Race to the bottom

DNA modified

Ten years ago this spring the US house market was on fire. Rates were low and people were horny. House prices in California, Florida and Nevada were at unheard-of levels. Bankers were pushing teaser loans (called ARMs, or adjustable-rate mortgages) and zero-down deals were everywhere.

Nobel-winning economist Paul Krugman played Cassandra. In his syndicated newspaper column he wrote, simply, “Now for the obvious point: many American families and businesses will be in big trouble if interest rates really do go as high as I’m suggesting.”

What did he suggest? That home loans – then in the 5% range – would eventually go to 7%, and wreak havoc. The critics, including the National Association of Realtors, called him a kook. But by the summer of 2007, the 30-year mortgage rate was just a hair under 7%, and the housing market was in crisis. A year later it was all enough to prompt a global financial meltdown.

By the way, almost all mortgages in Canada are ARMs. Only a tiny percentage of people have mortgage commitments of longer than five years, which leaves the bulk of the population far more exposed to rate changes than American homeowners – who were creamed in the housing correction. In the US, as you know, once you get a mortgage it’s usually good for 30 years. The rate never changes – unless it’s an ARM with a teaser rate. Like at Scotiabank.

Our No.3 bank has just stepped up the race to the bottom with a five-year fixed-rate home loan at 2.97%. It’s the lowest fixed fiver ever for a major bank, beating BMO’s short-lived 2.99% mortgage by a whisker. Of course, some dinky credit unions, cheesy brokers and unheard-of online lenders are offering money for less. Plus they give great deals on duct-cleaning. Check your blue box for details.

As for variable-rate deals, Investor’s Group is the current leader, with a prime-minus-1.01% deal that makes money available at 1.99% for three years (unless rates rise).

Why are the lenders doing this?

Simple. Business sucks. Mortgage volumes and originations are way down from historic levels. The Spring has been cool and late almost everywhere in the country, with sluggish house sales and horrible conditions in some key markets, such as Montreal. Overall, with mortgages such a key hunk of the bankers’ balance sheets, there’s a frisson of freaking going on down there in the Bay Street canyon where a solitary, rebel blogger is oft seen humping along on his cane.

So, they put money on sale. Margins are cut so thin between the cost of funds and loan rates that the bankers make nothing. But this is about market share more than profits. Mortgages are relationship products – once they have you as a customer, you’re likely to stay one, getting hooked on other banking services.

Borrowers benefit from cheap money and easy credit, as they did in the US, with homeownership levels spiking to the 70% mark, and house prices soaring to all-time highs. Real estate becomes a cult, so easy to buy and carry. Until it isn’t.

Of course, the real benefit of cheap money is when it’s used to trash debt – to pay it faster than when mortgages are twice as expensive. Sadly, there’s no evidence this is happening in Canada, as overall aggregate consumer and mortgage debt goes up every consecutive month. Seriously, do you know anybody pre-approved for a $700,000 mortgage who buys a $400,000 house just so they can pay the 3% loan off?

After all, if people were borrowing below their capacity and using low rates to reduce debt, real estate values would no tbe bloating as they are now. Obviously the opposite is true.

Meanwhile, the longer rates stay low the more people who believe they’ll never go up again. Comments on this pathetic blog support such delusional thinking. It’s just naïve to believe inflation will not eventually return, along with economic growth, meaning bond holders demand a premium, and the cost of money rises. It may not be this summer, or next Spring. But it’s coming – big news to a nation of house hornies who borrowed to the limit and will likely end up years later with fat debts and declining equity.

Now this wouldn’t matter if you were taking a 30-year mortgage from Scotia, with fixed payments at 2.97% for the next three decades and zero debt when it was over. But you’re not. And in 2019, when the rate adjusts, there’ll be no sub-3% gift. Will you be ready? After all, that’s just 60 payments away.

Or do you think the bank is your bud?

175 comments ↓

#1 Albert on 05.28.14 at 5:02 pm

Ok, When will the interest go up ?????

#2 ozy - WRONG on 05.28.14 at 5:05 pm

” Margins are cut so thin between the cost of funds and then loan rates that the bankers make nothing.”

WRONG: I think in fractional system, banks LOAN $$$ they do not have. So they charge you interest 2.99% but pay NOTHING to anyone – as they do not borrow the money….

OK, maybe they borrow 1% or max 10% at 3% AA-bond rating. So – their COST is 0.3% but you pay 3%

are those low margins, Garth?

we need someone in business to write an article on fractional reserve in Kanata, maybe my understanding is wrong?

#3 Rob Ford In Rehab on 05.28.14 at 5:10 pm

First of all, I don’t mind a bit if you all want to wish me a Happy Birthday today! Yep, it’s my b-day here at r-hab and things are awesome, really goin’ great!

Today I am older and a heckuva lot wiser. I am already 100% better, guaranteed!!

The weight is totally coming off – maybe I’ll fit into that hand-me-down Speedo from Garth this summer, eh buddy :)

(You’re too old for it anyway, didn’t want to be the first to tell you but it’s the truth, something I’ve learned we all have to confront here at rehab)

Don’t worry about housing in Tronna, people. Once I’m back in office and those leftards and commies are in the ditch, people will be desperate to move to the Big Smoke. Prices are going skyward, with my approval rating. You watch!

Don’t be left out, folks. I care about you taxpayers.

#4 view on 05.28.14 at 5:12 pm

Unless you follow Garth the man… You ain’t probably ready.
Thanks Mr. G!!!

#5 Calgarian on 05.28.14 at 5:16 pm

For sure doomsday is close for those who invested way beyond their means. Most markets should see a correction, whether 5% or 35%. For those who bought early enough and within their means, there is little risk, other than potential loss of profit, if they miss the opportunity to sell at the top of the market (heck, if I knew when it is “Top” I would not be working for someone else). Still, home ownership will remain an important part of Canadian culture in the long term. It can change in couple of generations of course but then, what would not?

#6 rosie "moving forward" in the knowledge that, "this won't end well" on 05.28.14 at 5:23 pm

Found this little beauty in no time. Time to shuffle off to Buffalo.

http://www.zillow.com/homedetails/49-Alma-Ave-Buffalo-NY-14215/30177274_zpid/

#7 SESs on 05.28.14 at 5:24 pm

You’re not playing fair game :-(

#8 Late Boomer on 05.28.14 at 5:27 pm

OK. So how do we play this? What would be a good asset class to move into? Out of bonds into cash? Out of cash into stocks? Out of stocks into bonds? Or just cash out of everything and sip margaritas for the summer?

#9 jess on 05.28.14 at 5:28 pm

“pocket picking”

The Private Equity Limited Partnership Agreement Release: The Industry’s Snowden Moment
Posted on May 28, 2014 by Yves Smith

http://www.nakedcapitalism.com/2014/05/private-equity-limited-partnership-agreement-release-industrys-snowden-moment.html

#10 Old Man on 05.28.14 at 5:38 pm

Its called the bait and switch routine. The banks are casting their line to hook you into a mortgage, and then they slowly reel you in. First the mortgage gig, and then pressure and hound you for the rest of your business. They see you as their new debt slave and have become a -mark- for the rest of your money.

#11 Gigi on 05.28.14 at 5:53 pm

We are F than we think!

#12 Old Man on 05.28.14 at 6:00 pm

#3 Rob Ford In Rehab – its time you come clean to the citizens of Toronto. Disclose who the ringer was who led the press astray yesterday down the road and why was his brother’s car from Toronto sitting there in his Deco Lincoln waiting for the crowds? Then the plates appear from thin air on the Mayor’s vehicle driven by a puppet who raced out the barn door in the opposite direction leaving the press looking like utter fools who had been hooped by the Ford Nation.

#13 Eatin' Bonbons on 05.28.14 at 6:04 pm

I found this article a nice change from the usual stories of prices going up up up.

https://ca.finance.yahoo.com/blogs/pay-day-/canadian-cities-where-real-estate-prices-actually-falling-184722537.html

#14 James kitchener on 05.28.14 at 6:07 pm

Garth
You have been predicting a meltdown forever,
Let’s spice it up a bit.
In the event interest rates rise by some unknown amount, and baby boomers need money and people wake up and my golly housing prices dropped 15, 20, 25% maybe 30%. But in the end how many people will really loose their shirts. Like you said yesterday in 1990 housing took 17 years to recover. So if you do not sell you do not loose. So put your prediction hat on and really think how many people will go under, 8.5 million Canadians own a home, how many will go bankrupt?
How many went under in the 90s
Many of us love owning a house rather than living in an apartment. And many people love renting. Now one more point, how many really smart renters are going to buy a house when the price drops?
Bottom line I agree with you 5% downers will suffer! but if they hang on for 20 years will they really lose?
A good debate inspires better comments

#15 Joe on 05.28.14 at 6:12 pm

Seems like gov. and banks are supporting the house shopping spree…..no doubt about it…

#16 Andrewski on 05.28.14 at 6:29 pm

I have heard that Rob’s rehab is happening in (an undisclosed facility) Muskoka…

#17 Shawn on 05.28.14 at 6:29 pm

Ethical Advisors and Trading

Yesterday Garth explained:

Over 25 years ago, as I was in the financial media and dispensing advice to people, I reached the conclusion it would be best to be devoid of any personal conflict of interest. Never did I wish to profit, or be suspected of profiting, from the consequences of my own public statements or actions. At that time I placed my personal financial assets in a discretionary account under an advisor with whom I had no other relationship. When I served in the House of Commons, this was additionally placed in a blind trust. As an investment advisor myself, I have maintained this structure, in which I have no direct involvement in the management of my own assets, because it is the most ethical one I can imagine. I realize I stand alone in this belief, and that most advisors spend many hours a day trading in their own accounts. But this is my choice. Those who look to me for financial guidance will always know it is their interests only which are on my mind. — Garth

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No disagreement there, that is a fine way to do things.

But many advisors love investing and would also manage their own money. I think that is fine too with a few restrictions.

The advisor should disclose his positions to clients, at least periodically.

Advisors should never buy shares and then attempt to push the price up. This is a concern with small illiquid companies. It’s not likly you advisir is going to have any influence on the price of bif liquid companies ot most ETFs. The goal is to predict winners not to manufacture them with ype. Pump and dump is of course unethical.

The Advisor should avoid buying or especially selling ahead of clients. Biggest concern would be with illiquid stocks.

Anyhow I think we have established that an advisor managing his own money is not automatically unethical though it can be.

Many clients would prefer their advisor be invested in a similar portfolio (adjusted for rsik tolerance). Others would prefer an advisor who is not in any way competing with the client. Garth’s approach. There is plenty of room for both approaches I think.

#18 Shawn on 05.28.14 at 6:33 pm

Adjustable Rate Mortgage Definition

By the way, almost all mortgages in Canada are ARMs.

*****************************************
Maybe… I thought the old 2006 2007 ARMS were all in the nature of teaser rates like Prime minus 2 for 5 years then resettign to Prime plus 1 for the duration.

I don’t think our variable rate mortgages are treaser rates nor are they ARMS as I understand the term.

But yes, our mortgages do adjust after 5 years max ium iun almost all cases typically, that is certaintly true and certainly dangerous.

#19 Shawn on 05.28.14 at 6:46 pm

How to Prevent a Mortgage Crisis

Now is the time for all good finance men to come to the aid of their mortgaged countrymen and offer a 25 year locked in mortgage rate at a reasonble rate. And with minimimal break fees just like in the States.

If the U.S. can do it, why can’t we? I think we can. It would take a CMHC securitization program and it could be done. Investors would buy 25 year mortgage backed securities where the rate was fixed but where the investor would take the risk that mortgage would be paid off early. Investors buy these all day long in the U.S. and have for years even decades. It’s bull that investors would not buy this in Canada. They would.

It’s also not true that the Bank Act prevents it. Yes loans over 5 years are not subject to interest differential break fees after five years. But in the U.S. there are no interest rate differentials. Interest rate risk is passed on to invetors and refinance or break fees are minimal.

Banks cannot due this without CMHC because they fund with shorter term deposits mostly and they can’t take the risk of 25 year fixed loans on their books. They NEED to securitise the 25 year fixed interest loans to do this just like in the States.

Securitisation did not cause the housing crisis in the U.S. It was liar loans and NINJA loans and giveing loans to deadbeats that did that. We can have rules to avoid that.

Some of you will object that this will keep house prices high. True, but it would prevent a disaster that will happen if rates rise miuch.

NOW may be the last time to do this and let people lock in for the full term of the mortgage BEFORE rates rise.

Investors would snap up the product. Investors want to invest in the securitised 25 year fixed interest loans and home owners need them. Let’s match up the two right now!

#20 sheane wallace on 05.28.14 at 6:51 pm

Remove CMHC and 80 % of these loans would never be made. Stop CMHC and Harper.

#21 Dean Mason on 05.28.14 at 6:51 pm

Interest rates are not going up now as many were so sure in late 2013 going into 2014.

The opposite is happening and fast falling rates are happened every years almost.

Canada bond yields today, 5 years 1.50% versus 2.25% high in 2014, 10 years 2.21% versus 2.87% high in 2014, 30 years 2.76% versus 2.76%.

U.S. bond yields were as high as 3.92% for 30 years in 2013 and now are at 3.30%, 10 years are 2.44% today and were 3.00% in 2013 etc…

They are higher from 2012 at time 60, 70 year lows but we could easily be going near or testing them again in 2014.

Western economies and Japan are weak. Good luck if people are waiting for 10 year and 30 year U.S. 4.75% to 5.30% government bond yields like back 10 years ago in 2004.

#22 sheane wallace on 05.28.14 at 6:53 pm

#19 Shawn

Securitization: YES BUT WITHOUT GOVERNMENT/MY GUARANTEE!

#23 Nemesis on 05.28.14 at 6:54 pm

#ABasisPointHereABasisPointThere. #SoonerOrLaterItAllAddsUp. #InsideTheCSuites’OBayStreet. #IntolerableCruelty.

http://youtu.be/Zz-mpgYNUW8

#BounusZenForSpeedoAfficionadas!

http://youtu.be/39iP1TtXq-8

#24 Frustrated Kiwi on 05.28.14 at 6:57 pm

#2 ozy – WRONG

I don’t think you’re wrong. For an excellent review of how banks create money, which comes from the Bank of England, see the below:
http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q102.pdf
I guess allowing banks to create money is seen as better than the alternative of leaving it to the government to create money. It seems rather dangerous to me though.

#25 sheane wallace on 05.28.14 at 6:57 pm

Why do we need private banks to make home mortgage loans in first place? They have no risk anyway, just profits.

Government non-for-profit home loan agency with strict regulations would do much better job.

#26 Shawn on 05.28.14 at 6:58 pm

Wrong about Fractionals Reserve Banking

Ozy at two says banks fund at near zero costs. but admits:

maybe my understanding is wrong?

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You are absulutely correct that you are wrong.

Fractional reserve means that a dollar that is loaned out can come back as a deposit (and it will to some bank or other) and most of it (say 95%) can be loaned out again. The thing the fractioanl reserve nutbars forget is that every time the money comes back it is a deposit and typically earns interest.

Now maybe today interest rates are often zero to the depositor, but not on the five year money that is involved in these mortage loans.

If your story were true why would banks pay anything on GICs?

Stay away from zero hedge and anyone who claims that fractioanl reserve banking is nefarious or creates free money for the bank.

Banks have a cost of funding and must charge interest rates sufficiently above that to cover their costs and make a profit.

Read bank annual reports.

#27 Piccaso on 05.28.14 at 7:03 pm

You already did this pic Garth, it is good but…

When you going to do my lineup of dogs waiting to take a piss?

Cheers

#28 Shawn on 05.28.14 at 7:05 pm

Shean opts out…

Securitization: YES BUT WITHOUT GOVERNMENT/MY GUARANTEE!

***********************************
Then, we’ll muddle on without you dude. My suggestion will SAVE CMHC a bundle as there will be fewer defaults when homeowners are not subject to higher interest rates during the mortgage.

Anyhow CMHC makes a profit on its insurance and charges big fees for it and this has been going on for 50 years or so, so dream on about CMHC going out of the mortgage business.

CMHC already makes sure that those who get mortgages can afford the payments. They can tighten that up as needed.

P.S. Ayne Rand (actually Daggnie Taggart, that hottie) called and is waiting for you in that Valley, where government and taxes are banned.

#29 Piccaso on 05.28.14 at 7:10 pm

I always thought Saskatchewan was a boaring place

http://www.cbc.ca/news/canada/saskatchewan/more-wild-boars-than-people-possible-in-saskatchewan-expert-says-1.2657050

#30 Son of Ponzi on 05.28.14 at 7:10 pm

Canadians should be up in ARMs over the high property prices.

#31 sheane wallace on 05.28.14 at 7:12 pm

#21 Dean Mason
………………….
Interest rates will increase significantly once inflation shows up and that is coming, You could get them even going to 10-15 % no matter how crazy it looks this now.
Don’t be confused by the current state of the affairs.

#26 Shawn
………………………………….
There is also full reserve banking where banks loan against their capital, there is nothing wrong with that.

As for the fractional reserve banking, according to Wikipedia only 7 % of money are issued by Canadian government, 93 by private banks.

#32 Son of Ponzi on 05.28.14 at 7:13 pm

#26

Banks have a cost of funding and must charge interest rates sufficiently above that to cover their costs and make a profit.
—————
You obviously never worked for a bank.
Ever heard of duration and gap financing?

#33 sheane wallace on 05.28.14 at 7:17 pm

Muddle through?

No you won’t.

#34 Old Man on 05.28.14 at 7:17 pm

#28 Shawn – ” CMHC already makes sure that those who get mortgages can afford the payments.” I needed a good laugh today.

#35 sheane wallace on 05.28.14 at 7:19 pm

Think about it: If CMHC is declared a fraud in court are you obligated to cover it’s losses?

#36 -=jwk=- on 05.28.14 at 7:36 pm

@ #6 That house has seen “510 days on Zillow” and still no sale. Demo costs exceed the $9000. In other words, it has a negative value. Wasn’t so long ago certain among the blog dogs insisted the value of property never goes to zero. Except when it does.

#37 young & foolish on 05.28.14 at 7:42 pm

Does softer lending mean bank profits will be heading lower soon?

#38 Flawed on 05.28.14 at 7:46 pm

#179 Ralph Cramdown on 05.28.14 at 4:27 pm
#164 Flawed — “Ralph the whole reason people are turning to bitcoin is because they do not trust corrupt banks and corrupt govt. Again if people would “take a minute” to understand how bitcoin works they would see that it is a public ledger. […]“

Flawed, the whole reason people are investing thousands into bitcoin, payment systems, wallets, ETFs, building mining rigs, buying mining rigs etcetera is to MAKE MONEY.

You make money by buying something for $1 and selling it for $2, or providing a service for a flat fee or a percentage, or by making a market and keeping the spread.

Either bitcoin takes off and the people who use it pay fees to JP Morgan, IBM, or Amazon, or it doesn’t and this was all a colossal waste of time, money and coal-generated electricity. But everybody with half a brain in the ecosystem is trying to monetize it in one of the ways above, and most of them are probably hoping to go public (which requires a somewhat plausible plan to generate revenue to pay shareholders) or to get bought by a bigger player.

Businesses are starting to accept bitcoins (thousands a day? really? source please) for the same reason they give out tenth-one-free loyalty cards or Airmiles — because some customers might be lured by them. Do any businesses share the savings with customers (i.e. charge less for bitcoin than by credit card?

*************************************

Wrong wrong and wrong…..

Not sure why you don’t appreciate the hatred for banks and corrupt govt right now. You can read it on million websites.

banks FEES exchange FEES credit card FEES is what people are saving.

Plus you know those things called smartphones? Make’s it easy to pay. You don’t need to bring your wallet with 50 cards in it.

Yes….THOUSANDS of businesses are putting bitcoin POS systems in their store:

http://www.coindesk.com/bitpay-now-processing-1-million-bitcoin-payments-every-day/

And that is mostly in the USA. There are several EU companies doing it as well. Bitcoin is here to stay. Corrupt Govt/Banks are on their way out. Patience. You will see.

#39 Retired Boomer - WI on 05.28.14 at 7:47 pm

Rates, Rates, Rates. When WILL they finally “normalize”?

Rates could double overnight, and I would likely rejoice!

Bay St. might not like it, but…. where are those war mongers that can restore a faltering economy by goosing up the cost of “borrowed money” by simply shooting at another country? Oh, that’s right, they were voted out…
never mind.

#40 sheane wallace on 05.28.14 at 7:48 pm

#8 Late Boomer

gold.

#41 devore on 05.28.14 at 7:48 pm

#17 Shawn

Many clients would prefer their advisor be invested in a similar portfolio (adjusted for rsik tolerance). Others would prefer an advisor who is not in any way competing with the client. Garth’s approach. There is plenty of room for both approaches I think.

This is because these clients do not understand what they are asking for. Like people who give an adviser half they money, and tell him he will lose their business if he underperforms the other half. People who want their adviser to have his money “in the same boat” are making two mistakes:

1. Investment portfolios should be customized to each investor’s profile and goals. By definition, you’re not in the same boat.
2. No matter how careful, an adviser will ALWAYS treat his money differently than client money, which he will treat differently still than, say, family or friend’s money (should he be dumb enough to take such).

This is an inherent conflict of interest. I realize some people want this, but they are mistaken in their beliefs. It serves them as a false sense of security. And we know when it comes to a false sense of security, there is plenty of money to be made.

#42 devore on 05.28.14 at 7:55 pm

#24 Frustrated Kiwi

I guess allowing banks to create money is seen as better than the alternative of leaving it to the government to create money. It seems rather dangerous to me though

No more deficits ever again. There would simply be no limit to growth in government spending if governments did not have to go to private debt markets. It sounds great in theory, but in practice politicians have no incentive to care what happens past next elections; quite the opposite in fact. Future problems are somebody else’s worry.

#43 whipster on 05.28.14 at 7:55 pm

https://www.ecorealtyinc.ca/listing?id=261016710

even with lower rates now, this is just one example of why we will wait; hardly “affordable” as some would have the public believe. small beachside community of metro van area…townhome with over 300$ strata fee on top of everything else. adult oriented (they actually discourage children we know this) and is recommended for those downsizing. yup. downsizing. my inlaws once thought this was a nifty area to think about, but they would get less for their home in the same town than this old townhome.

to list at this price….what are people thinking?

#44 Observer on 05.28.14 at 7:58 pm

Simple. Business sucks. Mortgage volumes and originations are way down from historic levels.

One wonders when the tipping point is reached where even those with adequate savings avoid housing’s valuations. Saturation.

#45 Ralph Cramdown on 05.28.14 at 8:01 pm

#18 Shawn — “But yes, our mortgages do adjust after 5 years max […]”

It isn’t that our mortgages adjust every five years… They’re balloon mortgages — the balance is due in full at the end of the five. Yes, your lender almost always offers a renewal (at better or worse terms), but is under no obligation to. If you can’t find alternative financing to pay off the full balance, foreclosure.

#46 LB on 05.28.14 at 8:03 pm

Isn’t it easy to jump from a variable to fixed rate if “crap hits the fan”? A lot of my friends have variable rates and said that if the rates go up, they simply move to fixed and lock in.

#47 Hulot on 05.28.14 at 8:07 pm

Canadians are dealing with their debt as Bank loan losses are at a record low. Plus Bernanke said recently he does not expect the federal funds rate, the Fed’s main benchmark interest rate, to rise back to its long-term average of around 4 percent in his LIFETIME. He’s only 60, so figure it out.

So no major rate increases for a LONG time. Therefore the bloated home prices will continue indefinitely and all of YOU will continue to rent basement suites.

Exactly the silly talk I referenced. — Garth

#48 Vamanos Pest on 05.28.14 at 8:11 pm

Shawn and Sheane

Why can’t the for-profit mortgage business be kept exclusively in the private sector?

The lender assesses risk, charges an interest rate according to that risk and applies appropriate demands for a down payment and collateral to the loan, enjoys the profit on most loans but takes the loss if the loan is defaulted on. If the bank wishes to buy insurance on the loan, then they may do that privately. The governments only involvement should be to provide some regulation to prevent banking practices that could lead to systemic economic threat.

I really don’t understand the argument for the existence of CMHC in the first place. Even if it served a vital function (which it might) mortgage insurance should be done within the private sector. No?

I think what we’re seeing is the moral hazard of public sector involvement in the banking business. I’m certainly not against regulation, but I am against being on the hook for a mortgage that I had no say in (as a taxpayer).

#49 Spiltbongwater on 05.28.14 at 8:19 pm

Of course, the real benefit of cheap money is when it’s used to trash debt – to pay it faster than when mortgages are twice as expensive. Sadly, there’s no evidence this is happening in Canada, as overall aggregate consumer and mortgage debt goes up every consecutive month. – Garth

I mentioned last year that I was making extra principal payments on my prime +.5% HELOC and you snidly congratulated me on building equity in a declining asset.

You always deserve a snide response. — Garth

#50 Daisy Mae on 05.28.14 at 8:29 pm

“It’s just naive to believe inflation will not eventually return, along with economic growth, meaning bond holders demand a premium, and the cost of money rises. It may not be this summer, or next Spring. But it’s coming…”

**************************

The Gen Xs and Gen Ys have never known financial hardship. But they’ll learn. The hard way. As usual. The Boomers, however, should know better.

#51 Shawn on 05.28.14 at 8:33 pm

Yes, Virginian, Banks Create Money. Get Over It.

Frustrated Kiwi at 24 posted the link to the Bank of England article that explains how banks create money.

1. Banks do create Money
2. The created money is owned by (owed to) depositors and cannot be held in a particular bank unless a competitive interest rate is provided.

Step 1:

Bank create a loan and deposit at the same time. (Just like I can loan you a million right now if I can keep it on hand for you, no problem)

Step 2, the borrower writes a cheque and spends the loan, the deposit is gone from the lending bank and ultimately shows up in some other bank.

Step 3, our lending bank sees its cash reserve drop and now wants to attract a new deposit to replace the one that just left when the loan customer spent his loan that had been deposited in his account.

Step 4 – Fractional reserve alarmists will never give up on their alarm so why bother trying to explain it.

The bank of England article explains that the bank has to compete to make loans and attract deposits.

It says “Although commercial banks create money through lending, they cannot do so freely without limit. Banks are limited in how much they can lend if they are to remain profitable in a competitive banking system.”

Fractional reserve alarmists read selectively and have not understood the full picture.

Men who cannot become wealthy in our economy would likely have fared far worse in most all periods in the past. Survival and thrival of the fittest is part of the human condition.

Stop complaining about who creates money and go forth and earn and accumulate money and wealth.

Fractional reserve alarmists should get a clue, banks are part of the system that allows the financially fittest to become wealthy and wealthier. They also allow almost all people to own homes and buy cars. Seems like win, win to me. If homes are too expensive, don’t buy, don’t borrow. Your choice. Banks can’t make people borrow. Smart people use banks to their advantage. They don’t run around spouting about fractional reserves they just take advantage of our excellent systems. Survival and thrival of the fittest.

In other words meritocracy.

#52 Kris on 05.28.14 at 8:34 pm

#1 Albert on 05.28.14 at 5:02 pm
Ok, When will the interest go up ?????

Answer….NEVER !!

#53 Ben on 05.28.14 at 8:34 pm

Carney: “I cannee hold her for too much longer captain!”

#54 JBird on 05.28.14 at 8:35 pm

From a friend of mine downunder. Seems Vancouver-itis has started to spread:

http://au.pfinance.yahoo.com/photos/photo/-/23912087/rotting-sydney-shack-sold-for-nearly-1-million

#55 JSS on 05.28.14 at 8:36 pm

“Or do you think the bank is your bud?”

Yes Garth, the bank IS my bud.

National Bank -> Increased dividend by 4%
BMO -> Increased dividend by 3%

#56 Metro Van Observer on 05.28.14 at 8:40 pm

C’mon Garth, you are starting to sound like Mark Carney used to as BOC gov all those years.

Can you blame people from tuning this rate hike rhetoric out? The bond market is telling us something else with the 10 year rates on a slide this year.

Is this the ‘new normal’ with respect to rates? 5 years of overnight ’emergency’ rates seems to suggest so and reinforce what the bond market is indicating.

Only the ill-informed would not use low rates to reduce debt rather than grow it. — Garth

#57 Shawn on 05.28.14 at 8:40 pm

Why CMHC?

Vamanos Post, I don’t disagree. I don’t know why CMHC can’t be private.

We do have some say in the existence of CMHC through voting. We elect people and then they govern. You are free to create a party and run on the platform of dismantling CMHC.

So far CMHC is NOT costing tax payers anything. It makes a profit, actually. The elected representatives see CMHC as being in the public good.

We don’t run this country by referendum and if we did it would fall apart under tyranny of the crowd.

#58 Retired Boomer - WI on 05.28.14 at 8:40 pm

Climate Change aka Global Warming might be the more immediate problem (over your 20-25-30-40 year amortization period. 96 out of 100 scientists say it’s real!

Look at where interest rates have been over the last 35 years. What is to say they will not repeat their cycle? Might even be more intense over the next 25 years? Who can tell. Only a FOOL would buy at the higher end amount of what the bank says they were ‘approved.’ Who would want to live merely to feed a house? Not me.

Anyhow my last post was rather glib, and not to be thought of as real, but even such foolish things have indeed come to pass in our history.

I am fascinated by the lack of economic knowledge on display so frequently. Can there be yet hope?

#59 AlbertaGuy on 05.28.14 at 8:44 pm

Garth, speaking for all of the non-home owners here, how could one take advantage of the low fixed terms offered to borrow to invest in well balanced, diversified portfolios yielding 2-3 x the interest rate and be able to deduct the interest in the process. A theme for a future post perhaps?

#60 Spiltbongwater on 05.28.14 at 8:45 pm

You always deserve a snide response. — Garth

Is that a snide response? Surely you can do better.

#61 sheane wallace on 05.28.14 at 8:57 pm

So far CMHC is NOT costing tax payers anything. It makes a profit, actually. The elected representatives see CMHC as being in the public good

Like freddie mac and fannie mae?
You had any stocks there?

#62 dance...dancetotheradio on 05.28.14 at 9:05 pm

Albert Number One:
It’s not when rates will rise.
They might not.
Though if they did could you cope with rising rates?
How much discretionary spending would you have to cut to service your increased debt obligations?
You won’t be alone.
If you’re not spending that money on goods and services someone else won’t be, either.
Downward spiral.

#63 weedeater on 05.28.14 at 9:06 pm

“Why are the lenders doing this”
Because they have no fricking skin in the game. If lenders had to bear the risk and reflect on their balance sheets, none of this BS would be happening. CMHC should be disbanded and the mortgage liabilities dumped back in the laps of those high paid CEOs. Removing the risk was the biggest bailout the banks received from Flaherty.

#64 darth on 05.28.14 at 9:08 pm

Wait till China’s shadow banking system implodes and their real estate bubble bursts… Lehman times a thousand.

#65 Nemesis on 05.28.14 at 9:10 pm

#Curses!FoiledAgain. #SnidelyTheMortagee’sComeUppance

http://youtu.be/BWgi6W-uMeI

#66 Ralph Cramdown on 05.28.14 at 9:11 pm

#38 Flawed — “Not sure why you don’t appreciate the hatred for banks and corrupt govt right now. You can read it on million websites. banks FEES exchange FEES credit card FEES is what people are saving.”

Not sure why you don’t appreciate my precis of how the world works. Here’s the website of the company featured in the article you linked:

https://bitpay.com/pricing

Trying to build a customer base. If successful, they’ll either increase pricing (just like Square did last fall) or sell themselves. I don’t know how young and dumb you have to be to believe this hippy-dippy-commune shit, but everybody’s working for a buck.

#67 Low rates forever on 05.28.14 at 9:11 pm

#56 Metro Van Observer on 05.28.14 at 8:40 pm
C’mon Garth, you are starting to sound like Mark Carney used to as BOC gov all those years.

Can you blame people from tuning this rate hike rhetoric out? The bond market is telling us something else with the 10 year rates on a slide this year.

Is this the ‘new normal’ with respect to rates? 5 years of overnight ‘emergency’ rates seems to suggest so and reinforce what the bond market is indicating.

Only the ill-informed would not use low rates to reduce debt rather than grow it. — Garth
_____________________________________________

You didn’t answer his question.

#68 Mark on 05.28.14 at 9:12 pm

“Garth, speaking for all of the non-home owners here, how could one take advantage of the low fixed terms offered to borrow to invest in well balanced, diversified portfolios yielding 2-3 x the interest rate and be able to deduct the interest in the process. A theme for a future post perhaps?”

Deep-in-the-money call options on ETFs that comprise a balanced portfolio. One could also use margin lending and some form of interest rate swap or futures contract as well, although options work just as well and are much easier to understand without the need to obtain a futures account.

#69 Mark on 05.28.14 at 9:16 pm

“So far CMHC is NOT costing tax payers anything.”

I beg to differ. Anyone who evaluates the quality of GoC debt certainly must be pencilling in a potential liability of several hundred billion coming onto the GoC’s balance sheet. A contingent liability (ie: CMHC subprime loan guarantee) into an actual liability.

This costs taxpayers additional funds to finance the debt. Plus the CMHC’s subprime credit preference saps economic growth. A few blog posts ago I gave an example of how a 5-year term mortgage borrower in Canada pays a net of 2.5% or so to the bank to borrow, but BCE, one of Canada’s largest businesses, was paying 3.51% for $1B of 5-year term debt. So we have expensive bubbly houses, but none of our kids have jobs!!

#70 Frustrated Kiwi on 05.28.14 at 9:19 pm

#51 Shawn
I’m not arguing for a different system, because I haven’t seen one put forward that looks better (not a gold-bug and government printing money whenever they want is not going to work). Doesn’t mean one doesn’t exist. However, I think what happened in Ireland highlighted big risks with the current system that are contrary to your glowing endorsement of it. In a market of rising house prices, banks growing the money supply through growing the size of their loans is certainly adding fuel to that fire.

#71 Mark on 05.28.14 at 9:19 pm

” CMHC should be disbanded and the mortgage liabilities dumped back in the laps of those high paid CEOs. “

CMHC insurance was bought and paid for. If the government changes the CMHC or defaults on it, how is this any different from a sovereign default?

If what you suggested actually happened, the banks would immediately stop lending, and the housing market would crash to all-cash valuations. Which would probably be nickels and dimes on the dollar of today’s prices, if even. Not sure if that’s what even the most bearish on housing actually would want.

I agree that the CMHC should stop being in the business of writing subprime credit guarantees and should return to a strict mandate of engineering R&D in the housing sector. Not social engineering and trying to repeal the basic laws of economics.

#72 The Patient on 05.28.14 at 9:32 pm

#2 Ozy writes:

“We need someone in business to write an article on fractional reserve in Kanata, maybe my understanding is wrong?”

The issue came up on this blog a couple of years ago. It was asked, “What is the minimum reserve ratio that CDN banks must meet?”

The answer, shockingly, is zero. 0%. (http://tinyurl.com/mvfo6tj)

Money for nothing for Canada’s big guys.

Record profits? Duh.

You’re not wrong, Ozy.

#73 Mr Happy on 05.28.14 at 9:35 pm

ya ya ya…. RE is screwed….

Now this whole “balancing” thing…. Is this something you do quarterly or whenever a holding takes a nice run?

If one does it often, it really bites into profit from the commissions? No?

A fee-based advisor collects no commissions. Rebalancings cost nothing. — Garth

#74 Joe2.0 on 05.28.14 at 9:44 pm

Good article Garth.
” Or do you think the banks your bud”…

Most people grow up thinking the banks their bud, the marketing methods are no mistake.

Remember the commercials with Mom and Dad opening juniors first account.
Like an initiation into adulthood.
Overseen by your new buddy at the bank.

It’s a finely honed machine with years of brainwashing
tactics aimed at under educating and overextending us.

It’s byproduct has many similarities to Stockholm syndrome.

#75 Pete on 05.28.14 at 9:46 pm

Commenter #2 You got it right. They print up the money out of thin air and loan it out at interest even though it is backed by nothing and has no value. That’s the way our entire monetary system works. Once the people learn this fundamental aspect about money, the intelligent ones should be able to figure out a whole lot more about the world they live in.

#76 Cici on 05.28.14 at 9:50 pm

An ex-colleague of mine got a fixed fiver at 2.97% in May 2013.

Of course, that wasn’t the advertised rate…

#77 Rural Rick on 05.28.14 at 9:52 pm

late almost everywhere
Reminds me of Shane
You are too great
O Garth one

#78 Ralph Cramdown on 05.28.14 at 9:56 pm

#41 devore — “Investment portfolios should be customized to each investor’s profile and goals. By definition, you’re not in the same boat.”

I gotta say, I disagree with this crap. I know it’s conventional wisdom.

Let’s take three clients:
1) says “I want to gamble. Twenty years from now, I want to either be stinking rich or broke, and let the cards fall where they may!”
2) says “I want a reasonable return for my risk. Don’t put me in anything where I’d be broke if a margin call came in, but I want the best chance of the most growth in twenty years.”
3) says “I don’t want much risk at all. I’m willing to sacrifice some return, but in twenty years I’d like a decent return on my money.”

Conventional wisdom says you put #1 into whatever your research department says is hot shit this week, and rotate quarterly until broke. Put #2 into a 60/40 and rake in the fees. Put #3 into a bond ladder and rake in the fees.

I say you put each of them into the exact same portfolio. Tell #1 to check his account weekly, #2 annually, and tell #3 not to peek for 20 years.

If you can cogently explain why I’m wrong, do tell.

#79 NS in Calgary on 05.28.14 at 10:00 pm

#51 Shawn on 05.28.14 at 8:33 pm

Thank you. Exactly my thoughts.

#80 Bottoms_Up on 05.28.14 at 10:04 pm

#14 James kitchener on 05.28.14 at 6:07 pm
———————————————-
If we assume housing in Canada peaks soon at 400k, and doesn’t return to 400k for 20 years, then yes of course people can be screwed.

Someone buying today with 5% down and paying that mortgage off over the next 20-25 years, will pay over $800,000 for something that one day, again, will be worth 400k.

That seems to be a 400k (or more) loss, no?

#81 NS in Calgary on 05.28.14 at 10:05 pm

#66 Ralph Cramdown on 05.28.14 at 9:11 pm

Everyone that I know interested in Bitcoin is trying to profit from it, not trying to avoid banks, fees, or any existing systems.

#82 Bottoms_Up on 05.28.14 at 10:08 pm

#58 Retired Boomer – WI on 05.28.14 at 8:40 pm
————————————————–
Climate change/global warming IS real.

96 of 100 scientists agree that humans are responsible for over half of the change.

Just clarifying.

#83 45north on 05.28.14 at 10:13 pm

So, the banks put money on sale.

as the market dries up the banks put out the opposite signal which is money is cheaper.

Shawn : How to Prevent a Mortgage Crisis

you would think that it would be in the interest of the banks to prevent a mortgage crisis or CMHC or the government but apparently not. Reminds me of Nortel, you would think that it would be in the interest of management to protect the company but apparently not.

Ralph Cramdown : It isn’t that our mortgages adjust every five years… They’re balloon mortgages — the balance is due in full at the end of the five. Yes, your lender almost always offers a renewal but is under no obligation to.

There are two things here: one is the individual and the other is the system itself. In the States we see them intertwined – as there were more and more individuals in distress then there were increasing restrictions put on the banks in terms of moratoriums on foreclosure. Mark Hanson says the moratoriums are dysfunctional and have the effect of hampering the supply of housing.

In Canada there seems to be almost no one who is ready to defend the real estate market itself. Not the banks, not CMHC, not the Government and not the political parties.

Ralph Cramdown : It isn’t that our mortgages adjust every five years… They’re balloon mortgages — the balance is due in full at the end of the five. Yes, your lender almost always offers a renewal (at better or worse terms), but is under no obligation to. If you can’t find alternative financing to pay off the full balance, foreclosure.

#84 Inglorious Investor on 05.28.14 at 10:14 pm

“Margins are cut so thin between the cost of funds and then loan rates that the bankers make nothing. But this is about market share more than profits.”

So… mortgages are now almost loss leaders? Did the banks just jump the shark?

On a grander scale, if banking became boring again––whereby banks were mostly just places to sock away money, rather than acting like giant hedge funds drowning in derivatives––that would signal a return to sanity.

But getting from here (monetary mania) to there (sound financial system) may require the death of our current ‘money’. If that happens, it won’t be a calamity. No sudden shock. No massive collapse. Just a nice, shiny new currency will one day appear, with new denominations designed explicitly to conceal the fact that what will cost one dollar in the new currency used to cost 50 cents in the old currency. And that, kiddies how they can devalue our money in just one sleep. And cut our standard of living in half. It’s not fantasy. It’s not conjecture. It’s not conspiracy. It’s exactly what happened to Europeans about, oh… just over a decade or so ago.

#85 ozy - Earth to #26 Shawn on 05.28.14 at 10:30 pm

it was RETHORICAL… it appears you have no credentials nor credibility since your desperately repeated responses contradict themselves blatantly!!!!

do you have any remorse, ever….? again, RETHORICAL…

I repeat: we need someone ” in business ” and HONEST to write an article on fractional reserve in former colony of Kanata….

#86 Mike T. on 05.28.14 at 10:47 pm

Ya Ya but… the Blue Jays just won their 9th in a row.
Plus, it is not fluky. This counts as a real, legit win streak. Anyone seen that offense? 2 through 6 they slug 500+.

Something something about houses and interest rates…ya ya Let’s go Blue Jays!!

#87 Inglorious Investor on 05.28.14 at 10:51 pm

#78 Ralph Cramdown on 05.28.14 at 9:56 pm

First, would you mind showing that asset allocation doesn’t matter by providing actual data?

Second, all of your examples were based on 20-year horizons. What about 10 years? 30 years?

I’m not saying you’re wrong. Or right. I would just like to see actual numbers if you have them.

#88 sheane wallace on 05.28.14 at 11:00 pm

#71 Mark

We may not be that far from all cash purchases. How does it sound SFH in To and Van for the equivalent of 200 k?

But good luck in earning that 5 kg gold.

#89 Bottoms_Up on 05.28.14 at 11:17 pm

Dogs I need help.

Can I lock in an interest rate now, for an early mortgage renewal that begins in August? (that is, mortgage is actually up for renewal in December)

#90 Shawn on 05.28.14 at 11:21 pm

More Banking Errors

The Patient at 72 said:

The issue came up on this blog a couple of years ago. It was asked, “What is the minimum reserve ratio that CDN banks must meet?”

The answer, shockingly, is zero. 0%. (http://tinyurl.com/mvfo6tj)

Money for nothing for Canada’s big guys.

Record profits? Duh.

You’re not wrong, Ozy.

****************************************
Official required reserve ratio is apparently 0%.
But don’t leap to conclusions. Avoid non-sequitors.

First no bank needs the government to tell it it needs to keep some cash on hand for when depositors make withdrawals and transfer money out of their accounts to retailers and pay bills and such. So, they don’t run with 0% reserve.

Second the cash reserve ratio does control how many times money is multiplied and loaned out and then cycled back into the banking system. But it does not mean the deposits cost nothing. The interest rate paid on deposits of various terms including five year GICs has NOTHING to do with the reserve ratio. Even with a reserve ratio near zero if the bank wants to do that, it still has a cost of funds. Read any bank annual report.

Third, don’t confuse the cash reserve ratio with the capital reserve ration (the other side of the balance sheet) which is not zero and which controls how many times a 1.5% return on loans can be leveraged up such as 10 times (10% common equity) equals a 15% ROE.

Fourth, knowing this two years ago you surely bought bank shares?

Fifth, you surely don’t begrudge banks that operate in a competitive market their fair returns from the market place? I mean today’s topic is that interest rates are too low. Banks lower interest rates in part due to competition. We can’t complain rates are too low and then complain profits are too high can we? CMHC guarantees repayment but does not guarantee a bank can make a profit lending five years at 2.97%.

#91 Inglorious Investor on 05.28.14 at 11:33 pm

#75 Pete on 05.28.14 at 9:46 pm

“They print up the money out of thin air and loan it out at interest even though it is backed by nothing and has no value.”

What we call “money” today is debt. That’s one way of saying that our currency has POTENTIAL value. It’s value comes from FUTURE productivity. As I’ve said before, what commercial banks actually do in our current debt-based system is allow borrowers to monetize their own future wealth.

In order to have value, all money––whether debt-based or commodity-based––derives its value from productivity. The difference between debt-backed money and commodity-backed money is that the latter has real value (either in full or in part) when it is issued because the work that imparts value to the currency has already been done and is stored in the commodity (e.g. gold) that backs the currency.

In other words, society has to work for it. That’s why governments can’t just give everyone a million currency units to spend. The nominal amount is meaningless. What matters is the actual VALUE, as measured against real goods and services. In other words, there is no free lunch.

Now, ‘money’ as a medium of exchange can be anything: coins, rocks, feathers, beads, etc. Just as long as the participants have the confidence that they can exchange their monetary feathers or beads for real goods and services at some future date, then feathers and beads will work fine as long as a balance between feathers and beads and real goods ans services is maintained.

However, it is the risk of upsetting this balance that many argue that real money (not just currency per se) must also function as a store of value. That’s why societies have used things like gold and silver (and central banks hoard them still). They are excellent stores of value. If truffles could be genetically engineered to never rot or break down, truffles might be a good option as well ;)

#92 SESs on 05.29.14 at 12:11 am

China’s largest property developer warns that China’s property bubble is bursting… (via Bloomberg)

The “golden era” for China’s property market has passed, according to China Vanke Co., the nation’s biggest developer, which is shifting its focus to homes for owner occupiers rather than investors.

“The period in which everybody makes money out of property is gone,” President Yu Liang told reporters May 26 in Dongguan, a southern city in Guangdong province. “Vanke will take a cautiously optimistic approach to face the slowdown and target those buyers who need homes for self-use.”

“He should have seen some signs since it’s indeed difficult to make money now compared with before,” said Dai Fang, a Shanghai-based analyst at Zheshang Securities Co. “Growth we’ve seen before is no longer possible and you won’t be seeing blossoms everywhere again,” he added, using a Chinese idiom to refer to the property boom seen in every city.

The growth in the real estate industry will slow and the phase where “whoever buys makes money” is gone…

New construction has fallen 22 percent and sales, including commercial real estate, have slumped 7.8 percent this year.

——–
Give me your best Shit Eating Smiles…people!

#93 the jaguar on 05.29.14 at 12:21 am

Blaming the banks has been around since Christ was a Corporal.
Seriously people. Can we take some personal responsibility for our own actions? Nobody (not even those big bad banks) put a gun to your head and made you sign up for all those granite counter tops and mortgage debt. Did they try to attract your business? Of course. Like McDonalds or Burger King wants to sell you hamburgers. They are public companies responsible to shareholders to make profits. If you feel safer with a Nanny State and blaming your every lame move on someone else I suppose having a convenient evil corporation that “made you do it” provides some relief from real responsibility. There may have been a time when it was more difficult to be informed on these issues, but something came along called the “Internet”. The banks may play a role in all of this madness, but the ultimate responsibility lies with individuals who can choose to participate or vote with their feet.

#94 JL on 05.29.14 at 12:22 am

“And in 2019, when the rate adjusts, there’ll be no sub-3% gift. Will you be ready?”

Let’s see. Say I buy a new property for about $600,000 and get a $500,000 mortgage in Calgary.

Mortgage at 2.99% = $2363/month.
Property taxes will be about $250 per month.
Insurance about $200 per month.

Total is just over $2800 per month.

In five years if mortgage rates DOUBLE to 6% my mortgage payment would jump to $3000 per month.

Assume taxes increase 5% per year and insurance by 2% year. Brings those numbers to $320 per month and $220 per month. New monthly payment is $3540 per month.

So in 5 years my payments go from $2800 per month to $3500 per month.

A quick check on the financial calculator tells me that’s an average compound growth rate of 4.5% per year. A little high, but really not crazy.

Plus Garth fails to mention that if you really couldn’t afford the higher payments after 5 years you could simply refinance to a new 25 year mortgage at the higher rate. In the example above after 5 years at 2.99% and a $500,000 mortgage, the principal would be down to $427,000. If you had to you could refinance the $427,000 into a new 25 year mortgage amortization at the 6% and your payments would only go up a few hundred in 5 years. Well below historic inflation.

#95 Son of Ponzi on 05.29.14 at 12:29 am

Another lying real estate pusher.
http://www.theprovince.com/business/Will+cancellation+Immigrant+Investor+Program+spark+flight+Chinese+money/9886021/story.html

#96 Dean Mason on 05.29.14 at 12:37 am

The next few months are okay for equities with the S&P 500 topping at 2,020, Nasdaq at 4,550, Dow Jones at 17,700 and the S&P/TSX at 15,850

However, after that last push upwards, don’t be shocked at these all down by at least 35% from these higher levels in the next 12 to 18 months latest by December-2015.

The S&P 500 at 1,313, Nasdaq at 3,000, Dow Jones at 11,500 and S&P/TSX at 10,300.

Time will tell but any of these future predictions or forecasts within 2.5% to 3.5% are pretty accurate.

#97 Old Man on 05.29.14 at 12:41 am

The Mayor of Toronto cancelled out his birthday party via Skype this evening as the citizens of Toronto must appreciate he is in rehab and doing great. The Mayor is indeed having a birthday party and in good spirits in Bracebridge at Crabby Joe’s Tap and Grill tonight. Oh am so jealous as has his arm around another young lady; its party time out of rehab. Why can’t I be a fat man too!

#98 jane24 on 05.29.14 at 12:50 am

Yes Garth I do know one young couple that under-mortgaged themselves. My daughter and hubby a professional couple live in London and earn about £280,000 Cdn per year. They were offered a mortgage of £700,000 and incredible $1,260,000 Cdn and turned it down.

They accepted a mortgage of £350,000 and brought a modest three bed terrace house. My daughter’s reasoning is that they want to pay down as much as they can before the babies come and don’t want any financial stress at that exciting point in their lives. Plus she said that the three bed terrace house of about 1200 sq ft is plenty of room for a young family.

I must have done something right in raising this girl.

#99 Mark on 05.29.14 at 12:51 am

“you would think that it would be in the interest of the banks to prevent a mortgage crisis or CMHC or the government but apparently not.”

Certainly the banks don’t care. They have all of their subprime mortgage business insured by the CMHC. Seems that all the trouble flows back to the CMHC, which means that they’re going to require a significant bailout because the problem will be systemic.

CMHC’s supporters claim that the CMHC is properly capitalized, and even threaten the tort of libel if one argues otherwise. However, it is fairly clear to anyone with a brain that a mere $20B at best of resources to back $900B of subprime mortgage guarantees is not prudent, nor sustainable. No chartered bank would be allowed to even run that sort of leverage with GoC bonds, nevermind sub-prime mortgages. The CMHC, like Fannie/Freddie, Ambac, PMI, and the other private mortgage insurers in the USA, will experience a solvency issue sooner or later.

#100 souvereigninternational on 05.29.14 at 1:10 am

There is nothing fixed other than 25 years of slavery on Canadian “fixed” mortgage. The US ARMs were/are generally more “fixed” because the rate it adjusted to was disclosed up front and lasted for the remainder of the 30 year term. e.g. 5%/3y than 8%. Unless you have cash to pay the loan at the end of term you are at the mercy of the banks.

Garth – inflation is an increase in money supply. We always have it to varied degree unless the money is being destroyed faster than it is “printed”. what you call inflation is an increase in prices expressed in $, as in CPI.

Shawn-when you have diarrhea go to the bathroom. You may have had some good points today. But your arrogance is annoying.

for the Gold Bugs and real estate doomers:

ww.gold-eagle.com/article/gold-forecast-versus-real-estate-forecast

#101 Longterm on 05.29.14 at 1:27 am

#50 Daisy Mae on 05.28.14 at 8:29 pm

Yeah, we Gen Xers have never known financial hardship.

Except for that graduating university into the early 90s recession with a huge student loan and no jobs part.

Then, in my case bouncing between $10/hr HRDC funded make work projects for six months and wafer thin EI while paying Vancouver rent. And then it taking nearly ten years to finally nail a full time job in my sector, which took two years of volunteering, three university degrees and eventually having to move to the UK for find the work.

Or in my wife’s case, working for four years in the mid 90s in Vancouver as a substitute teacher before getting a teaching contract and then being laid off every year for three more years and not knowign if she had a job until the first week of Sept until she finally got a permanent position 8 years after graduating from university.

Oh, and then that tech melt down. And that minor finanical crisis in 2008.

Yeah, none of that touched us Gen Xers.

#102 Rexx Rock on 05.29.14 at 1:30 am

Come on, Garth after 5 years of low rates the trend will continue for many years just like Japan.Zero growth for the next decade.
On another note I see Jason Kenny going to the Bildiberg meeting in Denmark.This elitist group who want to control the world and make us poorer.Thanks Jason for doing your part and getting Canada to participate in this destructive organization.

#103 Andrew Woburn on 05.29.14 at 1:39 am

#42 devore on 05.28.14 at 7:55 pm
#24 Frustrated Kiwi

There would simply be no limit to growth in government spending if governments did not have to go to private debt markets.
======================

Governments don’t need to borrow money in private debt markets. If you can print money, by definition, you don’t need to borrow. Governments issue debt to create high quality financial assets to meet the needs of banks, insurers and investors. Issuing government securities allows for a degree of control over liquidity and interest rates in the economy.

This is one reason why the goldbug scare that China will bankrupt the US by demanding repayment is nonsense. The US could and would simply repay the debt by printing money.

The real limit to government spending is when uncontrolled printing debases the currency to the point that suppliers of goods and services will no longer accept it as payment.

#104 DW on 05.29.14 at 1:40 am

$820,000 for a crappy semi in North York, the madness continues. The greater fools just keep on coming but will be left with a hangover once rates rise.

#105 Flawed on 05.29.14 at 2:45 am

#82 Bottoms_Up on 05.28.14 at 10:08 pm
#58 Retired Boomer – WI on 05.28.14 at 8:40 pm
————————————————–
Climate change/global warming IS real.

96 of 100 scientists agree that humans are responsible for over half of the change.

Just clarifying.

************************************

Are these 96 scientists actual climate scientists? Or just being paid to do what they are told? The only climate scientist in the world I am aware of is Dr Tim Ball of Winnipeg and he says climate change is a scam. I am also of that opinion considering it raises money for govt and govt is going broke fast.

#106 Buy? Curious? on 05.29.14 at 4:18 am

What you’ll find in the next decade or so will be two types of classes, those that own property and those that don’t. With the middle class shrinking as fast as it is because of automation and outsourcing of manufacturing, who’s going to be able to afford houses in the city? Buying a place now is securing your future and your kids’ future. This opinion doesn’t apply to Baby Boomers because they’ve only got a few more years left before their health starts going down and will have to be put on an ice flows. This applies to younger people. Don’t be fooled by someone mocking the “Buy now or buy never” mantra. It’s true. Just look back at historical prices. Which way have they gone? Go on, google it! And that dip in the 90’s, that was 30 years ago. Do you really believe the cycle of housing dips happens every 30 years? People were saying the crash was right around the corner since 2007-2008 because of ‘Merica and Spain, now it’s when an intrest rate reset in 2019? Cmon, are you that easily manipulated by “economists”?Imagine how far ahead you’d be if you paid $250k (est $2k/month rent for 10 years) towards your house instead pissing it away.

Young and house horny sounds more like Prudent and good-looking to me.

But hey! We need stupid people to lubricate the wheels of capitalism. Rent or Buy, I don’t care. It’s just my opinion and I’ve been right so far. Just make sure my cappacino has cinnimon on top and not chocolate.

https://www.youtube.com/watch?v=fHrrq78tS0c

#107 Buy? Curious? on 05.29.14 at 4:25 am

Oh, and one more link about the entrepreneurs that will bring this great country back to its former glory!

https://www.youtube.com/watch?v=jZRZ9uN1Mgw

#108 Londoner on 05.29.14 at 4:37 am

“Meanwhile, the longer rates stay low the more people who believe they’ll never go up again. Comments on this pathetic blog support such delusional thinking.”

It’s just as delusional to predicate a rise in interest rates entirely on the argument that “rates can’t stay low forever”. Interest rates will rise only after you see an increase in economic productivity and wage growth. The central bank set overnight rate is reactionary to inflation, not the other way around.

“It’s just naïve to believe inflation will not eventually return, along with economic growth, meaning bond holders demand a premium, and the cost of money rises. It may not be this summer, or next Spring. But it’s coming”

Agreed, but last week you wrote a piece on how Canada is entering a deflationary cycle. If inflation will return within a couple of years then it will be a very short deflationary cycle (if at all). The only time you’ll be able to tell when rates are going up is when you start seeing an improving economic environment. At the moment Canada is quite far from that and there’s an equal chance that rates will go down before they go up again.

Undoubtedly people will continue to believe the probability of a rate rise without an improving economic environment. In the extreme, some people believe that there will be rate rises in a deteriorating economic environment. There is nothing wrong with being a contrarian, however I think too many people are unaware of the implications of taking this view.

#109 just some guy on 05.29.14 at 4:55 am

If that story had a Cassandra it was Peter Schiff, he is still warning people and they still wont listen.

#110 James Kitchener on 05.29.14 at 6:02 am

Bottoms up
Yes you are correct about Interest on the mortgage.
And I like Simple math. $800,000 over 20 years or 240 months, works out to about $3,000 per month in rent.
Yes I know plus taxes maintenance and all the rest

It is an interesting argument that comes to emotion.
Can a person rent a house for lets say $1,500 a month and save $1,500 a month. Then it equals $616,000 at 5%.
I guess The renter is better off in the long run so long as they save the money.
Now the house owner lives rent free
Now the math for the next 20 years
Home owner saves $3,000 a month for 20 years equals $1.2 million plus the value of the house
The renter after 40 years has $2,2 million

So whats the answer? No-one can predict the Top or bottom or the exact time. Garth said he sold his house a few years ago and rented, and when housing corrects he will buy back. But how many Canadians can do just that?

Interesting.
My experience has been most people who rent do not save the difference.

It begs the question has anyone ever met a person who has rented for 20 years and saved all their money.

#111 maxx on 05.29.14 at 7:04 am

#11 Gigi on 05.28.14 at 5:53 pm

We are F than we think!

Oh, to have been a fly on the wall when that gem first saw the light of day.

#112 Ralph Cramdown on 05.29.14 at 7:31 am

#110 James Kitchener — “My experience has been most people who rent do not save the difference.”

That’s probably true. The mainstream opinion is that you buy a house, so by default, a renter is someone who hasn’t been disciplined enough to save a downpayment, or someone earning so little that he lives hand to mouth and CAN’T save one.

On the other hand the “own it after 25 years, 19 if you accelerate the payments” scenario also seems rather optimistic from observed behaviour. HELOCs and the occasional equity take out refinance abound, and I get the impression that most of them aren’t to buy productive investments.

Further, classic rent vs. buy assumes the same home for 25 years, not blowing $30-50k on transaction costs two or three times while climbing the property ladder.

Thus, many owners aren’t on the rosy path that a straight rent vs. buy calculation would suggest.

Me, I’m that person you question the existence of.

#113 Herb on 05.29.14 at 7:37 am

Here is corroboration for Garth on the future and implications of mortgage rates –

http://business.financialpost.com/2014/05/28/mortgages-interest-rates-debt/

And for part of the Ontario voter’s problem in my #130 yesterday –

http://www.ottawacitizen.com/business/math+enough+discredit+Tories+plan/9886364/story.html

#114 doome on 05.29.14 at 8:35 am

I’m just going to leave this here:
Canada’s Government Debt:
4.1 Trillion
http://beaconnews.ca/calgary/2014/04/canadian-government-debt-hits-4-1-trillion/

Consumer Debt excluding Credit Cards:
1 trillion
http://www.ctvnews.ca/business/canadian-consumer-debt-to-hit-record-28-853-in-2014-transunion-forecast-1.1600091

Mortgage Debt in Canada:
1.13 Trillion
http://business.financialpost.com/2013/12/13/canada-debt-mortgages-2/

Canada GDP:
1.821 Trillion
http://en.wikipedia.org/wiki/List_of_Canadian_provinces_and_territories_by_gross_domestic_product

Government debt to GDP ratio, we are actually one of the worse Countries.

How much debt does each working Canadian owe?
21,974,400 working Canadians with 6.3 trillion in debt.

$286,697/working person with an average of 10K in interest paid per year.

with incomes stagnating, and consumers tapped out. We will just end up borrowing more and more.

#115 Shadowy Man on a Shadowy Planet on 05.29.14 at 8:39 am

#110 James Kitchener and #112 Ralph Cramdown

Because I rented for years, I was able to establish a solid foundation in my retirement portfolio and to save money for a downpayment. In turn, post house purchase, although I had to reduce how much I contributed to my portfolio, I was able to pay down my 15-year amortization mortgage contract (bi-weekly payments) in approximately seven years. The base I had established in my portfolio continued to compound and grow.

What seemed logical to me is atypical behaviour for the population at large. Simple to say but hard to realize: just because everyone else does something a particular way does not make it the smart thing to do. Sometimes, I think our all-too-human trait of looking for patterns of behaviour to emulate can be our downfall.

#116 Phil in Ottawa on 05.29.14 at 8:52 am

Garth, then the big question is what are current home owners with mortgages coming up for renewal around 2019 supposed to do?!

I have a TD VRM at prime -.75 coming up in August 2016

Ask me in two years. In the meantime consistently invest in a non-registered portfolio and your TFSA. — Garth

#117 Markham Particleboard Shacks Rule! on 05.29.14 at 8:57 am

This morning on radio (CBC 1) after 9 a.m. EST there will apparently be a feature on millennials and how they are buying real estate with their parents’ money, artificially pushing up prices.

http://www.cbc.ca/thecurrent/episode/2014/05/29/parents-of-millennials-may-be-helping-to-skew-housing-prices-1/

#118 Kevin on 05.29.14 at 9:08 am

@Ralph Cramdown (#45)

It isn’t that our mortgages adjust every five years… They’re balloon mortgages — the balance is due in full at the end of the five. Yes, your lender almost always offers a renewal (at better or worse terms), but is under no obligation to. If you can’t find alternative financing to pay off the full balance, foreclosure.

Absolute nonsense. Of course the bank is obligated to renew you at whatever interest rates are at the expiry of the term. They cannot simply choose to call the entire loan balance and not renew you. Read your mortgage document before you spout such rubbish, it’s all there in black and white. The mortgage agreement is valid for the life of the loan, i.e. the entire amortization period, not just the term. The term just specifies how long THAT interest rate is good for. The loan agreement itself is valid for the life of the entire mortgage, unless the borrower chooses to break it and take the loan elsewhere. The lender does NOT have a similar option.

#119 Markham Particleboard Shacks Rule! on 05.29.14 at 9:12 am

OMG, just listening to the first minutes of that radio program, my jaw dropped:

“Amanda” says how “important it is for her to get into the property game” (her words) and no matter what else happens in her life in the next few years, “with property at least I have this”.

She used parents cash for the $70,000 down payment on a 700 sq. ft. $330,000 condo in Toronto’s downtown (where glass never falls).

She still has to rent out the den (!!!) to make ends meet or could not otherwise make the monthly payments.

OMG,OMG, OMFG!

#120 Kevin on 05.29.14 at 9:12 am

@Ozy – WRONG (#2)

maybe my understanding is wrong?

Yes, your understanding of fractional reserve banking is definitely wrong, as is Frustrated Kiwi. Banks do not create money out of thin air. Banks cannot lend out money they do not already have in their vaults.

There are multiple ways that money can GET into their vaults (customers’ deposits, borrowing it from investors as bonds/GICs, etc.), but simply typing a few keys on a computer and creating it out of thin air is not one of them.

#121 Shawn on 05.29.14 at 9:13 am

Money and Banking

Inglorious Investor at 91 said:

As I’ve said before, what commercial banks actually do in our current debt-based system is allow borrowers to monetize their own future wealth.

******************************************
I agree with that and with nearly all of what you said in that post.

Banking allows a person to own a house today based on the value of their future earnings. They can buy a house that already exists. Or the saved earnings of someone who worked in the past can be used to build a new house.

It’s the way the modern economy shares from those with surplus today to those who have naught but who have future earnings potential.

Would you really like a system where no borrowing was possible?

I agree wealth comes from production. Wealth exists as natural resources and land and from the produce of labour and the produce of capital (which some called stored labour). The owners of all three deserve to share the spoils.

I disagree that money needs to be backed by a commodity. The fiat system where the government and central banks control the value of money by controlling inflation is working well.

The world has never been better off in terms of living standards even though the population is so much higher.

It’s the system we have and it is working well for most people. Most people enjoy a high standard of living MUCH higher than 50 years ago. Unbelievably higher than 100 or 200 or 2000 years ago on average.

Get in the game. What’s in your wallet?

#122 Markham Particleboard Shacks Rule! on 05.29.14 at 9:19 am

OMG it’s getting worse:

Laura Parson, a BMO Calgary mortgage specialist described how she feels good about getting her two kids into housing:

…helps them become “financially astute”

….housing will continue to rise at “10% per year”

….compared to renting, owning “cuts overall expenses by 1/3″

….”healthier market when people are buying”

…..”building equity”

This is a supposed expert?

We are so doomed.

#123 Markham Particleboard Shacks Rule! on 05.29.14 at 9:24 am

Same radio program, Rob Carrick sounds much more cautious, but specifies:

“I’m not calling for a big correction…”

Translation:

“My newspaper and my job still depend on ad revenue from you house and condo developers; don’t worry, we’ve got your back”

#124 Smoking Man on 05.29.14 at 9:26 am

Something weird going on in the markets….

Bond buying in spite of tapper, a batman ear has formed.. CAD getting stronger vs USA.

Is that thunder I hear…..

It’s a warning dogs…

#125 Bubblicious on 05.29.14 at 9:51 am

Only the ill-informed would not use low rates to reduce debt rather than grow it. — Garth

Well the scenario you propose certainly makes more sense than to use high rates to grow debt.

You’ve heard the saying make hay while the sun is shining, well this is more like borrow hay while the sun is shining.

#126 Bubblicious on 05.29.14 at 9:53 am

#124 Smoking Man on 05.29.14 at 9:26 am
Something weird going on in the markets….

Bond buying in spite of tapper, a batman ear has formed.. CAD getting stronger vs USA.

Is that thunder I hear…..

It’s a warning dogs…

Do Tell

#127 frank le skank on 05.29.14 at 9:54 am

#94 JL on 05.29.14 at 12:22 am
So in 5 years my payments go from $2800 per month to $3500 per month.

A quick check on the financial calculator tells me that’s an average compound growth rate of 4.5% per year. A little high, but really not crazy.
==============================

Maybe you can handle a $700/month increase in your mortgage but there’s a significant amount of homeowners who can’t. You also need to consider the rising costs of other consumer goods. I’m pretty sure most families don’t see a $700/month increase in their salaries within a 5 year timeframe, so if they are already house poor they will be at risk. I think you are downplaying the impact of rising costs.

#128 Ralph Cramdown on 05.29.14 at 9:56 am

#118 Kevin — “Absolute nonsense. Of course the bank is obligated to renew you at whatever interest rates are at the expiry of the term. “

Here’s section 10(4) of RBC’s standard charge form for Ontario (you can google a copy online):

“You do not have a right to renew, amend or extend the Mortgage. Renewal, amendment or
extension of the Mortgage is at our discretion.”

Is that clear enough for you? If not, hire a lawyer to explain it to you using smaller words.

#129 Brian Romanchuk on 05.29.14 at 9:56 am

#69
“I beg to differ. Anyone who evaluates the quality of GoC debt certainly must be pencilling in a potential liability of several hundred billion coming onto the GoC’s balance sheet.”

Hundreds of billions? It would take a rather spectacular policy error – austerity in the face of a depression – to generate losses of that magnitude. Rather easily avoided.

Any sensible analysis of Government of Canada debt would ignore those “financing costs” anyway. Government finance for sovereigns with a floating currency is not like household or corporate finance. The consolidated government creates Canadian dollars at no real cost, and any increase in debt is self-limiting when properly analysed. Government finance is a question of looking at the utilisation of real resources, not dollar amounts.

“A few blog posts ago I gave an example of how a 5-year term mortgage borrower in Canada pays a net of 2.5% or so to the bank to borrow, but BCE, one of Canada’s largest businesses, was paying 3.51% for $1B of 5-year term debt. So we have expensive bubbly houses, but none of our kids have jobs!!”

If a corporation paid for a government guarantee (in the same way that households do) on its bonds, the bond coupon would be lower. However, the all-in cost would be probably be higher if the government priced the guarantee properly. (Since the government has no way of pricing those guarantees, they are not in that business.)

Additionally, consumer mortgages can be priced cheaper since (a) households do not strategically default in the same fashion as corporations, and (b) the fees and relationships created by mortgages are very valuable to the bank.

If you were a CFO and you think that the spread on your corporation’s fixed interest rate costs were punitive, you could stop paying dividends and start issuing equity to raise your credit rating. As far as I can tell, CFOs do not agree with that assessment. Fixed interest rate costs for investment grade corporations are well below IRR hurdle rates.

#130 Rational Optimist on 05.29.14 at 10:03 am

94 JL on 05.29.14 at 12:22 am

“Plus Garth fails to mention that if you really couldn’t afford the higher payments after 5 years you could simply refinance to a new 25 year mortgage at the higher rate.”

And that’s the path to long-term economic prosperity, right?

There are lots of risk in your example that you gloss over. Your housing costs increased by an annualized 4.5%, but what did your wages grow by? At least that, I guess? I don’t think the average person should count on it.

Increasing rates may well have caused a declining market, and your original loan-to-value of 17% might have increased substantially. Your new $427,000 mortgage may well be secured against a home now “worth” $500,000 in a sluggish market, and the bank might not be so keen on continuing to lend against it, especially when all of your ratios have changed with higher rates. Maybe they won’t renew with you and you have to shop around. Maybe they’ll ask for you to bring cash to your renewal to restore the loan-to-value, and you’ll have to borrow that at a higher rate. A mere ten percent decline could make your refinancing plan result in new CMHC premiums.

Even in your scenario in which there are no challenges, you bought a house that may or may not be worth more or less after five years of maintenance, property taxes, insurance and other expenses that are gone forever. At the end of the five years, you “own” a house that is five years old; you’re five years further away from having paid off your debt, with all of the lifetime interest costs therein; and for this privilege your monthly payments still go up by “only” a few hundred. That’s worth avoiding.

#131 Old Man on 05.29.14 at 10:03 am

The basis of a country’s prosperity in wealth creation is directly proportional to its manufacturing base. This historically can be seen with Germany, Japan, USA, and China for example. In Canada our manufacturing base or ability to make things that the world will buy sucks or in other words we have lost the ability for future wealth creation as a foundation.

#132 Markham Particleboard Shacks Rule! on 05.29.14 at 10:13 am

A final note on the CBC radio show this morning:

As CBC’s ‘The Current’ ended its broadcast, it closed, completely uncritically, with an excerpt from a speech by….wait for it…..

…a real estate ‘coach’.

I am not kidding.

“Travis Robertson, Real Estate Coach” basically gave a primer on how to sell real estate to millennials, how they have to get all the parents involved at the open houses, how these kids want ‘community’ not just isolated backyards, blah, blah, blah…

For a teaser that suggested this program might actually challenge the bubble, we really got none of that.

It is disappointing that a national broadcaster that should have no concern about losing advertisers by digging for the truth took the easy way out in this admittedly short broadcast, papering over the problems and giving so much airtime to real estate bubble enablers without challenging them.

To sum up:

No problem here, just move along folks. Even the CBC says so.

Those naysayers are wrong. Don’t worry. Get into the property game and start building equity, before it’s too late.

#133 frank le skank on 05.29.14 at 10:19 am

#110 James Kitchener — “My experience has been most people who rent do not save the difference.”

=================================

I rent and I save about 20% of my income because of it. I’d rather own but enjoy the freedom of being debt free. If house prices in GTA decrease enough I might consider it.

#134 dan on 05.29.14 at 10:26 am

http://business.financialpost.com/2014/05/28/mortgages-interest-rates-debt/

Canadians also have plenty of equity in their homes. The average Canadian household has $560,800 in net worth, including $189,400 in their home. Net worth as a percentage of disposable income reached a record of 715% in the first quarter.

That is more than 300K in liquid assets.

What planet do you live on? How many people do you know with $300,000 in liquid assets? Not only does the net worth number include pension assets which people may or may not receive, but it makes no allowance for wealth disparity. The richest 86 Canadians have enough money to buy New Brunswick. Hell, I could buy Tatamagouche. — Garth

#135 Rob Ford In Rehab on 05.29.14 at 10:35 am

Whoaaaa! What day is it blog dawgs?

Just woke up. What an awesome birthday party that was! I feel wasted. (It must just be fatigue.)

Rehab feels even more awesome today :)

Have a good one, dudes!

Buuuuuuuuurrrrrpppppp

Ffffffffffffffffffffttttttttttt

#136 Daisy Mae on 05.29.14 at 10:38 am

#101 Longterm: “Oh, and then that tech melt down. And that minor finanical crisis in 2008.”

****************

This affected us all. University costs and job instability affected us all. I’m referring to mortgages and irrational consumer spending.

#137 harden on 05.29.14 at 10:43 am

I recall back in early 2010 the constant Fed warnings that interest rate hikes were imminent. Some based significant financial decisions on those warnings. As we now know those warnings were utter BS aimed at slowing the rate of personal debt accum. Here we are almost 5 years later and rates are unchanged if not even lower. I’ll believe a rate hike when I see it

#138 Tatamagouche Realty World Inc. on 05.29.14 at 11:13 am

Dear Mr. Turner,

We understand you are looking for property in our community.

Are you currently working with a realtor?

Since it appears you are not currently represented, please sign the open house guest book and we will consider that as your agreement that we will represent you as well as the seller.

You will love this listing, complete with shed and babbling brook.

http://www.realtor.ca/propertyDetails.aspx?propertyId=14409510&PidKey=702607291

#139 Yo on 05.29.14 at 11:20 am

Its not only the low interest rates that have caused this housing bubble in the major cities. I think the major issue is why is the gov’t (CHMC) insuring mortgages for housing worth near $1M?

Lets put it this way, if you are say a bank you would actually want a borrower putting only 5% down on a $999K home and borrowing the other $950K since the gov’t will insure it – rather than having a borrower who has say 50% down, doesn’t have the gov’t insuring the mortgage and borrowing $500K. This causes poor credit analysis by the banks since there is no incentive too do it. The problem with this is that the person who sells their house to someone who takes CHMC insurance then takes the proceeds and buys something more expensive…and it just keeps on feeding the system. I bet if CHMC said they will no longer insure loans above say $500K, the market will simply stall.

#140 Ralph Cramdown on 05.29.14 at 11:27 am

#87 Inglorious Investor — “First, would you mind showing that asset allocation doesn’t matter by providing actual data?

Second, all of your examples were based on 20-year horizons. What about 10 years? 30 years?”

Absolutely asset allocation matters. But I think there’s an optimal asset allocation and that most people would be better served by being closer to the optimal than they are.

Most financial advice and rules of thumb comes from what worked in the last quarter of the 20th century. Take your classic formulation of stocks=risky, bonds=safe, 60/40=almost the return of stocks with less volatility. So bonds averaged maybe 6%, stocks maybe 8-9%, and you changed the mix depending on your safety vs. growth wishes. Safe made 6 and market risk made 8.5, so you were sacrificing some for safe, but not everything. This all comes from the US, and it is important to note that before 2003, it taxed dividends and interest the same, at your marginal rate.

Things are different in Canada, and they’re different now. I’d love to resurrect many of the old guys that recommended 60/40, and ask them if their advice would change if a bond fund had a yield to maturity of 2.2% less fees and a duration of 5.6 years, taxed as ordinary income, and Telephone was yielding 5 1/4% at a preferred tax rate of 15% — just to see if their eyebrows stay attached to their heads.

And then you’ve got the jar lady type advice for your different money needs. Keep six months worth of living expenses in cash. If you’re buying a house in a few years, don’t risk the downpayment fund — keep it in cash. If junior is going to college in a few years, dial down the risk on the fund for that. If you’re retiring in a few years (even though you’ll likely live another 25), best not take too much risk. This was great when bonds were paying 6% and cash was paying 4%, but now, still?

I currently view high grade bonds as a bad one way bet. Even in the belly of the curve you make nothing after inflation and tax, and if you go far enough out to get a return, you’ll get crucified if rates rise. So the only reason to own them at all is a bet that rates will fall.

#141 Smoking Man on 05.29.14 at 11:28 am

#126 Bubblicious on 05.29.14 at 9:53 amBond buying in spite of tapper, a batman ear has formed.. CAD getting stronger vs USA.

Is that thunder I hear…..

It’s a warning dogs…

Do Tell
….

Lighten up on your equities, fast… Real Fast…!!!!!

My invoice is in the mail..

#142 Ralph Cramdown on 05.29.14 at 11:41 am

Garth, I thought the Irvings already owned New Brunswick. Did they put it up for sale?

Yes. It’s used. — Garth

#143 Inglorious Investor on 05.29.14 at 11:54 am

#121 Shawn on 05.29.14 at 9:13 am

“Would you really like a system where no borrowing was possible?”

Of course not. Money lending is essential. It’s just that I don’t believe anyone should have the privilege to create money out of nothing, which banks do. The reason I disagree with it is because when one party has the power to create money out of nothing (in other words, money that they did not actually earn), then, by definition, any value that newly created money will have must be stolen from those who actually produce.

————–

“I disagree that money needs to be backed by a commodity.”

While I think it’s a good idea in theory, in practice governments can simply change the rules (as they have always done during periods of financial stress or war), negating the benefit of a commodity-backed currency. The real issue is controlling the supply/cost of money, which I think would be best left to the markets rather than to a money cartel (they don’t really control the supply/cost in the long run, but their short-term machinations sure can cause a lot of distortions). Let free market supply and demand determine the value of money, not some academics in an ivory tower.

—————

“The world has never been better off in terms of living standards even though the population is so much higher.”

True, but for that I credit human drive, creativity, ingenuity, a longing for a better life for themselves and their children, and a desire for wealth. But not greed. Greed is not good. Gordon Gecko purposely mislead people by conflating the beneficial human desire to earn wealth, with the desire to acquire unearned wealth.

——————

“Most people enjoy a high standard of living MUCH higher than 50 years ago.”

Even on a global level that may be true. But just as an aside, it also helps to distinguish between standard of living, and quality of life. Most people in Europe have a lower standard of living than we do, but many also enjoy a better quality of life. I’ve seen it. The current malaise not withstanding.

——————
——————-

#120 Kevin on 05.29.14 at 9:12 am

“Banks do not create money out of thin air. Banks cannot lend out money they do not already have in their vaults.”

Central banks are the liquidity pumps from which new money gets created (yes, out of thin air). The system pyramids off of this liquidity. It’s true that individual banks do not create money out of thin air. But the system, working as a whole does: new money becomes loans, becomes deposits, becomes loans, etc… The reason the system (usually) stays in check is because every single penny of that new money has interest attached, so there is always a cost to get new funds, whether it comes from reserves, repos, reverse repos, swaps, deposits, money markets, etc.

In our system, the currency comes first, and it is turned into money later. That is the way it HAS to be under a debt-money system. New/extra money must be constantly created out of thin air to service existing debts. If not, the system would crash under the weight of it’s own money/debt.

This is also why commercial banks get to create their own profits. They have the privilege of issuing some of this new money into the economy via loans, a portion of which comes back to them as profits. Nice, eh?

#144 OttawaMike on 05.29.14 at 12:00 pm

#141 Smoking Man on 05.29.14 at 11:28 am

Lighten up on your equities, fast… Real Fast…!!!!!
——————————————————-

Yeah about that, I have been in and out of the VIX twice since March via HVU, ouch. Complacency out there is rampant as the VIX keeps tumbling.

#145 OttawaMike on 05.29.14 at 12:02 pm

Bonds and Equities cannot both be right, one is giving a signal.

US equity markets have done little more this year than retain 2013 gains. — Garth

#146 Kevin on 05.29.14 at 12:26 pm

@Inglorious Investor (#143)

Central banks are the liquidity pumps from which new money gets created (yes, out of thin air).

Right. Central banks do. Retail banks do not. Can I borrow money from a Central bank? No. Quit trying to move the goal line. The assertion was that retail banks (like CIBC and TD) create money out of thin air and lend it to people, which of course is totally false.

#147 Mark on 05.29.14 at 12:32 pm

“Hundreds of billions? It would take a rather spectacular policy error – austerity in the face of a depression – to generate losses of that magnitude. Rather easily avoided”

Not really. If you figure that the average Canadian house is 100% overvalued, and due for a 50% drop, that leaves a large swath of CMHC subprime borrowers underwater (remember that subprime lending tends to be concentrated in the highest cost centres which are most vulnerable to precipitous declines!). CMHC, of course, has to make up all of the cost of being ‘underwater’ from its funds. On a total subprime guarantee base $900B, $100-$200B of losses sounds about right and would not require a ‘great depression’ any more so than having Canadian house prices drop by half would imply.

So are you really arguing that Canadian house prices are not overvalued? Because everything I’ve seen points to such.

#148 Smoking Man on 05.29.14 at 12:32 pm

Mike
Second batman ear, no volume.

I’m still in, but have a trigger finger hovering on the sell button.

What makes things worse have the shakes from withdrawal.

#149 Bubblicious on 05.29.14 at 12:42 pm

#141 Smoking Man on 05.29.14 at 11:28 am

Lighten up on your equities, fast… Real Fast…!!!!!

———————————————————

Good thing I follow the rule of 90.
90% of my net worth is in 416-SFH.

Uppa, uppa, uppa

#150 Nemesis on 05.29.14 at 12:46 pm

@Ralph/#78+#140

Profound. Sublime. [NoSarc]

BackAtYa:

http://youtu.be/ZDgFAFQGZbI

#151 Inglorious Investor on 05.29.14 at 12:53 pm

One more note about living standards that I missed along with my comment on human drive. The single biggest reason that living standards are much higher today is because of abundant, cheap energy.

Energy is EVERYTHING. It drives the universe, the climate, the economy, you and me––EVERYTHING. When energy is cheap and abundant productivity can increase, and this increases wealth.

Humans relied on the sun, animal and human energy, running water, wood, etc. at various stages in our history. Then came coal, which was a game changer because it had sufficient energy density and portability to make machines possible and possible just about anywhere. You no longer had to be near a river to power your mill, or whatever.

Then––God bless the black stuff––came petroleum. Unlike any other source of energy. Petroleum had enough energy locked away in it’s dark molecular chains to REALLY change the world and make everything that we take for granted today possible. Oil even makes modern finance possible.

So whether you love the banks, or hate ’em. Believe in the human spirit or decry our failings, pray to God or Allah or the Great Father or Para-Brahman or Gaia or Rockefeller––whoever––that we either never run out of oil, or we discover/devise a new energy source that’s just as powerful, cheap, and abundant. And safe. For, without that our stocks and bonds and homes and cars and iPhones––and maybe even Realtors®––would not exist.

#152 Big Brother on 05.29.14 at 1:02 pm

#141 Smoking Man on 05.29.14 at 11:28 am
#126 Bubblicious on 05.29.14 at 9:53 amBond buying in spite of tapper, a batman ear has formed.. CAD getting stronger vs USA.

Is that thunder I hear…..

It’s a warning dogs…

Do Tell
….

Lighten up on your equities, fast… Real Fast…!!!!!

………………………………………………………………….
MKULTRA says what Smoking Man intended to say was Light One Up!
That’s what a Smoking Man does best!

#153 devore on 05.29.14 at 1:12 pm

#133 frank le skank

Ditto. Throw another one on the pile. Not only do I objectively save more as a renter, because I keep track of such things, but I sold precisely because I was not getting ahead with my retirement plan and investments. Reluctantly, I traced the trouble to my condo, which I could rent for around 65% of what I was paying as an owner, and sold it. Like you, I would rather own, it did bring me a certain level of satisfaction, but as a renter, a huge weight has been lifted off my shoulders. Costs and risks of ownership (I was hit with a $9000 special assessment) were taking a measurable toll on my physical and mental health.

And lets not kid ourselves here. Profligate renters do not magically turn into penny-pinching owners. The explosion in HELOCs, refinancings and consumer debt speaks for itself. The days of a family tightening the belt, taking on extra employment, and paying off their mortgage in 10-12 years are long behind us, proportionally to the rise in income-price ratio and the drop in interest rates.

#154 Ralph Cramdown on 05.29.14 at 1:15 pm

#146 Kevin — “Right. Central banks [create money]. Retail banks do not. Can I borrow money from a Central bank? No. Quit trying to move the goal line. The assertion was that retail banks (like CIBC and TD) create money out of thin air and lend it to people, which of course is totally false.”

So when does the central bank create money?

Green Bank is having a hot day, writing lots of loans, but repayments are a little low today. No problem — if it finds itself short near the end of the day, it can borrow on the overnight interbank market from Blue, which maybe hasn’t been having a good week and has spare idle cash sitting around. At what rate can it borrow? That depends on the net deficit or surplus among all the banks. If more loans were written in aggregate, the rate goes up. If more money came in, they go down. The central bank has a target for this rate and prints or burns cash as necessary to keep the rate where it wants it.

So who really creates the money, the central bank, or the aggregate decisions of bank loan officers and repaying borrowers?

#155 jess on 05.29.14 at 1:32 pm

#19 Shawn
From the “city” within a city
(http://treasureislands.org/the-city-meets-a-naughty-schoolboy/)

Tuesday, February 08, 2011
To us, it’s an obscure shift of tax law. To the City, it’s the heist of the century
http://taxjustice.blogspot.ca/2011/02/to-us-its-obscure-shift-of-tax-law-to.html

B OF E – Mr. Carney latest topic:
“Inclusive Capitalism ”

Platos Ouroboros? self eating

“All ideologies are prone to extremes. Capitalism loses its sense of moderation when the belief in the power of the market enters the realm of faith. In the decades prior to the crisis such radicalism came to dominate economic ideas and became a pattern of social behaviour.” (the guardian)

Or this response to Piketty:
http://michael-hudson.com/2014/04/pikettys-wealth-gap-wake-up/

#156 Son of Ponzi on 05.29.14 at 1:47 pm

Only 2 days left to sell in May and go away!

#157 SESs on 05.29.14 at 1:57 pm

#131 Spot on Old Man.

That’s why I’ve been of the opinion for many many years, that the Canadian property market is a direct correlation of the China property market. Obviously not because of our manufacturing base, but rather the foolish thinking of our central planners . That very same monetary policy is what blew up certain European countries, via the JPM and GS predatory lending.

The same is happening in Canada where those cities that are dubbed ‘world class’ (aka:build as many investor-speculator high rises so they look like Hong Kong) are the drivers to our national irrational exuberance towards properties.

#158 dosouth on 05.29.14 at 2:07 pm

Yes, I know that this may not be news to most of us but to the masses…

Vancouver to slump says HK analyst…

#159 Realtor # 1 GTA on 05.29.14 at 2:19 pm

BMO wants greater share in mortgage business
RBC has 2.97%

Remember if lenders are willing to lend then the housing boom continues.

However what I do see is listing continuing to grow.

#160 Old Man on 05.29.14 at 2:58 pm

Caesar is in Toronto at the Maternal and Health Summit being held at the Fairmount Royal York spending our tax dollars again. On the surface seems to be a worthy cause to fret over the lives of women and children in the 3rd world. I am hearing double speak from a reformist, as seems ironic that Caesar was complicit in supporting NATO by leading Canada into wars killing thousands of innocent women and children during his reign; not to mention torture. I am sure am missing something, but this is not the Canada from the past; perhaps Peace means War. The next election is critical and do not split the vote if you want this country back – Vote Liberal!

#161 Smoking Man on 05.29.14 at 3:01 pm

#135 Rob Ford In Rehab on 05.29.14 at 10:35 amRehab feels even more awesome today :)

Have a good one, dudes!

Buuuuuuuuurrrrrpppppp

Ffffffffffffffffffffttttttttttt
……….

It’s fun being an idiot on here, isn’t it…. :)

#162 Bottoms_Up on 05.29.14 at 3:16 pm

#110 James Kitchener on 05.29.14 at 6:02 am
————————————————
That is an interesting take after 40 years. In my perspective, regardless of the value of the house at that point in time, owning, and not having to be subject to landlord wishes or constrained on what I can and can’t do around the house, makes all the difference. I can see though if someone needs flexibility that renting would be the way to go.

#163 Holy Crap Wheres The Tylenol on 05.29.14 at 3:51 pm

#160 Old Man on 05.29.14 at 2:58 pm
Caesar is in Toronto at the Maternal and Health Summit being held at the Fairmount Royal York spending our tax dollars again. On the surface seems to be a worthy cause to fret over the lives of women and children in the 3rd world. I am hearing double speak from a reformist, as seems ironic that Caesar was complicit in supporting NATO by leading Canada into wars killing thousands of innocent women and children during his reign; not to mention torture. I am sure am missing something, but this is not the Canada from the past; perhaps Peace means War. The next election is critical and do not split the vote if you want this country back – Vote Liberal!
_____________________________________________

Seriously vote Liberal, and what get Fuddle duddle number two for 4-5 years. No thanks, been there and done that back in the seventies dude. They are all cut from the same cloth to me brother. At least with this current guy I can peg his moves and know what he plans on doing to through a wrench into up our finely oiled machinery. Hell rather than vote for Liberals, Conservatives and god help us the NDP I would vote for Smoking Man’s party of UCC or whatever the hell it is.
Liberals my ass, hell Old Man you must be young, Je me souviens! Je me souviens! Je me souviens!

#164 Holy Crap Wheres The Tylenol on 05.29.14 at 3:53 pm

Smoking Man I got all fired up on my last post and I even made some spelling and grammatical errors. Holy shit I am gravitating towards a Smoking Man persona.

#165 Mister Obvious on 05.29.14 at 4:09 pm

#162 Bottoms_Up

“…owning, and not having to be subject to landlord wishes or constrained on what I can and can’t do around the house, makes all the difference.”
—————————-

I don’t have a landlord. At least, not one I’ve ever met. Instead, I have a building manager. He’s a professional and a nice guy too. We live by the rental agreement but so far (2 years) we have never had to refer to it.

When either myself or any of the residents of the other 38 units in my building need something fixed he takes care of it quickly.

Other than that, as long as everyone behaves civilly to each other and pays their rent (as they all seem to do) there are very few problems here.

Until about four years ago I owned a single family home for 25 years as well as a recreational property for 12 years. I was also unconstrained and had the freedom to do completely as I pleased around the house. I found that “freedom” to be quite overrated. It came at the expense of other greater freedoms I have now come to enjoy.

Renting from professionals in a somewhat higher end building has, for me, been completely stress free. I am now unencumbered by endless maintenance obligations and no longer worry about financial illiquidity in today’s extremely risky market.

I’ve never looked back.

#166 Nemesis on 05.29.14 at 4:34 pm

#Emperor’sMandarinsHaveNoClothes #GuangDong’sLongGones

@DoSouth/#158

…Ian knows of what he speaks…

“If those ‘naked’ official didn’t want to have their families return back or didn’t accept our arrangement after one talk, we would talk with them twice, three times or even five or six times,” said the official.

[SCMP] – ‘Naked’ party officials whose families live abroad demoted under anti-graft campaign: Move follows an order from Beijing in January that officials whose families have emigrated should not be promoted

…”Such officials are usually dubbed “naked” officials by mainland media. The term refers to a new class of cadre which has emerged on the mainland over the past decade who send their wives or children to live comfortably in foreign countries while quietly laying the ground for their own eventual departure.

There are no national statistics on such cadres across the country, although some analysts have put the figure at more than one million.

The Guangdong Communist Party Organisation Department has ordered its branches across the province to investigate how many officials’ immediate families have emigrated. All “naked” officials – including department heads – should either ask their families to return to the country or be moved to less sensitive positions.

Before transferring these officials to other posts, the organisation department tries to persuade them to have their wives or children return from overseas.”…

http://www.scmp.com/news/china/article/1521055/naked-party-officials-whose-families-live-abroad-demoted-under-anti-graft

[NoteToGT: Just between the two of us, I have a lurking suspicion that after the obligatory official ‘sixth talking to’ – the ‘conversation’ becomes rather less polite. Just a hunch, mind you: http://blogs.reuters.com/great-debate/2014/05/29/eyewitness-views-from-hope-to-horror-in-tiananmen-square/ ]

#167 Old Man on 05.29.14 at 4:48 pm

#163 Holy Crap – take the blue pill or is it the red one as the current guy moves too fast for your pegging. I see you are ill informed what he plans as its being done in baby steps, year after year. Sorry you have missed it all.

#168 saskatoon on 05.29.14 at 5:09 pm

#11 Gigi

this is my favourite comment so far this week.

#169 Life With No Fixed Address on 05.29.14 at 5:19 pm

Must Listen Radio — http://www.cbc.ca/thecurrent/episode/2014/05/29/parents-of-millennials-may-be-helping-to-skew-housing-prices-1/

#170 Inglorious Investor on 05.29.14 at 5:35 pm

#146 Kevin on 05.29.14 at 12:26 pm

The banks pyramid off each other.

Let’s say Bank A borrows a bunch of out-of-thin-air dollars from the central bank. Then…

• Bank A loans the money out. That money becomes a deposit at Bank B.
• Bank B loans the money out. That money becomes a deposit at Bank C.
• Bank C loans the money out…
etc…

The process is not 100% efficient of course, and there are limits imposed by various factors, but that’s the basic idea.

So, from one initial pile of high-powered ‘money’ borrowed from the central bank, three banks have just created three separate loans, creating new debt-money along the way.

And yet not one of the commercial banks lent out money it did not have.

#171 Bill Gable on 05.29.14 at 5:41 pm

Meanwhile BMO and Bank of Nova Scotia numbers suggest they are raking in dough!
What am I missing….?

Nobody I know is spending much. Basics. Vacations delayed, new car, not a chance; no summer jobs for the kids – so how are they going to help with the Tuition?

This is one ugly scenario.

Krugman was ridiculed, as Garth mentioned.

Now – with that in mind – check this out.

*This might sound too familiar:

“The current monetary system was saved “in extremis” in 2011 through concerted action by all major central banks. According to Economics Professor Jurgen Stark, “the whole system is based on pure fiction , struggling since 2008 to avoid a second Lehman , which if it were to happen, the system will not survive .” The bottom line is not the sequence of events in recent years but the same system that is being called into question . Paper money, printed without a real backup such as the production of goods and services in the economy, can grow without control due to the Central Banks’ mechanisms of monetary policy and the monetary multiplier. Commercial banks, at any time and under any circumstances , can create money by issuing bonds.

Link: http://tinyurl.com/opogfhp

#172 truth bender on 05.29.14 at 6:25 pm

Garth…why aren’t you telling people that super low rates are making people rich by allowing them to pay off their mortgages faster?

http://business.financialpost.com/2014/05/29/how-record-low-interest-rates-are-helping-us-pay-off-our-mortgages-faster/

By the smooth logic of this article we should all borrow millions so that we can pay more down…..even faster…..It’s a damn miracle of economics….

#173 James Kitchener on 05.29.14 at 9:03 pm

112- Ralph Cramdown My hat goes off to any person that has the discipline to save and not spend the windfall! Congratulations

115 Shadowy Man on a Shadowy Planet, again congratulations one of the few who save

133 -frank le skank 20% saving is very good, but I was speaking of saving the total difference. Still you are ahead of the majority of Canadians

Thank you all for commenting this is what makes this blog interesting

#174 GDPumpedup on 05.30.14 at 5:49 am

75% of S&P companies beat profit expectations and 50% exceeded revenue goals. The recovery continues. — Garth
—————————————————————-

Based upon extremely conservative expectations and huge stock buybacks. The beat the street game is pretty old. What % of GDP and the record profits are generated from deficit spending by all levels of government.. 10%, probably. Only made possible by record low rates making the rollover of debt possible.

-1% Q1 GDP. The weather, of course. IT WAS SUPPOSED TO BE AT 4% BY NOW!!! What is the catalyst for growth going forward?
However, owning stocks in good companies will be the only way to make money.

#175 TSML on 05.30.14 at 7:44 pm

Honestly, if we had the option to lock into a 25 year ~3-4% rate like the Americans, it is such a no brainer to just go buy and hold for a long long loooooooooooong time.

But since we don’t have that option, buyer beware… you might be in for a scare.