canada – Monetary Policy

What is the real reason? That is a very good question. Here’s Wikipedia on Central Banks.
The short answer is… control.

#78 Dan in Victoria on 12.08.09 at 11:58 am

Post#44 KC. No i’m not collecting any info about the trucks, (thank you for offering) a few of the pictures are from people that my wife or I know. Although, I am getting a print of old H-17 with a load of logs for my new office. Also one of the Avro Arrow too.
The post about building decent goods got me thinking….We went to the antique truck show in Port Alberni a few months ago and there were a bunch of the old trucks and fellows there, all these years later and that equipment would still work. Some of that iron was 60 plus years old, Hell most of those guys could still put a shift in.
They even had the Mclean Mill running (Canada historic site) and the old guys will cut custom sized lumber for special order, that place still runs and it must be a hundred years old. Geez ….Mrs Mclean used to come over for Christmas dinner, “Auntie Muriel” what a card ! Ha, there was someone who called it like it was. Sorry just started to wander off subject.
It seems Canada is selling its soul and is going to just be a bunch of consumers. We can build really good things and have a viable economy but we just don’t seem to get it.

#79 Nostradamus jr. on 12.08.09 at 12:02 pm

The U.S. is in process of bankrupting the world.

…Gold will be sold by its horders…China and India…for food in the not to distant future.

…The U.S. Dollar will remain the World’s Currency.

Nostradamus jr.

#80 BDG YYC / HOPE & A PONY ! on 12.08.09 at 12:12 pm

CAP’s for emphasis only.

Soooo … Another good one Garth! I’m amazed by your doggedness. Someday if you keep laying out the dots … over and over … there is going to be a sudden roar of amazement coast to coast as everone discovers … at the same time (that time is already “too late”) and they’ll discover that all the dots eventually connect. You’ll know when that is because your forum will be deluged with the question … “O.K. so I get what you are talking about … but do you actually mean … LIKE MAN – THE DOTS LIKE SOMEHOW CONNECT ?????

Looks to me like we’ve had:

1. An extended period of historically low interest rates accompanied by …
2. A concurrent period of historicallly lax lending standards … and
3. Historically low down payment requirements
4. Direct Government Participation … CMHC involved in a huge proportion of mortgages eliminating lender risk.
5. Increased activity by secondary lenders … extending market access (at higer/premium interest rates) to buyers unable to qualify even in the lax primary lending market,

Essentially this boils down to a combination of
1. Extremely cheap money and terms … low rates & extended amortization (35 years)
2. Expanded access … a new market segment opened – a group of buyers across the full demographic spectrum who otherwise would not be able to buy … gain entry to the market.
3. Accelerated access to the market for all … less time required to accumulate a down payment.
4. Greatly enhanced affordability – in spite of the extremes established in the metric of Price to Income … Cost (PIT) to income is historically fow relative to price paid.
5. CMHC participation = Lenders have no “skin” in the game.
6. Low down payment means buyers have little “skin” in the game.

Market Dynamics ?:

1. Demand – a substantial new category of buyers enter the market – prior economic barriers of lower income, and/or impeded ability to accumulate down payments due to low levels of discretionary income and inflexible screening practices are removed. Essentially the “rung” is lowered. This group of buyers introduces a “bulge” in demand and enter the market as an eclectic mix of first time buyers (likely heavily weighted toward the low end of the market). Their entry stimulates new construction across the board and facilitates a wave of “move ups” begining with existing first time buyers who gain equity as a result of the price action resulting from this NEW demand. THIS DEMAND BULG IS LARGELY A ONE TIME PHENOMENON THAT WILL/HAS TAIL(ED) OFF AND IS LIKELY LARGELY SPENT.

2. The early to middle stages of the above acceleration in demand occurred concurrent with increased levels of economic activity in a number of Canadian Markets eg. stimulated sales in the struggling auto sector (add benefits of strength in the Canadian dollar) and assistance to the financial and consumer sectors (eased credit and bailouts) rising energy and fertilizer prices, increased Canadian Transport, and the BC Olympics, Oil Sands projects etc. further excited conditions in the housing market. The Canadian market experirnced a disconnect from the failing US market based to an extent on differences in the fundamental construct of the 2 economies (Canada’s high resource content) and the relative impact of resource related projects and the Olympics.

2. The resulting price acceleration from the above further stimulated the market panicing new buyers in for fear of being priced out … and … introduced speculative appeal to the market. The market became heated.

3. An initial market correction occured in the particularly “hot” markets as well as in certain “minor” markets (Vancouver/Calgary/ Edmonton “HOT” … Southern Ontario – Auto & Manufacturing) … the correction brought in new buyers – speculative bottom fishng plus first time buyers who might have seen the market leaving them behind had the market come back to them – an opportunity for a do-over on a lost opportunity.

Present: Markets … are sustaining at a moderately reduced level (Calgary/Edmonton) hurting (southern Ontario) and sideways to up in Vancouver and GTA. Supported by a sustaining low interest rate environment, low down payment requirements, extended amortication terms.

Economic Conditions:
Global financial/economic/geopolitical conditions continue to be relatively unstable. US conditions, particularly on the fiscal front (consumer, municipal, state, federal) continue to deteriorate. On the Canadian front, the fiscal environment is deteriorating in the face of stimulative spending programs etc. and a (at best) flatlined economy and hightened unemployment. Consumer debt remains high.

HOPES ARE … that the housing market will remain supported, that employment will hold, that the historically low rate environment, loose lending standards, and long amortization terms, and particularly CMHC laxity/support will sustain the market, and that housing demand will continue to match or outpace supply for the foreseeable future in order to support a market that has to an extent developed an arguable fragility associated with the introduction of a relatively large component of buyers/households that are “marginally invested” with little equity/skin in the game, are carrying record levels of household debt with litlle cushion in the form of savings or unused credit availability and, on a relative basis; are highly vulnerable to weakness in the price of housing should it occur.

Going forward: HOPE is, that the present environment is able to maintain support under housing prices for an indefinate period of time and that new buyers continue to show up in force … as we enter a seasonally weak period. Further … HOPE also remains high that Canada’s circumstance remains a global anomaly, and that the destructive dots that continue to plague the rest of the developed economies (and especially the US – our major trading partner and with whom we have an economically dependent trading relationship) of the world, and indeed parts of the Canadian economy never find a way to connect to the housing market, the Canadian home owner and PARTICULARLY the Canadian WANABE homeowners.

Perhaps the BIGGEST HOPE should be that these highly stimulated conditions havent just brought a huge pocket of future demand forward and put one of those ugly black holes somewhere out there on the demand curve. Naaaa … housing is wayyyyyyy different from like … a zero down, zero interest, cash back (or for clunkers) deal right? RIGHT?

FACT IS … HOPE SEEMS LIKE IT MAY BE ALL WE’VE GOT GOING FOR US.

I hope it …. and the PONY are enough.Hope

Luck to all … we need it.

#81 Keith in Calgary on 12.08.09 at 12:15 pm

“This is how bubbles hurt average people.”

But banksters and realtors aren’t average people……they are “special”……snort…….and robbing the average you speak of people.

Human trash…..all of them.

#82 Alberta Ed on 12.08.09 at 12:59 pm

Armageddon looms… the Globe & Pail has actually addressed the housing bubble!

#83 Soju on 12.08.09 at 1:09 pm

Hmmm can’t see why people are waiting to buy… Even if RE goes down interest rates will be going-up as everyone says. That will just give you the same mortgage payments give or take. Others will have paid off some equity during that time. Best to buy a place now while calculating if you can still pay in the future than just wait around while the interest rate increases limit what you can buy.

#84 kc on 12.08.09 at 1:13 pm

53 Evangeline

“Yes, it is true that everyone’s thoughts and ideas are just as valid as the next poster’s and we can all learn from them. However how much $$$ one makes truly DOES affect a person’s perception of the world around her. Seeing the world through poverty, wealth, struggle, security or debt all give very different perceptions of the world around us.”

thank you for clearing up that tiny oversight of mine. In that context yes, I can see your point, however when examined in the bigger picture I was more advocating to the fact that when someone comments on this board you don’t know how much they make and need to examine the full context of what they say. There are some here who don’t mind saying point blank the particulars of the situation. Now do these facts stereo-type your perceptions? or do you take the full comment into consideration? Every situation is different.

cheers

#85 kenken on 12.08.09 at 1:14 pm

#41 The Truth

So you believe prices won’t fall…yet you compare the consequences to the US…in other words, you know what happened to the US!!
Moreso, this is a blog on the troubled future of the RE..why do you read it then and care to comment?

am guessing you are one of those greatest fool – 20 year old first timer who just bought and got heavily indebted…and NOW you are praying!! Go drink you milk little baby and get ready to get tucked into bed!

#86 BAD on 12.08.09 at 1:14 pm


The ultimate currency control:

North Korea currency change sparks panic

Now you have it… now you don’t.

#87 Genghis on 12.08.09 at 1:35 pm

Garth, your example nicely illustrates the dangers that come with being highly-leveraged, and burdened with high closing costs. The bottom-line implications of even a minor correction are a real eye-opener ($105K loss).

The other thing to perhaps consider is that selling is not going to be a quick process in this example. Anyone who has tried to sell in a real-estate down market knows that this process usually takes months, sometimes *years*. Houses won’t be selling in days or weeks anymore (yes, this may come as a shock to some under 30). In a down-market you usually cannot sell in a timely manner unless you want to sell at *less* than the market value ($405K in your example).

#88 Grey on 12.08.09 at 1:54 pm

CBC just uploaded a fantastic map of Central Bank interest rates around the world:

http://tiny.cc/lLs6V

#89 David Bakody on 12.08.09 at 1:58 pm

From the G&M

Markets fret over Greece debt woes

Yet another piece of the world debt destruction puzzle?

#90 TorontoBull on 12.08.09 at 2:10 pm

@79 excellent points. do you care to elaborate why do you think that:
“THIS DEMAND BULG IS LARGELY A ONE TIME PHENOMENON THAT WILL/HAS TAIL(ED) OFF AND IS LIKELY LARGELY SPENT.”

#91 conf in Tor on 12.08.09 at 2:11 pm

Garth or Anyone

I just read an artical in the Toronto star regarding Toronto’s financial sector and how there is evedence to suggest theat it with be the new economic backbone of Ontario’s prosperity.
I’m affraid that because of my background is in engineering, I just don’t get this.
I can’t figure out how the financial sector produces something tangible that can be sold on world markets in order to bring wealth back home? Yes, I get it that they provide a financial service but you have to make, mine or produce something to make the money first. Don’t you? Can someone clearly explain the steps on how this is going to work?

#92 Jeff Smith on 12.08.09 at 2:19 pm

>#32 Gord In Vancouver on 12.08.09 at 12:07 am
>Excellent post, Garth.
>I agree that many people will be crushed WHEN
>Carney raises rates. I won’t be at all surprised;
>however, if the federal government brings in policies
>to rescue overextended home buyers – you know it’s
>going to happen.

But then again, he might not raise interest rates and all those buyers will end up looking real smart and become real rich like the one in this real estate porn here.

http://www.youtube.com/watch?v=3lQtBzq7CdI

See this guy Dan here must be some kind of psychic or seers or something supernatural. Notice how he just kinda closed his eyes and see a vision of how much the house is currently worth and how much it will be worth after the reno is done. I mean no mortal can possible make that kind of prediction without doing due diligence. He must have gotten training from Ben Obiwan Kenobi or was it Yoda, heck maybe even the dark jedi Vader himself. There is such a thing as Jedi Clairvoyance I suppose.

#93 dd on 12.08.09 at 2:27 pm

#15 Nostradamus jr.

“Vancouver’s Real Estate prices will continue to rise because it is now the new Centre of the Earth”

Actually it will be Australia.

#94 Jeff Smith on 12.08.09 at 2:34 pm

http://www.theglobeandmail.com/news/national/british-columbia/in-vancouver-camping-out-for-condos-is-the-norm-once-more/article1392003/

Looks like the housing market is on a rebound in Vancouver. This is indicative of great news; the economy is on a recovering.

Old news. This story was covered here when it was still relevant. It is not indicative of the economy, but of investor behaviour. — Garth

#95 Soylent Green is People on 12.08.09 at 2:42 pm

Re #77 Dan in Victoria on 12.08.09 at 11:58 am

Once we can no longer pump oil out of the ground, everybody will be back to work producing things locally. I hope they don’t sell the machinery in the meantime, they’re going to need it soon.

#96 Garth Vader on 12.08.09 at 2:45 pm

#68 Kurt

The BoC can’t be trying to control the price of RE anymore than it can be trying to control the price of gold or the price of RIM shares. They are all investments.
The price of RE is not included in inflation, as owning RE is not a neccessity of life. We all have the option to rent. Now, if the avg price of rent was increasing the same way RE prices are, that would be a different story. But it’s not. In fact, in downtown Vancouver, rents are dropping (and have been for some time).
Let’s consider for a minute the BoC did try to control the RE bubble by raising rates. As discussed at length in this blog, it would likely put an end to the RE bubble, which I agree would be a good thing. However, unless the US was to also increase their rates, the CND would most likely rise vs the USD. This would lead to tougher export margins, which in turn would lead to closures of more Canadian companies and furthur layoffs. All of which would lead to a deeper recession. Is this what this blog is advocating? A higher dollar and higher unemployment in Canada, all in the name of bringing housing prices down???
The housing market will self correct in time.
Let’s not expect the BoC to grind the economy to a halt, just to pop the bubble for us. We all lose if they do.

#97 Thetruth on 12.08.09 at 2:55 pm

#62 SMW:

First, get a real education! and understand why housing prices are going up…and to help you out, it has less and less to do with domestic working class incomes. Your post suggests resentment towards high housing prices?? Even you (who probably missed the boat by reading “Boom, Bust, & Echo” in 1997?), want to buy when the your wished bubble pops…what do you think that will do to house prices when people like you all want to buy a the same time when the bubble corrects?? I suggest you keep waiting … people never see help (info) when it’s offered to them. How strange!

#98 The VULTURE on 12.08.09 at 3:01 pm

Crazy Corny Carney Carnage

“They are absolutely using interest rate policy to control the dollar (Canadian)” Aaron Fennel, Lind-Waldock Canada

It appears that Mark Carney takes his orders from those much more power than himself. He is certainly a very smart individual but he is not the one pulling the strings and setting interest rate policies by himself. He appears to be a political order taker following the orders of some really powerful people above him. I can just here them saying to Mark “Keep interest rates low, and keep them low for a long time Mark…OK. Good Job! Don’t let the Canadian dollar get out of hand. Who cares about the residential real estate sector. If they are foolish enough to pay this kind of money then so be it. The plug will be pulled when the Alpha and Omega, from first to last plans his return”. He is a international banker former Goldman Sachs guy as I do recall. He is very well connected.

Greenspan certainly appeared to be an order taker as well. The low interest monkey business in the United States did not help one bit either. They are currently in an economic depression.

Do they want the same thing to happen to Canada????? What do they know that they are not revealing to the general sheeple???

Answer: Just look at what the Bank of Canada’s overnight rate is for you answer….hint….SOFT DEPRESSION……..

Real Estate can and will destroy your wealth if you do not know what you are doing.

One last thing to ponder:

In Vancouver, camping out for condos is norm again

Real estate market is back to its regular insanity, and the promised market correction is nowhere to be seen.

Link: http://www.theglobeandmail.com/news/national/british-columbia/in-vancouver-camping-out-for-condos-is-norm-again/article1392003/

#99 Larry on 12.08.09 at 3:15 pm

Well either way Garth and folks on here, the housing bubble continues to make MSM headlines from Vancouver to Toronto. Peoples greed has no boundary. The herd are buying and don’t care for all the calculations provided here, they only see the monthly payment and the rest stick it on the cc.

#100 Soju on 12.08.09 at 3:42 pm

I feel bad for the people who linned-up for gold last week. Maybe people can drill a whole in their 1 oz. bar to hang it around their necks.

#101 Habs 76-79 on 12.08.09 at 3:47 pm

I’ve been reading Garth’s blog for a while now, lots of cool info and interesting thoughts written here. If I may add a few of my own.

A: Lets assume for the moment that the RE buyers who think RE will always go up and at incredible rates of increase we have been seeing under our current bubble and that interest rates will not adjust upwards over any time frame shortly. OK, you 5/35ers who over paid for your place, first you have NO EQUITY and will not be creating much over the next 10-15 years let alone the just the next 5. Compound interest eats up pretty well all those monthly payments for many years to come. But ok you are committed and you feel interest rates will stay low for at least 5 years (even a 1% increase on a $400,000-$500,000 mortgage will be a severe burden though), lets give you that. Do you think your other costs will stay in check with your ability to pay? Cities are all in big deficits and must by law balance their books, they will RAISE up significantly your property taxes. But it won’t stop there, they will raise up other municipal fees costing you more and/or cut services forcing you to go without or to pay at a higher cost (profit motives you know) private businesses to do those services.

Next both the provinces and the Feds will raise taxes to help cover the costs of the crazy deficit spending they are all doing to continue to prop up our corrupted fiat monetary system. Oh they will do all they can to not try to raise your income taxes but will claw back credits on them and will find ways to hit us all on more regressive taxes. Will you be able to afford just these things from cities, provinces and the Feds?

B: Other costs will go up. Home heating/cooling, electricity, home insurance, other maintenance costs including strata fees for you condo buyers, gasoline costs for your cars/trucks/SUV’s, car insurance costs, Do any of you who buy into an overpriced RE market today thinking “get in now or it’s too late” (more on that nonsense later) think your incomes will be able to handle these increasing costs even over just the next 5 years?

C: The bubble will burst even if interest rates do not go up much if at all though in reality commonsense notes they will and likely before the next 5 years when you all will need to refinance the remaining 30 years of your still minimal equity mortgages. My points A and B will add to this point.

D: Ok, on to the statement “Buy into RE now or forever be priced out.” Lets look at this closely. Why are many of you buying into an over-heated RE market with IMO a poor choice 5/35 mortgages? Many will say it’s an investment as you think your home will appreciate in value and you will gain future profit from such, HOW? You note buy now or forever be priced out. Ok, you bought now anyone who does not will be priced out. WHO WILL BUY YOUR HOME LATER ON THEN? They are all priced out right? Oh no, they will just have to pay more later on, so you assume they will have the added income to buy your (as an example) $500,000 shoe box, glorified apartment in Vancouver for what $1mil. in 5 years? If so why should they rush and buy now they won’t be priced out then right?

Now if incomes fall behind as incomes in North America have been since 1973. Then there will be no new buyers to buy your so called investment. No buyers, then your price FALLS! Oh, oh, but, but, Boomers will be retiring and wanting to downsize, we will sell them our condos and we will buy their houses. AND TAKE ON MORE DEBT!? That boomer house is way more expensive than your shoe box condo. Even as your condo supposedly raises in price over these say 5 years so too did the boomers’ houses and you will carry on a bigger mortgage especially since your 5/35 paid so little equity in those 5 years.

But wait it does not stop their. My point effects early boomers selling off and they will get some financial gains as they down size in the early sell off and some of you though most of you 5/35ers will not have the income to move up especially with the added living costs and taxation to come and not even factoring a rise in interest rates to keep you especially 5/35er happy, but many of you will try to move up in the trade off.

The double whammy will hit as a glut of boomers sell off to down size driving down the RE market putting you and your shoe box in Vancouver or your run down old hulk bought at an inflated price during the bubble in T.O. etc. UNDER WATER! Those who you say should buy now or forever be priced out will have a better choice available to them at better and more historically realistic RE prices. Even at higher mortgage rates likely to come in the next 5 years the price reductions in RE will be greater than the added interest costs of mortgages. The US RE market and its collapse which is still going on with the Alt-A and Option Arms, is our guide and we will not be much different in the end.

E: So you have to think that in 5 years you can expect interest rates to go up. Taxes will go up, other living costs will too and just as it has been since the mid 70’s incomes to inflation have gone down. Boomers will begin to sell their houses to try and down size and maybe make some cash from the sale driving down the market. You 5/35ers will have SQUAT equity paid into your homes in the next 5 years (Heck the next 10 -15 year as noted earlier) and you will be attached to your shoe box unless you go bust and have it forclosed for many years to come.

You have been sold a bill of goods based on hype and snake oil sales techniques. We in Canada are not smarter than Americans for the most part and they have crashed their RE market. We Canadians can be so G’damn smug at times especially when comparing ourselves to our US cousins. Our governments and bureaucracy along with bankers and other cronies are as corrupt or corruptible as in the USA.

Finally YES, it’s generally true RE will always appreciate BUT! based on it running with general inflation. All things we generally buy and use (except thing like technology which is an inverse, meaning you get more for likely less as typical but even that is askew) goes up over time but only based on increases roughly to inflation and incomes to inflation. RE bubbles as we saw in the USA and see in Canada are spiking way above inflation and the ability for real incomes to pay. It’s a PONSI SCHEME FOLKS! and most of you who play into it will GO BUST as result.

I won’t bother to go on as to why fiat money itself will smack us all in the near future.

#102 Kurt on 12.08.09 at 4:04 pm

#68 Garth Vader, *where* did I say that the BOC should try to control the price of real estate? How about actually speaking to my argument. I spoke to asset inflation as a whole, and bubbles as a symptom of excess liquidity. Please don’t deliberately try to twist my words. My point still stands: Greenspan and Carney *both* have piled on liquidity that can only benefit those who already own significant assets, and Greenspan’s policies just about ended the financial world as we know it. Carney had the opportunity to do the right thing, but chose to blow a bubble instead.

Your statement

“However, unless the US was to also increase their rates, the CND would most likely rise vs the USD. This would lead to tougher export margins, which in turn would lead to closures of more Canadian companies and furthur layoffs. All of which would lead to a deeper recession. Is this what this blog is advocating? A higher dollar and higher unemployment in Canada, all in the name of bringing housing prices down???
The housing market will self correct in time.
Let’s not expect the BoC to grind the economy to a halt, just to pop the bubble”

is really just an excuse to indefinitely post-pone the day of reconing, because a bubble does not do its damage on the way down, but on the way up through gross mis-allocation of resources. All the collapse does is reveal that mis-allocation. The longer it goes on, the worse it is for everyone – except those who held the bubbly assets before the run-up and bailed out near the top.

An interest rate increase would not be to pop the bubble, but to decrease the excess liquidity we’ve got sloshing around and to return the *real* rate of devaluation of our currency to something consistent with stable long term growth. Maybe that means we need to make significant structural adjustments in our economy – so be it. The fact that our growth was *un*-sustainable, and that a return to stability will cause great personal pain for many people can be laid at the feet of the people who pull the strings of folks like Greenspan and Carney. In Carney’s case, we can be pretty sure he’s doing everything he can to get Stephen Harper re-elected, which is pretty shameful for a guy in his position. James Coyne quit rather than toady to the Chief; Carney should do the same.

#103 BDG YYC / HOPE & A PONY ! on 12.08.09 at 4:16 pm

#89 TorontoBull … said “@79 excellent points. do you care to elaborate why do you think that:
“THIS DEMAND BULG IS LARGELY A ONE TIME PHENOMENON THAT WILL/HAS TAIL(ED) OFF AND IS LIKELY LARGELY SPENT.”

Hey T’B I’ll try …

When I think about it it seems to me that the lax environment opened the door to an economic/income level that had previously not (in history) been able to qualify for mortgages and become home owners based on their income levels and their ability to accumulate a down payment. I’m not sure what the numbers are but l’m guessing that that the door opened to more people say earning something possibly well below $50K … That might have looked like somebody being able to buy something at an entry level say down (in Calgary) in the $150K to $200 range and perhaps a bit higher. Say 4 or 5 years ago … and beyond … with very small down payments and with the ability to fund that using RRSP money. A lot of this likely went into the Condo market … and paved the way for some move up activity.

Now for the … why I think it might have been a limited phenomenon as far as time goes. Lets keep it simple for purposes of example … Lets say on day one we had 100 potential new buyers based on higer standards. These would tend to be the new “crop” of buyers at the entry level – first time predominantly youthful buyers say 25 to 35 … the regular crop that enters the market each year as they turn 25ish. A pretty steady stream subject to demographic variations.

Now … we lower the mortgage standards and rates. Over a relatively short period. The new standards now apply to not only the new group of 25 to 35 year olds .. but likely also … boost the number of households in that group that now qualify under the new standard PLUS … likely pull some people up into the market from a younger segment say 20 to 25 …. PLUS … and this is I think significant … create new qualifying buyers in every age category from 35 to 50 and beyond. So as soon as the rung is lowered … qualifying buyers are drawn from across the spectrum of ALL households exclusive of demographic.

So … it might look like say in a relatively short period of time … that 100 aged 25 to 35 grows to say 150 aged 20 to 35 plus … 100 from age 35 plus. So say we have now … 250 potential new and motivated buyers instead of the 100. So we have an invenory of eligable buyers of 250. Say it takes a year or so for most of those to work their way through the market … or two years or whatever. Each subsequent year we can now only add new buyers (for the most part) entering from the young end of the demographic spectrum. Add to this that once the standards are as low as they can/will go … the population of potential qualifying buyers becomes fixed – can’t grow further … it can only deminish as each becomes a homeowner. Then … as prices subsequently rise … the maginal buyer – just qualifying (who waits) falls out of the market as price erodes their debt servicing capacity and the dollar value of the down payment increses. Eventually the inventory of buyers gets burned off by purchases and by being priced out. The replacements then can only come from the annual “crop” which is pushed down from the 150 level to say 125 or lower by the effect of price action.

So the effect is a temporary “bulge” is demand … accompanied by increased sales, increased mortgage applications, increased prices etc. And should be short lived (produce a sales/price spike) followed by a period of softening markets … with some remaining but deminishing support below the market on relatively mild pull backs until the bulge is completely worked off.

My thinking is that a significant proportion of these new buyers (brought in by lax lending standards and low rates) are likely very fragile owners in terms of their vulnerability to job loss, and changes in lending standards. The market got a boost from the weakest end of the economic strata … and is dependent to a large degree on the ability of this (one time influx – no more where these came from) to withstand economic shocks of any kind – including income interruptions, increases in mortgage rates (especially if they qualified only on the basis of a low variable rates and can’t take a significant cash flow hit to move to fixed. etc. etc. etc.

Keep in mind this is all “rough cut” stuff … and its only my speculation and opinion. Opinion … not proven fact.

Hope that helps.

Regards and luck to you.

#104 TheBigLebowsky on 12.08.09 at 4:29 pm

2000-2400 small and mid size U.S banks will close next year. The U.S dollar on the usdx will break .72 and head for .55 . End of the year the U.S dollar will officially be devalued giving people 1 new dollar for 3 old ones . 2/3 of debt between countries will be defaulted on and all currencies will be revalued against each other aka Bretton Woods agreement. You really think the BoC will jack up rates in this envirenment to turbo charge the gap in value between the loonie and our biggest trading partner ? The U.S debt is unpayable as it is so higher rates are a fantasy south of the border. As the Trailer Park Boys would say, “We are heading into the mother of all financial Sh$T storms”

#105 HouseBuster on 12.08.09 at 4:55 pm

I’m seeing some cracks in pricing of resales in the GTA.

It is beginning.

#106 BAD on 12.08.09 at 4:56 pm


Bernankenomics:

“There is a Chinese saying that one could quench the thirst by drinking poison,” said Xie, who predicted in September 2006 that the U.S. economy would fall into a recession in 2008. “Bernanke seems to be prescribing exactly this to the U.S. economy. The slower Bernanke raises interest rates, the bigger the next crisis.”

Bernanke Low Rates ‘Poison’ to U.S. Economy, Xie Says

I sincerely hope that whatever Carney gave us to drink is just plain old Kool-Aid.

#107 Meggie on 12.08.09 at 5:18 pm

#49
Your language is offensive and unnecessary to get your point across. We”re better than that on this blog.

#108 Men With Hats on 12.08.09 at 5:32 pm

As the rubber bands of the economy are pulled tighter and tighter .There is precious little give left .
When they snap look out !
Blood on the tracks from coast to coast .
It amazes me people are so blind,and stupid, they cannot see we are living in a false economy .
Tens of thousands of people will become destitute .
There will not be enough food banks to help everyone .
You had better reserve your shopping cart now .
Bottle hawking will become a legitimate job .

#109 john m on 12.08.09 at 5:50 pm

“he does it again”…………oh yes..but what alternative to they have to save face?….they know the mess and the imminent disaster they have created……..they are trying to buy time……..sadly the more time they buy the more serious the downfall which is inevitable…………we are the victims of a ship of fools with vote buying political leaders at the helm

#110 palebird on 12.08.09 at 6:03 pm

#44 I used to drive a Hayes Clipper heavy spec for logging and construction in the north when I was a young lad, boss picked me cause I grew up on the old cummins and knew how to drive a 5 x 4 trans, funny, beautiful old beast, I was proud to drive it and really a shame that Paccar shut them down, simply done to promote Peterbilt in Canada.Kenworth and Peterbilt cannot compare to Hayes..my dad was with Mack for years and visited the Hayes factory in Van while still in production..you used to see Hayes trucks all over the west but not anymore..forest industry is a shadow anyway..

#111 Ultraman on 12.08.09 at 6:17 pm

#Habs 76-79,

Thanks for reminding me how lucky I was to have just sold my shoebox condo in Vancouver and make away like a bandit. I’m deeply conviced that to make that much profit, net $260k, on a condo is a chance of a lifetime never to be repeated.

People don’t realized how hard it can be to unload a property in a slow market. I have memories of twice my parents being caught holding the bag for over a year and taking a big hit.

#112 ruraldude on 12.08.09 at 6:39 pm

#15 Nostradamus jr. Vancouver is not the center of the universe like you so richly keep trying to impress upon. For your information Toronto is the center of the universe or haven’t you heard.
After the 2010 games VC will be a big bust. Bragging up your town ain’t gonna change reality. Just get used to it and be prepared to wallow in your own crapulance.

#113 ManfredSteyn on 12.08.09 at 7:06 pm

Garth,

Better get the new book out soon:

http://paul.kedrosky.com/archives/2009/12/the_next_bubble_1.html

#114 Soju on 12.08.09 at 7:27 pm

#111 Ruraldude

The only thing Toronto does is sell the natural resources that the West has. Besides, Vancouver doesn’t give its people warnings to stay inside due to polution levels.

#115 Weston on 12.08.09 at 7:37 pm

#99 Soju

You won the Darwin award again.

#116 jkimba on 12.08.09 at 7:46 pm

#90, re: financial centers basis of economy? yes. Someone, somewhere has to make a physical product. But in order to make it, they need to buy inventory, get a loan. Whoever buys the goods needs a loan to buy it, a loan to pay for shipping, insruance while the goods are in transit and a loan to house the store that sells it. Hong Kong, Shanghai, London, New York City don’t make anything physical. Hong Kong never really has, the other three used to be huge manufacturing bases. Hogn Kong started trading in China in the late 1700’s as western traders weren’t allowed to bring their goods inland. So the native Hong, who lived on the island, bought the goods from the westerners, and then shipped it inland for sale. Thus, a huge banking, insurance, and shipping industry was started in Hong Kong. Singapore, a city-sate formed in 1819 was created for no other purpose then to enable trade in the region.

These hubs of commerce enable others, all over the world, to make and distribute physical things. And for that, they get to share a little of the profits.

Toronto is the 3rd largest finance center in North America. It certainly can’t take on NYC, but it has a shot of overtaking Chicago, if the government invests in infrastructure, training, ….oh who are we kidding? Harper hates Toronto so forget it.

#117 Schroedinger's Bull on 12.08.09 at 7:48 pm

Soju:

Rising interest rates won’t result in flat affordability over time.

They hit the market from more than one direction. New buyers can’t qualify at higher rates, so demand suffers. Bear in mind, this is a demand curve shift, rather than a movement along the curve. Rising interest rates actually reduce the pool of capable buyers.

At the same time, marginal homeowners have to sell, or declare bankruptcy in some cases, resulting in higher supply. That’s before you even consider the direct effect of rising interest rates on buyer/seller psychology, and the sudden loss of whatever component of demand is attributable to speculators.

Markets don’t behave perfectly rationally either, especially housing markets, so I suspect that any significant downward correction will lead to panicked selling, in addition to the otherwise rational selling that will occur.

I’m definitely in the bear camp, but there are a ton of potential buyers who fall closer to the bull side of the distribution. Those buyers will start to hold off as well if prices start to correct, further weakening demand.

#118 jkimba on 12.08.09 at 7:51 pm

#42. Maybe if they made up the beds before taking the pictures, they could have gotten 3M? And how does a house rent for $1800/mo sell for 2.65M?

#119 Boombust on 12.08.09 at 8:13 pm

Garth,

I was recently talking to a “late twenties, soon to be married couple” who lost out on a bid in Coquitlam. The house was an OLD one on Marmont St.

List price was 488K and they offered 502K.

I have done EVERYTHING I can do to sway them from buying.

They simply will not listen…

#120 Ultraman on 12.08.09 at 8:13 pm

#111 ruraldude,

Re Vancouver being the center of the universe I think it depends on the perspective and I totally agree with Nostra that it is the center of the universe. The universe of RE bubble and the ensuing delusion of the greatest concentration of fools in the solar system.

#121 30 BELOW on 12.08.09 at 8:13 pm

Peddle to the metal in Edmonton according to CMHC

http://www.cmhc-schl.gc.ca/odpub/press/2009/2009_12_08_0900_EPE.pdf

#122 Dan in Victoria on 12.08.09 at 8:17 pm

Post#94 Solyent Green is People Yes, Yes, Yes, Yes. Only thing is, with most of the old, can do guys gone in 20 years or so it should be interesting. Cheap oil has enabled a bigger population,and required a lot less critical thinking.
Speaking of “consumersim” went shopping tonight, yikes. The ladies can spot one of those Guess handbags at a 100 feet, but I don’t think they could tell the diffrence between a corn sprout and a weed out in the garden. I guess when the SHTF I can rest easy knowing that I will be dining on expensive, imported, boiled leather. Nobody beats the “boss” to the deals.

#123 30 BELOW on 12.08.09 at 8:24 pm

#110 Ultraman

“just sold my shoebox condo in Vancouver and make away like a bandit. I’m deeply conviced that to make that much profit, net $260k”

Unreal, you couldn’t make that kind of coin doing anything else. Just curious, how long did it take?

#124 eddy on 12.08.09 at 9:06 pm

Jayman wrote:
“#17 Eddy
How can you blame David Miller for the Toronto bubble? Perhaps because he’s leaving his post next year? No other reason.”

The answer is: some councilors refused to support the tax unless miller gave a rebate to first time buyers, this allowed them to look good and grandstand to their constituents. miller gave the rebates, but when combined with dolt on e-guilty’s rebates to first time buyers- the unintended consequence is a massive bubble in the under 450k price range. there is no bubble in the higher price ranges.

A normal solution to revenue shortfall would be to raise property tax. miller, being a chicken shit, didn’t have the guts to do it. he figured: “I’ll just piss off the 5% of Torontonians who buy a house instead of all homeowners.” but all homeowners were receiving city services. fairness is not in the vocabulary of toronto city councilors.

example: family with 2 kids paying property tax on a TO bungalow for the last 10 years may have already contributed about 30k in property tax to city hall. they outgrow the bungalow and need to spend 600k for a bigger house. they would pay $16,200 to miller and e-guilty in new land transfer taxes. a first time buyer, or new Canadian off the boat can spend up to 450k and after rebates maybe pay around 2k in taxes . it’s the same activity- buying a house! one group subsidizes the other.
miller’s tax killed trade and city hall is still short of cash

eddy says- abolish first time buyer incentives, and dissolve cmhc- if a loan needs to be insured before a bank will touch it, the buyer isn’t qualified. these insurance schemes and rebates inflate the market, increase bubbles and force people with cash to pay more. in other words- cash is diminished in value each day.

#125 Ultraman on 12.09.09 at 2:27 pm

#122 30 BELOW,
It took about 4 weeks to sell (completed Nov. 30) and we had to reduce the price from an unrealistic (real estate agent idea to test the market) $599k to $575k and sold for $560k. We bought early 2003 for $280k.

Indeed unreal. Ultimately what convinced me to sell is the fact that this was more money than what I made after tax in 14 years living in Vancouver. And that is the unreal part.

#126 Wondering on 12.09.09 at 8:06 pm

How do we get the speculators out of the market so the prices can reflect the the amount the average Canadian can pay so they can buy a decent home to live in with their family!

If only the crash could happen sooner than later and leave these smucks with lots of capital loss.

Question is “When is this bubble going to burst?” Should I buy now or wait for the burst???