Dustin’s a doubter. He wrote me yesterday from a prairie somewhere. “I’ve been following you for some time now, along with other “contrarian” personalities,” he says. “I think we all know that with rising interest rates that assets such as housing will obviously go down. But is your strategy of investing in the stock market during the time of rising interest rates a sound one?
“How about preferred bank shares? I’m going to say that these banks will suffer when housing prices decline and people are unable to renew mortgages, walk away etc. In general though, the stock market as a whole would essentially suffer. An echo of the American financial crisis per se, although not as grand in scale. My take on this is that housing will not be the only dog in this “show” and that other assets will not be immune to the punchbowl being taken away.”
Well, Dustin is right about one thing. Rates will rise. The Fed made that clear yesterday, and we’re still on track for the first hike in years to take place in September. As I said yesterday, our poodles will eventually follow suit. There will be no more 2.6% five-year mortgages this autumn.
As rates rise, real estate cools. How much sales and prices are affected will vary by market and other factors we don’t yet know. But the long-term direction is obvious. Just take a look at the latest StatsCan numbers hatched Wednesday – Canadians have been on a borrowing binge for the last ten years with indebtedness growing by 64%. By 2012, 71% of us were in hock – no surprise, since almost the same percentage own houses.
So, family debt and real estate values have been moving in lockstep – about what you’d expect. That means stability, even if incomes don’t swell at the same pace, so long as interest rates stay in the ditch. Hard to overstate the importance of cheap money, because once rates creep higher, house values (and net worth) inch lower, but debt levels remain the same. Ouch.
Now, what of Dustin’s fear that financial assets will also tank?
Could happen, of course, but history suggests otherwise. Interest rates were coursing higher between 2004 and the financial crisis of 2008. Then we suffered the worst market decline in 80 years including a global credit crisis, followed by six years of emergency rates and one of the slowest recoveries in modern history, complete with a US debt ceiling scare in 2011.
Despite all that, a portfolio that’s balanced (40% fixed income and 60% growth assets, no individual stocks, no mutual funds) and diversified (across asset classes and geography) averaged 7.41% over the last decade. The five-year number is 10.06%. Last year it was 8.5%. So far this year (four months) it’s returned 4.2%.
In other words, the performance has been remarkably consistent through one of the most volatile and unprecedented decades in the lives of everyone reading this pathetic blog. When rates rose, it did fine. When they fell, it was cool. When crisis hit, it recovered fast. Overall returns have paced or exceeded almost every real estate market. And unlike houses, such a portfolio paid regular income, didn’t need reshingling, avoided property taxes and needed no bozo in a Audi charging 5% commission to sell it.
But what of now? Are things so much worse that little Dustin could be creamed if he invests?
Of course not. There’s so much more risk in buying a bungalow in the GTA with 7% down than there is investing in a rational portfolio. Rising interest rates actually mean economic growth – because central bankers (like the Fed) wouldn’t even consider getting back to normal if they thought the economy might croak. More growth means more corporate profits, more jobs, and more growth. Nothing scary there, unless you have an epic mortgage.
As for preferred shares, they slid about 10% this year as the Bank of Canada foolishly trimmed its key rate, and that is expected to reverse. In fact, rate reset preferreds (now the majority of the market) will bob higher along with the cost of money. (Yes, that means they’re now on sale.)
Banks in trouble? That’s rich. There will be no mass defaults on Canadian mortgages, and no streets-full of people walking away from their indebted homes. Even so, bankers are insured and are now enjoying record profits, even in a soggy economy. But if bank profits were to dip, preferreds would surely retain their value and continue to churn out tax-reduced dividends.
So, higher rates mean an economy’s thriving, just as low rates mean decline. When money costs more, people borrow less, or accelerate debt repayment. How’s that worse than the borrowing binge we’ve been on?
Things are getting better, Dustin, not worse. And if a decent portfolio can deliver 7% over the decade we’ve just had, why would you suddenly expect losses?
True, many homeowners with scant equity will be crushed. The moaning and gnashing will be deafening. But there’ll be no tag day for the balanced. Still time, kid.
192 comments ↓
GDP shrinking. Time for me to buy some bullion before this all goes down.
Set it and forget it.
It’s about investing, not speculating.
Good news for Long Branchidians.
Southside Johnny’s Yelp ratings soar:
http://m.yelp.ca/biz/southside-johnnys-etobicoke
0 comments ↓
There are no comments yet…Kick things off by filling out the form below.
—
Order filled.
I will believe a RATE HIKE is coming, right after it is HERE!!
Yellin’ ain’t yet Jellin’ and the economy will NOT materially improve in the United Snakes until we finally deliver a minimum wage hike – Long overdue!!
Strange, but when we help the lowest wrung on the economic ladder, we help us all.
(my never humble opinion) Besides, I would kind of like to see the buyers on a shingle toast a while, it is cruel FUN!!
I too…..love bacon. First?
We are still missing a reasonable nationwide commentary on the impact of foreign money on real estate.
Some of this money is legit. Some of it is corrupt.
Some of it is from people who are entirely foreign. Other money is from people who hold a PR or are recently new citizens.
Some of the money is gifted to local citizens but originates from afar.
Is it a big deal? It is a red herring? We won’t know and whenever we try to talk about it, someone throws out the racist card to shut down the conversation.
Here is another data point:
http://www.scmp.com/news/china/society/article/1780152/major-vancouver-property-developer-chinese-corruption-suspect
“Major Vancouver property developer is a Chinese corruption suspect wanted by Interpol”
This post (with the exception of the belief that interest rates are on their way up soon) pretty much matches my beliefs. Basically the ship of good long-term returns on balanced portfolios, particularly those with low fixed income and high equity weightings will sail for better and richer waters. Those who are stuck in home ownership will be left on the dock — still alive, but unable to accumulate any meaningful wealth for many years as most payments into the principal on an amortization are consumed by declining equity.
If the 1990s repeats itself, a home buyer who merely saved his down-payment funds and bought an equity index-heavy portfolio, a decade later, had enough to buy the house outright in cash. Not a bizarre outcome. Not reaching or grasping at straws. Not “conspiracy theory”. Simple facts which anyone can go verify if they want.
Thinking of something to buy for this year’s RESP.
Given tax sheltered status of this vehicle, what asset class is most favorable? I was thinking of throwing in a REIT but am considering preferreds as well.
These lucky kids already have RESPs and 529s. Shhh don’t tell them.. Need to fake poverty and/or middle class identity lest they get spoiled to the core.
Yes the balanced portfolio recovered faster than home values (in the US) but it still hurt.
I think what Dustin’s getting at is that those of us who don’t own homes but want to someday, if our portfolio is in the dumps when home values decline are we really ahead?
If your housing situation is settled then it’s clear you should invest in the market over RE but if part of your portfolio is to secure a portion of an RE purchase then declining prices don’t do much for you when they’re spread all around.
What decline? — Garth
I would be more concerned about big increases in hydro, electricity rates, heating, water bills, property taxes, garbage fees, H.S.T., more and higher income taxes, carbon taxes, eco and environmental fees, other new and higher taxes like land transfer taxes plus fees like road tolls, infrastructure taxes too.
Don’t forget higher C.P.P, E.I., payroll taxes, gasoline prices, food costs, auto, home insurance costs, condo fees etc.
Paying another $200, $500 a month for a mortgage is just more crap on the pile. More and higher bank fees today too, folks!
Banks in trouble? That’s rich. There will be no mass defaults on Canadian mortgages, and no streets-full of people walking away from their indebted homes.
–at the cost of CA dollar destruction
So, higher rates mean an economy’s thriving, just as low rates mean decline.
–that means we have problems now, not recovery hence low interest rates. If they don’t increase rates that proves we are in trouble.
Things are getting better, Dustin, not worse.
–not sure if this applies to Canada. For sure applies to Europe and US
#5 Retired Boomer – WI on 04.29.15 at 6:54 pm
I will believe a RATE HIKE is coming, right after it is HERE!!
—————————–
Agree, there will be no interest rates increase this year. Maybe cosmetic 0.25 early next and that would be it,
being balanced is nice
60/40
What’s the longest period of an unchanged rate in history?
You got understand what the FED is attempting to do.
Let’s face it, crap GDP, lot of people on the sidelines, waiting for a sign, to buy that car, the fridge, hell even a home down south.
A spike might just be what the Dr ordered. Make the herd believe, yes, they spiked, things must be better. Could become a self fulfilling.
Let’s buy now before rates go up even further.
But then again, I have a buddy, a guru in his field. Working in a cube at a Major financial institution, in 2005 he made 100 P/H in 2015 he makes 100 P/H
The joints profits are 8 times more in 2015 than 2005
I asked him have you been buying shares.. Long silence on the phone.. No.
Bottom line, he’s an idiot. He could easily be making double that if he went to a hedge fund. So I asked him, why do you stay..
He said he likes his job.
Who the hell likes a job, I only do it for medical reasons. Cuts down on my bottle time. No self control.
Where am I going with this post. Who knows. Lost my train of thought. It’s been happening more and more.
Seriously thinking about AA. I even pencilled it in my calendar, Jan 1st 2020.
Dustin: Garth is correct about bank preferred shares holding their value. Case in point – the early 80’s meltdown when the NEP nuked Alberta’s economy but good. For two solid years there were repossession sales out of a trailer & two full, double sided pages of repossessed homes for sale. The banks who repossessed, wept, wailed, beat their chest while proclaiming how hard done by they were – yet posted record billion – with a ‘B’ – profits for the quarter. So in the housing apocalypse they still made record profits. Have to hand it to the banks, they sure know how to get theirs even as the rest of the world panics & crumbles all around.
Nobody knows.
Everybody guessing.
Do something useful.
#Sometimes… #YouHaveJustHaveTo… #YieldToYourUrges…
https://youtu.be/T-ge61p-hvU
https://youtu.be/YjTvrsPLr70
#10 LH on 04.29.15 at 7:09 pm
Thinking of something to buy for this year’s RESP.
Given tax sheltered status of this vehicle, what asset class is most favorable? I was thinking of throwing in a REIT but am considering preferreds as well.
These lucky kids already have RESPs and 529s. Shhh don’t tell them.. Need to fake poverty and/or middle class identity lest they get spoiled to the core.
………
Ha, sounds familiar, dogs it’s time to rotate more weight into into Syndicated Commercial Mortgages… Sweat Returns.
Bill Gross has announced he’s got a huge short on Treasury’s. It’s been moving the market…
But what if, the doomers are right, what if the masses are alot more broke than studies show, what if they’re still spoked from 2008 have Money and don’t spend..
Gross will be the bug, bond market the windshield.
Sticking with my no movement in rates, CAD and USA, it sounds crazy based on what the FED said, and the strategic spike in my last post.
It’s like we have a decisive winner in monopoly, so the bank keeps lending money so the other players can continue to play. But the winner owns all the properties, the MSM, everything.
The losers have no chance in hell, and eventually, the card board cash box in the monopoly package will be empty.
At which point, the winner better learn to run fast.
Or fake poverty.
Baltimore bitches, Baltimore.
http://www.cbc.ca/m/news/canada/british-columbia/thin-home-sells-for-1-35m-in-vancouver-s-point-grey-1.3051838
The overhead on owning a house/condo is extremely high, and in too many ways to list here. If a person/couple is not already financially stable with a good sized net worth, they are merely buying a house on leverage/margin, which is a high risk strategy in buying any asset. No exception. There will be blood.
Gartho baby:
Rates in US will NOT go up. Unless forced by the market. Which is unlikely for some time.
Rates in Canada will go up BECAUSE will be forced by the bond market.
..but before that to happen …and here be very careful listening to the words of wisdom: rates will go DOWN again. Within 6 months we’ll have a housing market crush of an entire beauty to watch. And yes… one or two banks will go bust and will have to be bailed out.
All I have to do is watch the morons around getting more in debt to maintain a crappy dig in newmarket.
And yes Gartho, with the dim reality of not being politically correct, all those bitterly divorced chicks will be leading the plunge.
..so yup.. tighten your seat belt for a big yo-yo this year and the next. It’s actually a great opportunity to make like thieves.
“and needed no bozo in a Audi charging 5% commission to sell it”
———————————–
Garth, you’ll get another e-mail from the realtors®.
It should read:
Bozo® in a Audi!
“Banks in trouble? That’s rich. There will be no mass defaults on Canadian mortgages, and no streets-full of people walking away from their indebted homes.
–at the cost of CA dollar destruction
“
Why would the CAD$ be destroyed if the masses are trapped in their minimal equity houses, unable to spend because they’re broke and desperate to repay mortgage debt? That sounds very strongly deflationary, people saving and repaying debt. Not inflationary.
If you look at the Japanese experience, the Yen strengthened dramatically for 2 decades after the peak of their housing bubble. I don’t see why Canada will be different.
#7 link to corruption scandal
“Major Vancouver property developer is a Chinese corruption suspect wanted by Interpol”
This is the same developer bidding the Richmond Convention Center to be built by 2017.
From the article, we learn that there are a total of 26 high profile fugitives believed to be hiding in Canada, possibly all in Vancouver.
Nevermind rate hikes or a stagnant economy. This is potentially so huge that all the million Dollar property retirement dreams are going to be left in ashes.
You gotta wonder, where the real floor is under 604 real estate. Deutsche Bank says values are 60% above where they should be.
Closest thing I would compare the 604 real estate mania to is the infamous Dutch tulip craze. I know personally of a couple examples of friends (who didn’t listen to me) pooled money and either reno’d or built a house and hoping to hit the late Spring market. One part is already walking on razor’s edge and could possibly lose a good chunk of equity. The other is still running from one friend to another and looking for more funding…
At the end of the day, it’s just money… It’s a huge gamble right now to build or flip in the 604.
But this crackdown on Chinese corruption by the party leadership has the potential to throw a real wrench into the RE economy here.
#9 Mark on 04.29.15 at 7:08 pm
This post (with the exception of the belief that interest rates are on their way up soon) pretty much matches my beliefs. Basically the ship of good long-term returns on balanced portfolios, particularly those with low fixed income and high equity weightings will sail for better and richer waters. Those who are stuck in home ownership will be left on the dock — still alive, but unable to accumulate any meaningful wealth for many years as most payments into the principal on an amortization are consumed by declining equity.
……
So what is it, Rent vs Ownership difference, House cost Vs Income?
Wrong, it is, and will always be, Supply vs Demand. With 100k people a year or, 2000 people a week coming to the GTA housing will remain strong for a long time.
If your a robot, or human slide rule, that concept is difficult.
DR Smoking Man
PhD Herdonomics.
….”The Fed made that clear yesterday, and we’re still on track for the first hike in years to take place in September”….
Watch out..in September (for any kind of reason) the Fed will still “made that clear…” (again) but interest hike will be delay (again!) till January 2016 this time!
61 One-Sentence Rules That Will Make You Better With Money
http://www.businessinsider.com/one-sentence-financial-rules-2014-3
…There will be no mass defaults on Canadian mortgages, and no streets-full of people walking away from their indebted homes. Even so, bankers are insured…
So how do mortgage defaults work in Canada anyway since “jingle mail” doesn’t exist?
Since CMHC protects the banks, if someone defaults on their mortgage, does that mean the bank is off the (due to CMHC) and the owner is still on the hook for the balance? If so, where does the owner’s money go if the banks are getting the CMHC insurance money???
Do you not know how insurance works? — Garth
RE #That’s because Garth is afraid of offending people so he belittles the influence of foreign money in the real estate market. Its influence is so obvious that the politicians don’t want to have a discussion about it. They say they don’t keep stats–they could easily keeps stats, but then we would have proof of the influence of foreign money on real estate. So many people are benefiting from this speculation–realtors, who probably would be working retail if they couldn’t sell real estate, construction workers, trades people, architects, bankers, etc.
This is not an anti-immigrant blog, and I will not bow to the haters. — Garth
When someone says a portfolio returned 7% over the last decade, does that include dividends payments or just straight capital gains?
Total return, of course, but the effect is the same as investment income is added to the portfolio. — Garth
Re: #6 Made in BC. Interesting, do you eat bacon while coming first? Messy.
Wait a second, if interest rates go down, preferred share prices generally go up, and vice versa. Why are you saying the reverse just happened?
Most of the market is now rate resets, influenced by the 5-year bond rate. That’s why. — Garth
Hi Garth
There is one huge misconception out there that shows how ignorant they are to the reality of home ownership and insurance.
They think the banks will take the hit in a crash or serious downturn. Yes the banks will get a minor spanking but in a serious wave of defaults, people don’t understand that it is they, the taxpayer, that is on the hook via the CMHC. The banks have downloaded the risk on us, the consumer. Guess who really is in control?
And the sheeple continue to gorge…….
http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/more-canadian-families-are-highly-indebted-statscan/article24162884/
Mr. R.
Three rounds of QE and 0% interest rates. 18 trillion in debt, ontario alone reaching 300 billion. You people are insane. This f**Kers going to blow and blow hard. It should have happened a long time ago. I will say however that I am truly impressed by the ability of the powers that be to keep the confidence game going for so long. Personally, I’m looking forward to when the sh*t hits the fan. It will be the greatest show on earth.
You’ll be waiting a couple of lifetimes. — Garth
Garth I would like to make a bet that rates will not rise this year ,
Stay the same or lower , whats the wager?
in terms of foreign influx of vast amounts of money?
re #27 Roy
…not different at all. Zurich is still a bit more expensive than Vancouver.
But you don’t hear people of Zurich complaining about the inflow of foreign cash into their banks and into the jurisdiction. It pays their wages!
“Wrong, it is, and will always be, Supply vs Demand. With 100k people a year or, 2000 people a week coming to the GTA housing will remain strong for a long time”
Remember that those 100k people a year who come to Canada are most often relatively poor (as verified by Garth in a previous blog entry, they bring little more than enough for an apartment first months and last months rent and a used Honda). And they are available, probably more so than the average Canadian worker, to be deployed in the labour market to build more houses. So immigration does not automatically shift prices upwards, as immigration also expands the capacity of the housing industry to create *supply* (as well as the obvious demand they bring, which you addressed!).
Additionally, Garth points out constantly that immigration levels have not meaningfully accelerated. The housing industry was obviously providing enough supply in years past, particularly in the 1990s, to keep prices down. So why would the industry magically fall short today?
Fact is, the industry is not only not falling short, but they are now delivering far more housing supply to market than the market is demanding. Hence falling prices. Heaven forbid if immigration were to slow for a variety of reasons, look out below!
RBC will soon be charging customers for making loan and mortgage payments to them. http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/no-stone-left-unturned-as-rbc-hikes-fees/article24170387/
“They say they don’t keep stats–they could easily keeps stats, but then we would have proof of the influence of foreign money on real estate.”
The stats that are kept show minimal foreign involvement with Canadian RE. And the Canadian RE bubble can be entirely explained in the context of abnormally loose lending standards and historically abnormal interest rates. If you can identify the boogeyman from the facts, why go looking for more boogeymen? Its like going through the trouble of getting your toddler tested for lung cancer the first time he comes down with a minor cough — sure, I guess its possible, but the statistical probability of a cough being caused by such is minimal.
If you read the media, the only people making the claims publicly of ‘foreign money’ coming to Canadian RE are those who have a financial interest in pushing such point of view. Most claimers of such have diminished credibility even before we look at the true veracity of their claims.
Since CMHC protects the banks, if someone defaults on their mortgage, does that mean the bank is off the (due to CMHC) and the owner is still on the hook for the balance?
Yes. If there is an equity deficiency, the CMHC makes a payment to the bank, and then sues the defaulted borrower for the deficiency.
In most cases, the borrower is bankrupt, so the claim is, at best, a claim against the Bankruptcy Estate of the defaulter. CMHC gets a little bit of money back from the liquidated Estate and payments subsequently made into it, but not a lot for the equity deficiency it has covered. First time bankruptcy in Canada only requires 21 months of such payments at a rate prescribed by the Superintendent of Bankruptcy or as may be ordered by the Court.
If so, where does the owner’s money go if the banks are getting the CMHC insurance money???
The owner doesn’t have any money.
#40 LazyJason on 04.29.15 at 8:47 pm
RBC will soon be charging customers for making loan and mortgage payments to them. http://www.theglobeandmail.com/globe-investor/personal-finance/household-finances/no-stone-left-unturned-as-rbc-hikes-fees/article24170387/
……
So, be opportunistic, buy shares. Hello!!
Why take the risks of being a home owner. Or a cash strapped home owner that will rent out their own overprice home just to make ends meet:
http://www.cbc.ca/news/canada/calgary/airbnb-nightmare-renters-leave-calgary-home-trashed-1.3053555
Unfortunate, but the reality of home ownership. The risk is on the owner.
BREAKING BLOG DOG NEWS
Tarek & Christina didn’t even show up to the HGTV conference in North Vancouver. What a massive disappointment (via @craig_boyle on Twitter)
#38 Is Zurich any different?
You are funny!
Zurich is different just because there are limitation on foreign ownership of re, and whole swicerland is only 6x bigger than GTA.
gov there is not top heavy, like here… Most of the taz collected stays with cantons/municipal gov.
But what do I know.
The GFC was just a prelude to the big show coming up. No matter which way you slice it the basic fundamentals for a healthy productive society no longer exist. Go ahead and crunch fudged numbers all day long to draw the conculsions you like, but when your done take a look around at the basics. Not good.
I’m am fascinated how many smart intellegent people fail to see what is going on. If the economy was really sound we would all be busy building infastructure for cleaning up the environment, dealing with the drought in Califonia, supporting local communities and local food production, eliminating smog, and coping with climate change, helping our fellow man…
Instead geoengineering is creating the drought in California, there are riots in the streets due to police brutality and widening gap between the rich and the poor, wars are being waged on false flag attacks, civil liberties are being stripped in the name of freedom and governments drunk on power will stop at nothing to crush the middle class.
The stage is set folks and like I have said before, soon we will not be able to ignore the truth and reality any longer
Choose wisely going forward with how you perceive reality and how you interact with your fellow man for the seeds of deception have long been sown… Past performance does not dictate future reality.
It is time to wake up and understand the reality of the situation even if it is extremely uncomfortable, and trust me it will be… But in the end the truth will set you free
#18 Washed Up Lawyer on 04.28.15 at 7:23 pm
The second is one that even a type like me with no economic education or background should have known, is that electric vehicles to not have to replace a significant portion of the demand for oil, they only have to dent it to have an effect on price.
======================
The question is, over what time scale?. Presently, even \ with the Tesla cool factor, sales of plug-ins are puny. For example, according to Wikipedia:
“The British market experienced a surge of plug-in car sales during 2014. Plug-in electric car registrations in the UK quadruple from 3,586 in 2013 to 14,498 units in 2014.”
That “surge” is in a country with short driving distances and high gas prices. Until EV sales start rising \ significantly faster than the overall growth in world demand for automobiles, I can’t see much impact on oil prices.
For me the essential issues for growth in EV’s are:
(1) Would you buy a used EV?
(2) Are taxi fleets buying them?
There is little experience to date on the risks of buying an 8 year old EV which may or may not need a very expensive battery replacement. Tesla’s new battery plant should tilt this equation.
Taxi fleets have been early adopters of cost saving strategies such as conversion to propane and hybrid gas/electric systems. In principle they should love the potential for lowered energy and maintenance costs with electric propulsion. However city taxis may have to run 20 hours a day and cannot afford to be towed or stuck for an hour at a charging plug. When the day comes that taxi fleets line up for plug-ins, the rest of us will be right behind them.
Hey Garth- 300 Dudley Ave. is now listed for $1,288,000. Took a walk today and saw the ‘for sale’ sign and decided to Google. Stumbled on your old post from April 2012, which mentions the place; then listed for $1,219,800. Others may differ, but I find the entire street quite bleak and almost depressing, even on a beautiful sunny day. Especially with all of the new mcmansions going up constantly around here, which is a pain in the ass for locals – noise, dust and general annoyance. Funny feeling that flippers are largely responsible for the 4000 ft new builds with postage stamp backyards, but who knows… I did notice that most new builds tend to have 2 driveways and separate entrance so maybe some of these places are just fancy rooming houses. As a long time renter I have seen many such places; scenario being to rent to students, or anyone else that is content with a room in a clean house, shared kitchen and free Internet, and pay mortgage + profit. Not for me, but I know people driven to that choice by circumstance. Might be me someday, who knows…
Value for money is not something that people seem to consider nowadays, when it comes to housing. Nothing done to that poor old bung in 3 years- looks neglected and droopy eared. I’d send you a pic but don’t want to get hit with a strange and unusual defamation suit by one of the many institutions that are all jumping over this listing LOL.
Been reading since 2009- things have gone from stupid to outright crazy in the housing market.
All the best Garth!
#25 Mark
I already explained many times – houses will not be allowed to drop in nominal terms significantly as this will jeopardise banks and budget.
So to achieve equilibrium (as a house in country with no economy can not be 5 times more expensive then a house in a country with economy – Germany for example) the Ca dollar has to tank. It is that simple.
#38 Is Zurich any different?
Zurich is one of the financial capitals of the world. Vancouver is nothing.
[…] Source: http://www.greaterfool.ca/2015/04/29/crushed/ […]
#42 Mark on 04.29.15 at 8:59 pm
You blog dogs that are critical of Mark can say what you want. I do not know his educational background but his comment at #42 is a welcome refresher course for me on foreclosure and insolvency law and the realities of debt collection.
I have not done any foreclosure and debt collection work since the mid ’80’s in Alberta. I remember an embarrassing moment seeing a woman pushing a wheeled cart into a courtroom with about 30 files in the cart. Based on her hauling that many files into the courtroom, I addressed her as Madame Clerk thinking those were the files on the docket for that morning.
She was not the Clerk of the Court. She was the leading foreclosure legal specialist in town. Another day’s work. The next day there were another 30 or so. Etc.
#CodeBlue/3!!!… #DoctorsOnCallRespondFast… #Smokin’Man’sEssentialInterventionIn4Acts…
#TheWisdomOfSandraPart1…
https://youtu.be/Yajrfh2ZlVU
#TheWisdomOfSandraPart2…
https://youtu.be/3BUSPNN8Svw
#JimmyBuffet’[email protected]…
https://youtu.be/5VIYV1lrscg
#Jimmy’sReprise… #WhyNotTryParis,SM?…
https://youtu.be/56K_O_EdTng
“I already explained many times – houses will not be allowed to drop in nominal terms significantly as this will jeopardise banks and budget.”
Could you come up with an example, even one example, of this actually happening to an asset class that has been so significantly over-extended on credit in the history of the universe?
And just where does inflation come from, when there’s so much overcapacity in labour that is now worsening as even the few bright spots in the Canadian economy, to wit: housing and O&G, are dimming quite rapidly?
I’m open to your theories, but just can’t reconcile how these inflationary conditions are supposed to arise when it appears that we’re in a credit bubble that’s in the process of popping. And Canada is mostly a long-term net exporter no less.
#Paris…
https://youtu.be/SIxOl1EraXA
I feel badly for people in Vancouver and Toronto. RE prices across the board have been on a straight line up for the last 2 decades; far exceeding all rational metrics.
Although I don’t think a decline will necessarily be caused by increasing rates, I do believe that prices will come down. Sooner or later. And considering the heights that prices have (and continue to) achieve, the downturn will be catastrophic.
Years ago I thought that buying U.S. property was as good as it was going to get, but now I think that the best time for buying may actually be ahead of me…
#7 ILoveCharts
A data point of what? What do property developers, corrupt or otherwise, have to do with foreign money?
#53 Washed Up Lawyer on 04.29.15 at 9:39 pm
#42 Mark on 04.29.15 at 8:59 pm
You blog dogs that are critical of Mark can say what you want. I do not know his educational background but his comment at #42 is a welcome refresher course for me on foreclosure and insolvency law and the realities of debt collection.
I have not done any foreclosure and debt collection work since the mid ’80’s in Alberta. I remember an embarrassing moment seeing a woman pushing a wheeled cart into a courtroom with about 30 files in the cart. Based on her hauling that many files into the courtroom, I addressed her as Madame Clerk thinking those were the files on the docket for that morning.
She was not the Clerk of the Court. She was the leading foreclosure legal specialist in town. Another day’s work. The next day there were another 30 or so. Etc.
……..
Let’s all celebrate, selfie bjs, damn arthritis, I was so damn close.. That ship has sailed.
Nothing to look forward to any more..
Just booze and anarchy…
If the economy was really sound we would all be busy building infastructure for cleaning up the environment, dealing with the drought in Califonia, supporting local communities and local food production, eliminating smog, and coping with climate change, helping our fellow man…
Capitalism doesn’t work that way.
There seems to be a lot of disagreement as to when the Fed will raise rates…
I’m no economist, but it’s pretty clear by looking at the following chart that the Fed simply follows the 3 month Treasury Bill yields and adjusts rates to match. The correlation is undeniable, and rate Fed rate moves come AFTER bond yield moves, not before:
https://www.elliottwave.com/images/freeupdates/image/mw%2006-24-2014.GIF
And this updated chart seems to confirm:
https://www.elliottwave.com/images/freeupdates/image/mw%2006-24-2014two.GIF
So, if you want to know when the Fed will raise rates, simply pay attention to Treasury bond yields.
Here is the article that sums it up:
http://www.elliottwave.com/freeupdates/archives/2015/03/19/The-Fed-s-Coming-Rate-Hike-The-One–Little-Indicator-That-Could-.aspx
Could it be this simple, or am I missing something?
… And based on the above, it doesn’t look like any rate hikes are coming any time soon.
Wrong, it is, and will always be, Supply vs Demand. With 100k people a year or, 2000 people a week coming to the GTA housing will remain strong for a long time.
SM is right on the money. Again.
I guess that makes sense since he actually knows how to make money (as opposed those who beg for the opportunity to be a wage slave)
He said he likes his job.
He’s lying.
Nobody chooses to spend their one and only life, slaving dozens of hours a week to fatten a corporation’s profits, away from family and friends, because that’s what they ‘like’.
Unless they hate their family, friends and life, but love fattening the wallet of their corporate stakeholders.
#59 Smoking Man on 04.29.15 at 10:17 pm
#53 Washed Up Lawyer on 04.29.15 at 9:39 pm
#42 Mark on 04.29.15 at 8:59 pm
You blog dogs that are critical of Mark can say what you want. I do not know his educational background but his comment at #42 is a welcome refresher course for me on foreclosure and insolvency law and the realities of debt collection.
I have not done any foreclosure and debt collection work since the mid ’80’s in Alberta. I remember an embarrassing moment seeing a woman pushing a wheeled cart into a courtroom with about 30 files in the cart. Based on her hauling that many files into the courtroom, I addressed her as Madame Clerk thinking those were the files on the docket for that morning.
She was not the Clerk of the Court. She was the leading foreclosure legal specialist in town. Another day’s work. The next day there were another 30 or so. Etc.
……..
Let’s all celebrate, selfie bjs, damn arthritis, I was so damn close.. That ship has sailed.
Nothing to look forward to any more..
Just booze and anarchy…
—————————————
Yoga might help.
Do you not know how insurance works? — Garth
I thought I did, but when it comes to CMHC and who it really protects, I have no idea.
I know the buyer pays CMHC which then protects the bank’s butt. I’m just no sure how the buyer gets protected in all of this.
He doesn’t. — Garth
Wrong. The govt will stop increasing rates if it effects the property market. they wont let it go down. mark my words.
44 RE: Ari BnB Rental trashed with $50K damage
From the article: “She and her husband, Mark, turned their keys over to the renters on Saturday night and went to stay with their in-laws in another part of the city.” It says they did the same thing two weeks prior.
These people are renting their principal residence out as a hotel (while staying with parents) to make ends meet. Just another example of how ‘people are affording it’. In other words they can’t afford it. You’d think it would be easier to just rent a place (at half the cost of owning) and not have to move to mom and dads every weekend to make the mortgage payment. Kind of sucks for mom and dad too.
Hopefully they saved enough from past rentals to pay for the $50K in damage. I doubt it. Back to the bank of mom and dad for a hand out.
#63 Leo Trollstoy on 04.29.15 at 10:24 pm
Wrong, it is, and will always be, Supply vs Demand. With 100k people a year or, 2000 people a week coming to the GTA housing will remain strong for a long time.
SM is right on the money. Again.
I guess that makes sense since he actually knows how to make money (as opposed those who beg for the opportunity to be a wage slave)
….
I spend it just as fast… Live for today. A Shakespearen moment will be shared shortly. MoFos, unless beings coming after my gold. Well it’s just a bit of gold. But the nerve is all I’m thinking.
Big mistake for the messenger , bit of Spartan in me. been practising in front of the mirror.
The tennis drama award still at West Toronto secondary school , with my name ingraved.
3 years in a row. Best actorian.
Love my life’s challenges.
Nothing is more of a gratification of sorts to bitch slapping the schooled with a dyslexic prospective.
It can’t come soon enough.
#26 Ouch.. that’s gonna leave a mark
Wow. 26. 90 properties change hands in REBGV region every day. Vast majority of houses are still sold to locals. Stop looking for your boogeymen in other countries.
Re #60 Leo Trollstoy
If the economy was really sound we would all be busy building infastructure for cleaning up the environment, dealing with the drought in Califonia, supporting local communities and local food production, eliminating smog, and coping with climate change, helping our fellow man…
Capitalism doesn’t work that way.
———————–
Hmmmm. So the post WWII infastructure boom in America was based on???
I thought it was capitalism, but seems it no longer works that way. Strange.
“I guess that makes sense since he actually knows how to make money ”
I make plenty of money at what I do. With declining RE prices in Toronto, you’re loosing value at this point and have been for the past couple years. Don’t know why your narcissism has no bounds, but I think people here are getting a bit tired of it.
Wrong. The govt will stop increasing rates if it effects the property market. they wont let it go down. mark my words.
What makes you think that rates actually matter, as the market goes into ever-increasing states of overcapacity?
The US has thrown close to a decade of low rate policy, trillions worth of QE, and almost everything but the kitchen sink at the housing market and has still failed to achieve full reflation.
Falling prices are a natural signal of the economy telling producers of housing to slow production and investment in a given asset class. Efforts to suppress such might be able to prop up housing temporarily, but eventually fundamentals will re-assert themselves.
“I know the buyer pays CMHC which then protects the bank’s butt. I’m just no sure how the buyer gets protected in all of this.”
The buyer, who ordinarily would have to pay subprime mortgage rates without the CMHC insurance, gets to qualify for a prime mortgage at the banks once CMHC subprime mortgage insurance has been purchased. The banks accept CMHC insurance as an enhancement to the quality of their otherwise (subprime) credit quality.
In a housing downturn, this may be a form of ‘protection’ in that, CMHC insured subprime mortgages are highly desirable investments for mortgage investors (theoretically equivalent in quality to GoC bonds, although practically speaking, the market trades at a slight discount on account of the variable characteristics of such loans and the slight risk of perceived default at the CMHC). While in a downturn, uninsured subprime loans are not particularly desirable and renewal at favourable terms may be difficult if not impossible.
Really? Why were houses “allowed to drop” after every other housing bubble? Why did they “allow it” recently in the US, Japan, Spain, Iceland, etc? Our politicians are smarter than theirs?
If the CAD drops (which it might) that does not help Canadians afford houses priced in CAD who are paid in CAD.
Spot the inconsistencies and the fallacies :
The Bank of Canada’s top brass assured a parliamentary committee that Canada’s bloated housing market has not become a risky asset bubble, despite the central bank’s own calculation that house prices nationwide are roughly 20 per cent overvalued.
“We don’t believe we’re in a bubble,” Bank of Canada Governor Stephen Poloz said in testimony Tuesday to the House of Commons Standing Committee on Finance. He said Canada’s long-running boom in the housing market hasn’t been underpinned by the kind of rampant speculative buying that is the hallmark of an asset bubble.
Must be an election coming up.
Cheers.
New math ???
Does make you scratch your head.
#4 According to numbers that were just released by the Bureau of Labor Statistics, in one out of every five American families nobody has a job. So how in the world can the “unemployment rate” be sitting at “5.5 percent” when everyone is unemployed in 20 percent of all families in the United States? It doesn’t make any sense.
58:
Plus, the developer in question came to Canada in the year 2000 via Hong Kong. Not quite Chinese anymore. That was 15 years ago. He is building a shopping mall and hotel at the airport.
People sure have creative imaginations when it comes to why we have a bubble.
#190 Network Admin on 04.29.15 at 3:36 pm
#84 With the lower dollar, inflation is rampant. Saw cauliflower hitting $5.99 each the other day.
——————
#181 My wife just bought cauliflower (product of the USA) in Kingsville, ON for $2.49. Perhaps like housing, cauliflower is grossly overpriced depending on where you live.
=======
Assuming the #84’s price is per kg, and #181’s per pound, it is pretty much the same
————–
Shouldn’t make assumptions. That $2.49 was not for weight, but EACH.
#68 BS
Well, Airbnb has insurance, so they’re covered, right? Right?
Re: 300 Dudley ave.
Interesting, that house is back on the market almost 3 years to the day after it sold for that record setting sum.
Now why could that be? Something to do with a statute of limitations? Or maybe the time it takes to qualify for permanent residency?
The owner is a local, long-time resident. — Garth
The devil on my shoulder is telling me to short gworth and home cappy. I resist for now.
DELETED (Anti-Chinese)
#76 meslippery
Retired people don’t work. Students (living outside home) don’t work. Severely disabled don’t work. And of course people who are fine with living on welfare also don’t work, although not including them in employment stats is controversial.
#77 BS
I came to Canada in 1999, and own(ed) a condo, so I guess I am a foreign buyer too? Depending on whom you ask, I might even be corrupt, although no one’s asked me to build a shopping mall yet.
#47 SWL1976 on 04.29.15 at 9:30 pm
When you go to a nice restaurant are you concerned with what goes on in the kitchen? Not really, you’re in the dining room – the illusion is what you’re paying for. There are two worlds going on (at least) and those that can afford it don’t want to know. Unfortunately the collective shadow grows, and grows, and grows and the illusion grows harder to maintain.
https://www.youtube.com/watch?v=p1X11aLACso
What do the rich know, or want to know, about it?
Everyone keeps talking about the future of rising interest rates in the U.S. / Canada. Dream on. Here’s why I say that:
The truth is that the U.S. has a massive government debt / entitlement bubble that is ready to burst with the slightest rise in rates. Maybe a 1% to 1.5% rise can be sustained if the economy begins to gain traction and their GDP rises to above 5% growth. But if GDP growth remains below 3% then rates won’t rise more than what they already are at.
You see; for the debt-based financial system to function
you have to have the GDP growth of the economy a couple of percentage points GREATER than what the Fed Funds rate is. It’s as simple as that.
So if the U.S. gets 6% GDP growth then you take 6% minus (2% to 3%) and you get a maximum Fed Funds rate of somewhere between 3% and 4% , instead of the 0% to 0.25% range of where it is now.
Well, lately growth in the U.S. has been in the mid 2% range, so that translates into a Fed Funds rate of: lets see, 2% minus (2% to 3%) gives you ……. um? Negative? No, that can’t be right.
Well yes, that’s exactly right, that’s why rates in Europe are now going negative as we speak.
Growth all over the world is quickly collapsing towards zero, all because of the quicksand-like effect of DEBT.
Sorry, but unless the multi-trillion-dollar debt of the U.S. suddenly evaporates overnight, we won’t be getting a great amount of GDP growth like we had in the 70’s or 80’s because debt acts as a moderator that slows down economic growth.
I wondered what is negative interest rates and why should we be worried about them, and I read this story and now I’m sorry I did. Basically what will happen when people themselves begin to experience negative interest rates is that people will stop saving and start to borrow like crazy. literally in a few months money becomes ‘worthless’ because of massive borrowing by consumers to buy ‘stuff’ and the price of everything around us EXPLODES overnight. You know, it makes sense, just look at what’s going on in Toronto with ‘LOW’ rates. Now imagine how insane things will get if rates turn negative? Wow.
Here’s the story:
“Negative Interest Rates: The Black Hole of The Financial System.”
http://www.zerohedge.com/news/2015-04-26/negative-interest-rates-black-hole-financial-system
QUOTE: (( “Who is going to save money then? Not a single soul, of course. People will start to create debt en masse, because it is the better and cheaper option. The resulting investments will rise in value, moreover, when an increasing amount of people take on debt in search for returns. Things cannot get a lot crazier than this.
If this is how the system ends up working, we fear that the effects will be irreversible. It is like a black hole that sucks in more and more matter – read: capital – and never lets go. This financial black hole story will also end with a sudden implosion, a flash of light and a big bang, just like in space, and those who do not own hard assets at that point in time could lose every bit of wealth they’ve ever accumulated. As Alan Greenspan, former chairman of the Fed and original promoter of monetary expansion, said once: “Or how you can lose your savings in a blink of an eye”. “)))
NOTE TO MYSELF: Watch the trend in the price of Gold. Watch this 3 year chart carefully.
http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=3&mn=0&dy=0&id=p10926741966
If Central bank rates begin to go negative en mass and this chart begins to show that the price of Gold has bottomed and is beginning to climb, then that’s the sign that paper currencies are beginning to become ‘worthless’ as the printing presses speed up printing paper currency.
When you hear of some major Western country defaulting on their debts then that’s when you need to go out and begin buying Gold bullion and hiding it under your mattress. Until then don’t worry, and don’t buy Gold as it is currently falling in value.
http://stockcharts.com/h-sc/ui?s=$GOLD&p=D&yr=3&mn=0&dy=0&id=p10926741966
RE: #74 BS on 04.29.15 at 11:11 pm
If the CAD drops (which it might) that does not help Canadians afford houses priced in CAD who are paid in CAD.
Exactly. Also, when the CAD drops it drives up the CAD cost of commodities like lumber which are priced on the open market.
Chinese authorities are investigating 100 high profile corruption scandals and at least 26 of those have ties to Canada, many probably to Greater Vancouver.
Our opinion on this matter is worth shyte. There is no extradition agreement – yet.
When the Chinese government makes a formal request to the Canadian government and the Canadian government tries to ignore the issue, there will be consequences.
In other words, if our authorities are turning a blind eye to these money trails, the foreign authorities are certainly not and they’re now cracking down on it.
This may impact the real estate economy of Vancouver which has been influenced by wealthy buyers from outside of Canada.
I think we can all agree on at least this much.
Only of you are Chinese. In which case you stay foreign forever and any money you have must be from corruption. The sad part is some people actually think this way.
Here is another ‘data point’ on corrupt foreign money flowing into Canada.
http://www.yvr.ca/en/business-at-yvr/development/shopping-outlet.aspx
Waite sorry it is a British developer. All is OK. Delete data point.
To prop up their housing bubble realtors in China have taken a page from us to arouse and incite the locals like we have here. Anybody need work?
http://www.nytimes.com/2015/04/28/opinion/rent-a-foreigner-in-china.html?_r=0
Funny thing about CRA they say it is all OK then ask for returns from 6 years ago.
Oh, you are driving an Audi. I thought you said audit.
I make plenty of money at what I do.
Not plenty if paid by a corporate wage slaveowner.
What was the (sub-prime) rate that individuals who qualify for CMHC mortgage insurance get again?
Oh right, it’s not sub-prime, that’s why you don’t know ;)
With declining RE prices in Toronto, you’re loosing value at this point and have been for the past couple years
No linked info source to support this opinion.
RE prices in Toronto rising for all sales mixes over most of the last 2 decades.
Sorry Mark. Wrong again. Hope you do better next time :(
I thought it was capitalism, but seems it no longer works that way. Strange.
Don’t feel bad. Most people don’t know how Capitalism works. That’s why they beg to be indoctrinated wage slaves. :(
Garth,
Loophole has been uncovered. If you want to collect pensions and etc. in 2 countries, all you have to do is legally change your name in Canada.
Its so easy :)
http://www.cbc.ca/news/business/non-permanent-residents-are-force-in-canadian-economy-cibc-1.3053897
770,000 and growing residents that live in Canada not counted in population stats. Most in Vancouver and Toronto. Called Non-permanent even though been here for 5-7 years.
At least Dustin is thinking.
But Garth a contrarian? Cmon Dustin.
Just because the majority are ignoring the obvious doesn’t make Garth a contrarian. It’s all just basic math.
#73 Mark
“The buyer, who ordinarily would have to pay subprime mortgage rates without the CMHC insurance, gets to qualify for a prime mortgage at the banks once CMHC subprime mortgage insurance has been purchased. The banks accept CMHC insurance as an enhancement to the quality of their otherwise (subprime) credit quality.”
Most CMHC (or otherwise insured, they are not the sole provider) insured mortgages are for mortgages at advance rates greater than 80%. Banks are not allowed to lend in excess of 80% as per the Bank act (which used to be 75% but was changed a few years ago).
So most of the time, insurance is required not to get a better rate but to get a mortgage at all.
Cases where mortgage insurance is required by the lender below 80% lending value would be for a sub prime borrower and those cases are I believe a minority (not the sub prime borrower part but the requirement for insurance below 80% lending value).
Competition is fierce with mortgage lenders and if 1 requires insurance with the cost attached, another lender may not due to the equity brought to the table.
Some of us here disagree on the definition of sub prime mortgages, some feel it is based on loan advance rate, my take is that it is more a function of borrower quality with some consideration for quality of asset securing the loan.
The lefties on this blob are following technocracy rising (sustainable commie development, climate fake science change, greenie lies, agenda21).
Here is a good interview about them infiltrating local politics:
http://www.trunews.com/wednesday-april-22-2015-patrick-wood/
God and freedom and capitalism has blessed us.
Athiest-communists hurt us, national socialism (NAZI lefties) hurt us, fiscal conservatives/social-sinners fail, socialist Europe is failing-eg.Greece, commie-jihad-Barry is a divisive street thug doing his Baltimore-commie-jihad. There is little racism. It is commie revolutionaries in action. Return to Jesus.
Bozo in a Beemer has a better ring to it.
#74 BS
We are in deeper doo-doo in terms of overall and consumer debt so any significant house correction brings the end game.
On the dropping dollar I agree, the imports could become more expensive and we don’t have much to export but theoretically that export will cost more Ca dollars to pay houses with. Of course we will be consuming less.
With CMHC I simply don’t see the house prices can be allowed to implode. They insure twice than the current federal debt.
#47 SWL1976 — “I’m am fascinated how many smart intellegent [sic] people fail to see what is going on. If the economy was really sound we would all be busy […]”
You’re reasoning from a false premise. Intelligent investors are fairly well attuned to how well the economy is doing. We know that, regardless of conditions, most punters are going to get out of bed this morning and go to work to buy their daily bread and make their monthly payments. All that remains is to price probabilities for the debts and equities of various governments and companies.
The bizarre Austrian theory that we are collectively worthy of more punishment, and will eventually receive it, has little basis in modern fiat economies. I think much modern Austrian error comes from studying early industrial economies in gold backed regimes and assuming the results hold in economies with central banks, fiat money, better inventory control, more patent monopolies and a greater tilt toward services versus goods.
And the rest is the influence of the goldbugs, possibly backed by industrialists, urging the masses to sell their ownership stakes. Good luck.
#84 devore — “I came to Canada in 1999, and own(ed) a condo, so I guess I am a foreign buyer too?”
I say welcome, and I hope you are enjoying your stay.
I’m concerned about people who don’t actually live here, earn income here, generate wealth here, pay taxes here, but use real estate here as a store of wealth here. I think it’s bad for the economy. People tell me I shouldn’t be concerned because we don’t have definitive proof of how big a problem it is. And nobody here is looking for the proof.
Apropos of nothing, here’s a favourite quote of mine:
“Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.” — John Kenneth Galbraith
Canadian residents and citizens are the architects of their own real estate excess. Ample evidence of that is published weekly on this blog. Get over it. — Garth
#5 Retired Boomer – WI on 04.29.15 at 6:54 pm
“I will believe a RATE HIKE is coming, right after it is HERE!!”
I completely agree.
“lowest wrung” – spot on and very clever.
If the economy is getter that also means wages would be higher. Hence people will be able to service even when rates rises. RE prices doesn’t necessary will decline. Rates, Price, and Wages can go up in tandem.
I guess that makes sense since he actually knows how to make money (as opposed those who beg for the opportunity to be a wage slave).
Leo fictional characters don’t make money.
#85 Godth
When you go to a nice restaurant are you concerned with what goes on in the kitchen?
Actually, yes. Yes I do care what goes on in the kitchen, cause if there are shadey chef’s in there preparing my meal that could effact my short or long term health.
I guess that is why from a young age I have always tried to find the truth behind the deception
This is one for the landlords.. Surely no one can be this hard up for money that they have to rent their home out for a week-end… http://www.castanet.net/news/Canada/138797/Renters-trash-family-home
About young voters:
Nemesis beat me to it yesterday (international date line may have been an issue) but today is the 40th anniversary of the fall of Saigon. I’m noting this because a month or few ago, some boomers on this blog were contrasting their successful antiwar efforts back in the day with the current youngsters’ as yet unsuccessful attempt to “fight the power” of million dollar Vancouver homes with a hashtag on Twitter.
Let us disregard the attempts of Canadian boomers to take credit for stopping what was most decidedly an American war by the late 1960s and early 1970s.
How did things work out? Richard Nixon was elected President of the United States in 1968, escalated the war, and was re-elected in 1972 IN A LANDSLIDE (carried 49 states), against an antiwar candidate.
Drugs fogging your memories, boomers?
https://www.youtube.com/watch?v=hRJFvtvTGEk
It’s great that you got a 4% return in the first 4 months! Here is how the balanced portfolio I started exactly a month ago fares:
ZCN (Canadian Equity) +2.1%
XUS (US Equity) -4.0%
VDU (International Equity) -2.6%
ZRE (REIT) +1.9%
ZAG (Bonds) -2.4%
ZPR (Preferreds) -3.6%
Overall, with my weightings, I’m a solid -1.6% for the month of April (excluding any trading fees, which would lower the return even more).
Of course, the first month is irrelevant when you’re investing for 10+ years. But it’s a disappointing start nonetheless.
What are the weightings? Why did you pick those ETFs? Why did you go with a long bond index? — Garth
#29 Better wtih bacon on 04.29.15 at 8:18 pm
61 One-Sentence Rules That Will Make You Better With Money
http://www.businessinsider.com/one-sentence-financial-rules-2014-3
——————————–
Great link, thanks, I’ve book-marked it. Some obvious points perhaps, or what should be obvious, and that’s the point, sometimes people forget the obvious. And others not immediately obvious, but after reading this blog and the comments these past few years, I nod in recognition and agreement.
Smoking Man…. I hate to tell you that your actorial award at Toronto West Secondary School is not likely still there… the Toronto School Board closed the school; the building was sold to the public french school board.
“Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.” — John Kenneth Galbraith
Marc Faber Today.
http://www.cnbc.com/id/102633564
#99 Julia on 04.30.15 at 6:38 am
Thanks for that.
#30 Hot Albertan Money
Real estate lawyers have another skill homeowners can access, when needed of course.
http://www.mississauga.com/shopping-story/5592211-what-to-do-if-you-are-facing-a-foreclosure/
#114 Ralph Cramdown
“Faced with the choice between changing one’s mind and proving that there is no need to do so, almost everyone gets busy on the proof.” — John Kenneth Galbraith
—————-
Brilliant observation
Winnipeg and Regina, FTW!
Finally getting the recognition they deserve…
http://business.financialpost.com/personal-finance/mortgages-real-estate/cmhc-says-regina-winnipeg-are-the-riskiest-housing-markets-in-canada
At #76: Meslippery, I assure you, and despite what many of the Canadian blog dogs want to be the case, the U.S. is running at about 5.5% unemployment. You’re questioning how this is possible when it is reported that about 1 in 5 households in the U.S., nobody has a job. The answer is simple. Very, very simple. The average U.S. family is 3.13 people. So, out of every 15.65 people, 3.13 aren’t working. That is very small potatoes, especially when compared to other industrialized nations. These statistics are derived, considering everyone in the U.S., including those currently working, those looking for work, those who do not work (retirees, disabled, students, undocumented workers, children).
When you consider the population of children in the U.S. of 74.2 million (twice the population of all of Canada), or 23% of the U.S. population in itself, and add another 43.2 million receiving SS and/or SSI benefits over 65 years old, and add in another 14.3 million disabled on SS and/or SSI, and add another 7 million as “other,” it’s obviously legit.
Hey Smoking Man– What happened to all that cheap natty that you called for? Up nicely past 2 days.
Funny that you called that. I sold my short position just before you post that day as well. Both our UCC’s are broken.
#89 BS on 04.30.15 at 1:02 am
———————————————–
Well I don’t know about the ‘foreign forever’ part, but the corruption part is all too real. Just ask someone from the mainland. And should you ever uncover the corruption, you and your family get roughed up by the local authorities, and some people, well, they just disappear.
#29 Better wtih bacon on 04.29.15 at 8:18 pm
61 One-Sentence Rules That Will Make You Better With Money
http://www.businessinsider.com/one-sentence-financial-rules-2014-3
————-
Yeah! Thanks for posting this.
I have shortened his 9-word summary of everything financial to 7 words.
“Work lots. Spend little. Invest the difference.”
Rule #38 directly applies on this RE blog:
38. You can realistically afford probably half the home the mortgage broker approves you for.
“Banks in trouble? That’s rich. Even so, bankers are insured …”
The big banks hold a lot of uninsured mortgages (see a recent Macleans article for details). They and their preferred shares will tank with a mortgage meltdown.
Definition of Sub-Prime
Leo Trollstoy asked:
What was the (sub-prime) rate that individuals who qualify for CMHC mortgage insurance get again?
******************************************
Leo, you appear to be under the mistaken impression that sub-prime means below the prime interest rate.
Not true.
Here prime is as in prime-rib. A sub-prime loan can be one in which the borrower has less than “prime” credit or less than “prime” income or less than “prime collateral or some agreed upon combination.
In order to know if CMHC borrowers are sub-prime we would need to know if they have less than prime credit ratings or less than prime income. Or we could arbitrarily say that anything less than 20% down payment is sub-prime by definition.
As Mark has explained, the CMHC insurance turns all borrowers into prime borrowers from the perspective of the bank. The bank gets a government guarantee. Therefore the CMHC insured borrowers usually all get the same interest rate as prime borrowers.
From the point of view of CMHC the borrowers may be sub-prime.
In any case, one cannot debate whether a group of borrowers is sub-prime without first agreeing on or debating the definition of what constitutes a sub-prime borrower.
As to mark, I don’t agree that it is fair to say that all CMHC loans are sub-prime. And it is wrong to claim that they have much in common with the no-documented-income, no-assets, no down payment loans that existed in the U.S.
CMHC is (so far) experiencing extremely low default rates. That suggests that the loans were prudently made.
#119 Renter’s Revenge!
saskatoon holding strong!
Garth, why didn’t you warn us it wasn’t different this time…
From CMHC
http://www.bnn.ca/News/2015/4/30/Regina-Winnipeg-housing-markets-at-high-risk-of-correction-CMHC.aspx
#121 OttawaMike on 04.30.15 at 10:53 am
Hey Smoking Man– What happened to all that cheap natty that you called for? Up nicely past 2 days.
Funny that you called that. I sold my short position just before you post that day as well. Both our UCC’s are broken.
…….
Dude, that’s a long term bet, USA Ramping up LNG to flood the European Markets with. Not their yet.
My UCC working great.
#107
With CMHC I simply don’t see the house prices can be allowed to implode. They insure twice than the current federal debt.
***
CMHC is capped at 600 billion if I remember correctly.
Our national debt is going towards a trillion…
http://www.nationaldebtclocks.org/debtclock/canada
All national and provincial debts are approx. 1.2 trillion as of 2013.
As we can see from the currency unwinds and the oil prices things are going right on track.
USDX has broken below the 50, 100 and 120day moving average.
Oil, WTI, has just crossed the 50 and 100 day (golden cross) on the way up.
BRENT, 50 and 100 day crossed a week ago.
WTI contango that was 25% premium 12 months out a few weeks ago has just dropped to 8%. Meaning a 68% drop in profit to store 12 months out.
Cushings, the tank that was supposed to overflow? Well yesterdays numbers showed a DRAW of 500,000 barrels. First draw in 21 weeks and a full 4 weeks ahead of draw down season.
And strangely enough, I don’t see the headlines from Goldman or Citi calling $20 barrels lately.
#38 Is Zurich any different? on 04.29.15 at 8:44 pm
in terms of foreign influx of vast amounts of money?
re #27 Roy
…not different at all. Zurich is still a bit more expensive than Vancouver.
But you don’t hear people of Zurich complaining about the inflow of foreign cash into their banks and into the jurisdiction. It pays their wages!
Zurich is a lot different.
At many levels, there are structural and cultural blocks to foreign ownership. Even though with enough cash from documented sources you can still buy a nice villa in Ticino.
First, there is a massive regional price difference between what you can buy in the country vs outside the country. Everything, from food to real estate. It serves as a sort of natural osmosis to draw money in from outside through visitors, but generally makes it far too expensive for neighbors to come in and buy stuff on a day-to-day basis.
Second, there are various types of participatory financial constructs which allow you to benefit from profits, but do not allow voting in company affairs.
Third, most senior employees of companies are also officers in the military. So they often know each other from their military training days, and share common interests and are bound by a common motivation to steer things in a direction beneficial for the country, not for outsiders.
Fourth, if you’re renting or buying a place, the agent involved will almost always give first choice to a local citizen, unless the property is overpriced even for Switzerland or is in a bad area.
Now also consider that over 90% of Zurich rents apartments long-term, regardless whether you’re foreign or not. Often the same one for most of their lives, and usually from large financial organizations which own them outright. That’s partly because a couple decades ago, federal law mandated that all retirement and social insurance programs must invest in Swiss artifacts. So that exploded the cost of land overnight with all that retirement money now being pumped into RE.
In most cases you could buy a really nice place in the French countryside for a tenth of the cost of the same place in Geneva. With far lower day-to-day living costs as well (with the exception of gasoline). Swiss laws governing rentals and buildings are also quite strict, so renters have fewer unexpected problems to deal with than those in Vancouver for example. Prices and financing costs are also more stable, so there is less speculative pressure. So why bother buying in Zurich?
The channeling of vast amounts of foreign money into Zurich for safekeeping and investment impacts local real estate much less than it does Vancouver. In fact, if you are buying a Zurich residence now, for the same quality it will be cheaper than the Vancouver one. And my old Zurich apartment is pretty much on par with similar ones in Vancouver. They just don’t have ongoing theatrics like the strata councils in Vancouver do.
Correction. Sold my long position.
CBC quoting Mr. Madani this morning: “We . . . expect the Bank of Canada to eventually cut rates later this year.”
Article headline in the G&M: “Don’t buy into the misplaced optimism of ‘Sunny Stephen’ ”
Putting aside the fact that nobody anywhere needs buying advice from the G&M’s assorted “dinglenuts”, SUNNY STEPHEN is hilarious. And on point in that Mr. Madani’s realistic read on the Canadian economy requires a GRIMFACED BoC gov.
Presently all our leading pols – with the exception of JT – are remarkably stupid-lookin’.
I venture to suggest that this is no accident. Leadership’s image is meant to reflect the reality of the day. What Harper’s weird hair, Lazarus, and Polonius’ rosy cheeks reflect is – insanity. (Not to mention the unfortunately horse-toothed, yellow-haired Granny Wynne.)
As for “misplaced optimism” I guess that’s the dinglenuts version of Polonius’ delivery to the Commons Finance Group. I heard a Cons election ad.
Nuts. Yer all nuts.
Cmhc sees no risk in van or Toronto , but more so Winnipeg and Regina etc , i wonder why Garth does
“At the upper end of the price spectrum, high net-worth residents, and those who have gained equity in their homes, are more likely to buy single-detached homes in central locations and luxury properties. Employment growth, long term population growth, and a limited supply of land for development provide further support to Vancouver prices,” it said in its analysis.
“Statistics Canada reported Thursday that the service sector increased by a small amount, but that was more than offset by a contraction in goods-producing industries.
The data agency also revised its numbers to show that January’s results were a worse showing than previously thought. Initially, Statistics Canada said the economy contracted by 0.1 per cent during the month. Thursday’s release updated that to a 0.2 per cent decline.
Two of Canada’s most closely watched sectors— manufacturing and energy — both shrank during the month. Manufacturing has now contracted for two straight months, something that’s a real concern to economist David Madani at Capital Economics.
“Despite the lower Canadian dollar, this sector’s struggle appears to continue. This doesn’t inspire much confidence in the Bank of Canada’s view that a pickup in the non-energy economy will offset the fallout in the energy sector,” he said.”
http://www.cbc.ca/news/business/canadian-economic-output-goes-flat-in-february-1.3055207
OMG! This joker is advising his readers to forego the government grant on RESPs and instead, buy real estate for their children. Unbelievable.
#72 Mark on 04.29.15 at 11:06 pm
“I guess that makes sense since he actually knows how to make money ”
I make plenty of money at what I do. With declining RE prices in Toronto, you’re loosing value at this point and have been for the past couple years. Don’t know why your narcissism has no bounds, but I think people here are getting a bit tired of it
————–
You keep saying this (even though you get shouted down by everyone who actually lives in TO).
I have been actively looking for a house in Riverdale/Playter/Riverside area and can assure you house prices have not been falling for 2 years.
Anyone who subscribed to TO Solds email list and scraped the sales data knows you’re a liar.
the pigg’s funniest yet!
http://www.thestar.com/business/2015/04/30/toronto-real-estate-at-moderate-risk-of-price-correction-report.html
# 25 Mark
“If you look at the Japanese experience, the Yen strengthened dramatically for 2 decades after the peak of their housing bubble.”
We’ve gone over this before. The Yen strengthening mainly occurred during the bubble. The low rates and low inflation that occurred afterward did not strengthen the Yen. Over the last two decades the Yen has only gotten weaker. Look at the chart.
“So most of the time, insurance is required not to get a better rate but to get a mortgage at all.”
I’ve written a few posts on this topic in the past, but it is clear that the banks are actually requiring insurance on loans greater than 20%. In other words, they don’t consider even loans with 20% down, in this environment, to be prime loans. Hence, the prime vs. subprime delineation has actually been set, by the banks, to be much higher than the Bank Act’s legal requirement. Which is simply a matter of both prudence on the part of the Schedule 1 Canadian banks, and a belief amongst the banks that houses are dramatically overpriced and losses >20% are likely in an inevitable housing downturn.
Anyways, getting back to the ‘benefit’ of CMHC insurance to a borrower — in a situation where there is distress in the Canadian mortgage financing market, having the CMHC insurance makes a mortgage very investment-worthy on the part of potential lenders. Hence, by having the insurance, the ability to renew at a decent rate is practically guaranteed since the lender is guaranteed full repayment. Even if the loan is ‘underwater’ or in negative equity. Contrast this with an uninsured loan where if the borrower is in a diminished equity position, they are entirely vulnerable to the predation of their specific lender.
Also, I suspect that as the housing downturn accelerates, the government is likely to roll out programs to “help” distressed borrowers, and those programs will largely be administered through the CMHC, and eligibility determined accordingly.
What if the high real estate is just trying to say that our modern money is worthless thanks to endless money creation within an unsustainable economic model ?
#122 Mark
There is a distinction between a Bank requiring insurance in order to grant a loan to a borrower (at the borrower’s cost) and a Bank obtaining insurance on it’s mortgage portfolio in order to improve their risk and their lower cost of capital (at the Bank’s cost).
Banks always have that option and it is a big part of CMHC’s business.
The only “benefit” of insurance to a borrower is to get a loan in the first place.
“CMHC is (so far) experiencing extremely low default rates. That suggests that the loans were prudently made.”
True, but mostly on account of the CMHC propping up the paper its emitted over the years. The peak of the Canadian housing market was basically when the Minister of Finance decided, in Budget 2013, that the CMHC’s guarantee authority would not be expanded beyond $600B. Approximately 2 years ago.
“CMHC is capped at 600 billion if I remember correctly.
Our national debt is going towards a trillion…”
Plus another ~$330B of re-insurance of 3rd party mortgage insurers including Genworth. For a total of ~$900B. Which is an overwhelming percentage of Canada’s mortgage market of ~$1.2-$1.4T.
“We’ve gone over this before. The Yen strengthening mainly occurred during the bubble.”
The Yen strengthened from roughly 130-140 in the late 1980s, to 80-90 ~2 decades later. I think you’re overly dwelling upon the strengthening of the Yen when the Japanese economy was transformed from being war-torn and primitive, to the bubble. Which was not due to debt deflation, but rather, due to domestic ingenuity and productivity. And the post-bubble collapse strengthening occurred despite 2 decades of extraordinarily accommodative monetary policy, government stimulus, etc.
“The only “benefit” of insurance to a borrower is to get a loan in the first place.”
And when such loan is obtained, its on more favourable terms than ordinarily would be possible given the credit metrics involved (obviously relatively poor if they need CMHC insurance!).
In a downturn, renewing is easier if the loan is CMHC insured, for the same reasons. The lender need not worry about the value of the collateral backing the loan as CMHC has guaranteed redemption of the loan at 100 cents on the dollar.
Soft landing?
“Canada’s uninsured mortgage market continues to grow, enabling some borrowers to circumvent tighter mortgage rules meant to put the brakes on a hot housing market, the International Monetary Fund said.
Canada needs to achieve the right mix of policies to support growth and economic rebalancing while also mitigating risks in its housing markets and from high household debt, the Washington-based fund said Wednesday in a regional economic outlook for the Western Hemisphere.
“Targeted macroprudential policies” might be needed to address housing sector vulnerabilities, it added.
House prices are at historical highs on a national basis, prompting continued concern about the possibility of a sharp, destabilizing correction. The IMF said its analysis suggests a national real house price overvaluation between 7% and 20% in Canada, adding that Canadians’ high debt levels and overvaluation in the housing sector represent “the main domestic vulnerabilities.”
House price gains between 5% and 6% on a yearly basis in 2014 were driven principally by Calgary, the financial hub of Canada’s oil patch, and by the single-family home and condominium markets in the greater Toronto and Vancouver areas, it said.
“With lower oil prices, however, some signs of cooling in housing markets have become visible, and risks of a harder landing need to be watched closely,” the IMF said. Oil is a Canada’s biggest export, and the drop in oil prices has weighed on the domestic economy.
The IMF expects a soft landing in Canada’s housing market, given “a solid labor market and low mortgage rates.”
http://www.wsj.com/articles/imf-says-canada-housing-market-likely-to-achieve-soft-landing-1430326886
Nothing to see here, move along…
http://www.theprovince.com/business/Vancouver+critical+money+laundering+transnational/11015083/story.html
http://www.biv.com/article/2015/4/investors-scoop-old-burnaby-apartment-blocks-land-/
#64 Leo Trollstoy
Well said – I agree.
Garth great work, but I’ve only ever seen machines which didn’t take a vacation of some kind. When do you find time for rest?
GM to cut 1,000 jobs at Ontario plant
http://www.cbc.ca/news/business/gm-to-cut-1-000-jobs-at-ontario-plant-1.3055605
#111 Colin,
I’d say you’re on the right track, you just happened to pick a rough month to start in. I know that bonds had surged right before you bought and then naturally came back. Long term they should stay even and you’re just collecting income. Preferreds have been going down for awhile and are just starting to bounce. As Garth says, it would seem like a great time to get into that category while they’re on sale. US equity has come to a bit of a plateau, but if you’re holding in Canadian dollars it looks like it’s dropping as the Canadian dollar has gained some strength with oil (temporary?).
I can’t speak for the exact ETFs you’ve chosen, but it looks like you are on the right track. My one recommendation would be to check your US equity ETF. You MAY want to consider holding it in a US$ account. The US version usually has lower fees and you get more return IF you believe the US dollar will continue to gain ground on the Canadian dollar.
Julia schooling Mark again by calling him out on his fabricated beliefs.
Sad.
As to mark, I don’t agree that it is fair to say that all CMHC loans are sub-prime. And it is wrong to claim that they have much in common with the no-documented-income, no-assets, no down payment loans that existed in the U.S.
Agree.
Keep talking oil down. I like it.
Oilberta is going commie….
http://www.calgaryherald.com/news/alberta-politics/holds+clear+lead+among+decided+voters+poll/11016814/story.html
#125 Shawn Allen — “I don’t agree that it is fair to say that all CMHC loans are sub-prime. And it is wrong to claim that they have much in common with the no-documented-income, no-assets, no down payment loans that existed in the U.S.”
Why is it that banks aren’t allowed to make those loans without insuring them? It isn’t just to fill CMHC’s coffers, as banks can purchase insurance from the private insurers instead.
Don’t buy into the story that most of America was garbage loans at the peak. Even at the peak, over half of loans were 30 year, fixed rate prime loans. When it all went pear shaped, over half of the delinquent loans were loans that started out as prime:
http://www.calculatedriskblog.com/2009/08/us-mortgage-market-and-seriously.html
At that time, more than 1 in 8 loans were subprime. I’d guess that over the last several years, Canada’s underwriting would be similar, considering that about 5% of mortgages are now written by “alternative” lenders, and CMHC is willing to insure high LTV loans for people with fairly low credit scores.
“CMHC is (so far) experiencing extremely low default rates. That suggests that the loans were prudently made.”
It suggests no such thing. In an era of rising housing prices, flat or falling unemployment, and relatively easy availability of subprime loans from alternative lenders, approximately nobody defaults on their insured loans resulting in the bank taking a loss and making a claim to CMHC. Rising asset values turn bad loans good. Falling asset values turn even good loans bad. Mortgage insurance claims are cyclical.
This is not an anti-immigrant blog, and I will not bow to the haters. — Garth
Bless you for that, but this being said the subject of foreign money fueling RE in Canada should not be avoided. It should be explained.
I agreed that foreign money buying RE in Canada is not enough by itself to overheat the market. It is however part of the problem.
The way fractional reserve banking works every dollar buying RE ends up being deposited in some Canadian bank and can then be lent ten times over (or so). Of course this is also true for dollars coming from local investors or speculator, the more money spent in RE the more banks can lend, foreign money is important because it is new fuel to that fire.
It is important to understand that, in conjunction with easy credit provided by CMHC that’s how the RE bubble causes the Canadian banking system to print money.
In case you wonder it is way worse than what the FED has ever done.
This economy is a sham and sooner or later it will show!
Johnny Redcoat’s Last Stand
or, Asia’s version of “Lawn Asians”
http://www.nytimes.com/2015/04/28/opinion/rent-a-foreigner-in-china.html
Immigrants are a critical, important and valuable part of our country. Many of us immigrated ourselves or within the past two or three generations. We definitely don’t want to turn into Japan.
However, we need to acknowledge that immigration (and temporary foriegn workers, and foriegn investment, and students from foriegn countries,) all have some level of impact on real estate. We then need to have positive, constructive discussions about that impact and make decisions (personal and policy,) accordingly.
If you look at this chart, it is striking that the two regions where immigration from China is huge are also the two regions where the real estate market refuses to slow down.
http://www.the10and3.com/mapping-canadas-mosaic-of-immigrant-communities/
I assume you did not notice the striking resemblance in appearance between Evan Siddall and Mark Carney. The ears don’t lie. He ‘advised’ Carney for many years after spending time at the Squid. Hmmm…. I wonder what the actor that played F is doing now… This message will self-destruct.
I didn’t know that Muskoka was in Toronto. The Pigg woman is a busy little porker today.
http://www.thestar.com/business/2015/04/30/why-toronto-is-hottest-city-in-the-world-for-real-estate-for-the-ultra-rich.html
http://www.cbc.ca/news/business/gm-to-cut-1-000-jobs-at-ontario-plant-1.3055605
Ouch.
#113 Just Some Guy on 04.30.15 at 9:52 am
Smoking Man…. I hate to tell you that your actorial award at Toronto West Secondary School is not likely still there… the Toronto School Board closed the school; the building was sold to the public french school board.
……
Awesome, I can now say I won it 4 years in a row now that the proof has vanished.
#136 Colin on 04.30.15 at 12:32 pm
[…]
I’m simply a guy trying to get the best return for his (meager) capital. At the end of the day, there seems to be some advantage to active trading.
You got that right. But it’s a varying shade of grey from one extreme to the other.
Everyone times the market to some degree, unless you expect be holding something the day you die. Best to take an educated stab at promising entry points after some research, rather than doubling down on losses after throwing darts at a dartboard. Then lightening up at bit after appreciation for whatever reason.
That applies to ETF’s as well as individual stocks. That is, you have to do your homework on either the systemic developments affecting ETF mixes or the individual developments affecting a particular stock.
ETF diversification is just another tool, which has to be properly deployed. Widespread rate-resets have torpedoed CPD for example, but there are some high-yield preferreds still giving out nice divvies which haven’t come down in price much. So the ETF diversification has provided false confidence in this case.
Now that the ‘damage’ has been done, CPD has been climbing in a straight line over the last few sessions. Still time left to get in on a bit of it. That diversification now should work in your favor.
Once invested for good reasons at a good entry point, then it’s rarely a good thing to panic-sell after seeing a paper loss the size of a new truck. That much is true. But ETF’s will only help that way if the drop is specific to one stock you happened to pick.
Things are definitely getting better – Atlanta FED just released their first prediction for Q2 (USA GDP)
https://www.frbatlanta.org/cqer/researchcq/gdpnow.cfm
http://www.cbc.ca/news/business/canadian-economic-output-goes-flat-in-february-1.3055207
“Canada’s economy didn’t grow in February, rebounding only slightly from a 0.2 per cent decline in January.
Statistics Canada reported Thursday that the service sector increased by a small amount, but that was more than offset by a contraction in goods-producing industries.
The data agency also revised its numbers to show that January’s results were a worse showing than previously thought. Initially, Statistics Canada said the economy contracted by 0.1 per cent during the month. Thursday’s release updated that to a 0.2 per cent decline.
”
Can you say, ‘rate cuts’??
“The way fractional reserve banking works every dollar buying RE ends up being deposited in some Canadian bank and can then be lent ten times over (or so). “
Nope. Every dollar deposited in Canadian banks can only be lent by the bank once. You have a fundamental misunderstanding of how banking works.
#125 Shawn Allen
“CMHC is (so far) experiencing extremely low default rates. That suggests that the loans were prudently made.”
This does not suggest that loans were prudently made. There is no logic in that statement at all.
In the US, rising prices prevented default problems but that only lasted so long. Eventually prices began to fall and then defaults became a problem.
If you say that high-risk, high-ratio loans covered by CMHC are prudent, then you must also say that the high-risk, high-ratio loans that were covered by Fannie Mae and Freddie Mac up to 2006 in the US were prudent. We all know this is absolutely false.
CMHC coverage doesn’t automatically make high-risk, high-ratio loans prudent.
CMHC covers high-risk, high-ratio loans, taking the risk away from banks. The banks make risky loans knowing that none of the risk will be theirs to deal with in the future.
Canada’s housing bubble has been fueled by policy changes that closely mirror those that fueled the 2006 US housing bubble.
Examples include:
* sub-prime loans (Garth has written about Canada’s growing sub-prime market)
* teaser loans
* zero-down loans
Canada has also allowed:
* 40-year loans
* loans to self employed applicants without proof of income
* soft fraud
Canada’s housing bubble is much larger than the 2006 US housing bubble. The bigger the bubble, the bigger the correction.
“. . . a portfolio that’s balanced (40% fixed income and 60% growth assets, no individual stocks, no mutual funds) . . . .” The bond market has been on fire since Reagan’s first term (I remember Canadian governments priced to yield near 20%). Virtually any portfolio with 40% in fixed income has done extremely well – and is now the fatted calf; note the current Bund 10 year sell-off. Also, “growth assets” w/o individual stocks or mutual funds? Where? Through thick and thin I dollar-cost-average into equities through the transfer agent. Thank-you.
“At that time, more than 1 in 8 loans were subprime. I’d guess that over the last several years, Canada’s underwriting would be similar, considering that about 5% of mortgages are now written by “alternative” lenders, and CMHC is willing to insure high LTV loans for people with fairly low credit scores.”
Even Fannie Mae/Freddie Mac maintained standards that were far more stringent than CMHC’s. For instance, the “conforming loan” limit was approximately $450k even at the worst of things in the US. And Fannie/Freddie still required 20% down. Contrast this with CMHC which until recently had no limit to the insurance it wrote, and at one point, was writing guarantees against loans with 0% down.
We know that Fannie/Freddie, with their much higher standards than the CMHC, blew up. So it logically follows that in a significant RE downturn, the CMHC will as well. CMHC’s balance sheet resources are woefully inadequate for the sort of risk they’re taking on.
It suggests no such thing. In an era of rising housing prices, flat or falling unemployment, and relatively easy availability of subprime loans from alternative lenders, approximately nobody defaults on their insured loans resulting in the bank taking a loss and making a claim to CMHC. Rising asset values turn bad loans good. Falling asset values turn even good loans bad. Mortgage insurance claims are cyclical.
Very true. I think the “CMHC isn’t subprime” crowd places an over-reliance on personal income and “credit scores” as the delineation between prime and subprime. Rather than equity (ie: LTV) which tends to be far more stable and a far more reliable predictor of default than merely personal metrics which can rise and fall with the economy. Not being able to bring a decent down-payment to the table is prima facie proof that a person is not particularly strong financially, whether it be in their long-term income, or their personal savings habits.
Also, in the US context, there was real foreign money involved in their RE marketplace, in the form of MBS being sold overseas. While I’m not quite sure you very much, if any meaningful foreign participation in Canada’s mortgage marketplace. Foreign institutions, such as Deutsche Bank were heavy participants in the US mortgage finance universe.
#152 Leo Trollstoy
“As to mark, I don’t agree that it is fair to say that all CMHC loans are sub-prime. And it is wrong to claim that they have much in common with the no-documented-income, no-assets, no down payment loans that existed in the U.S.”
“Agree.”
You agree with false information.
See my last post.
The same basic lax lending standards that fueled the 2006 US housing bubble have fueled the Canadian housing bubble as well, including the “no-documented-income, no-assets, no down payment loans” that you wrote about.
#146 ILoveCharts on 04.30.15 at 1:21 pm
Nothing to see here, move along…
———————–
no complaints here, cash inflows to 604 property market have made me a millionare, and i LOVE chinese food.
but from the link above….
While local developers once dominated the action, 95% of recent buyers are from China, according to Ben Williams, …. have sold the majority of Burnaby’s apartment buildings in the past few years.
Goold confirmed that nearly all his recent Burnaby land development sales are to investors from mainland China
———————-
buy near skytrain stns. and be a winner
Obama’s “No Growth, No Jobs, No Recovery” Economy Gives Up The Ghost
http://www.counterpunch.org/2015/04/30/obamas-no-growth-no-jobs-no-recovery-economy-gives-up-the-ghost/
whoops, let’s wait for the revisions.
# 150 Leo Trollsoy
“Julia schooling Mark again by calling him out on his fabricated beliefs.
Sad.”
You need to do more research on what caused the US housing bubble and why it eventually deflated.
It isn’t different in Canada.
The situation is actually worse for Canada than it was in the US leading into its major price correction. When house prices were falling in the US, they were able to slash interest rates from near-normal levels to emergency levels to limit the depth of the price plunge.
Canada already has emergency interest rates, so it will be without the ability to use that move to slow its price correction and there is no other comparable move that could possibly stimulate the housing market that much.
Canada’s price correction will likely be deeper than US correction.
@ #42 Mark on 04.29.15 at 8:59 pm
Maybe CHMC prints the money to fill the gap…they do own the printers you know…
“‘The same basic lax lending standards that fueled the 2006 US housing bubble have fueled the Canadian housing bubble as well, including the “no-documented-income, no-assets, no down payment loans” that you wrote about.”
I have to agree with Trollstoy et al, in that, the worst abuses of the US mortgage finance system have not occured in Canada.
However, Canada’s prices have been elevated to peaks beyond those of the US, and nearly all of Canada’s mortgage market is short-term in nature (<5 years to maturity including 40% "overnight adjustable" loans) with exposure to potentially violent reversions in interest rates and/or risk premia. So for what Canada lacks in terms of poorly documented loans, Canada easily makes up for with the lack of systemic stability to the mortgage finance system and housing prices that exceeded the US peaks.
# 168 Mark
“Even Fannie Mae/Freddie Mac maintained standards that were far more stringent than CMHC’s. For instance, the “conforming loan” limit was approximately $450k even at the worst of things in the US. And Fannie/Freddie still required 20% down. ”
Excellent points.
Canada’s lax lending standards are worse than those that fueled the 2006 US housing bubble.
I’ll update the list that I posted earlier.
Lax lending standards found in both Canada and the US:
* sub-prime loans (Garth has written about Canada’s growing sub-prime market)
* teaser loans
* zero-down loans
Canada has also allowed:
* 40-year loans
* loans to self employed applicants without proof of income
* soft fraud
Also:
* CMHC insures loans up to $1 million (down from no limit), while Fannie Mae and Freddie Mac insured loans up to about $425 K in most states (that limit is still in effect today)
* The minimum down payment in Canada is 5%, but some lenders will allow 2.5% or lower. In the US the minimum down payment is 20%
“Maybe CHMC prints the money to fill the gap…they do own the printers you know…”
The money already exists — after all, all CMHC-insured loans are funded by deposits into Canada’s banks.
What is likely to happen is that banks that have CMHC-insured mortgages on their books will see many of those mortgages default. They will take the mortgages to the CMHC. The banks will effectively end up with GoC bonds on their books once everything is said and done. Effectively private sector mortgage debt will be swapped for GoC paper, but there should be no need to ‘print money’.
In fact, the population is likely to be so un-creditworthy generally that lending to consumers will slow to a halt. Hence, deflation.
As the US and Japanese experience tells us, it is incredibly hard to get people to borrow money after they’re scarred by incurring severe losses on borrowed money. Hence deflation is relatively tough to break as a pattern, and as I’ve insisted for quite a while now, the BoC appears to be significantly “behind the curve” in providing interest rate and monetary policy (ie: QE) that reflects such. Perhaps out of fear of creating a self-fulfilling prophecy, but at some point they have to acknowledge the truth and move forward.
Mark # 165,
“The way fractional reserve banking works every dollar buying RE ends up being deposited in some Canadian bank and can then be lent ten times over (or so). “
—
“Nope. Every dollar deposited in Canadian banks can only be lent by the bank once. You have a fundamental misunderstanding of how banking works.”
————————————————
Excellent observation, Mark.
There may be hope for you yet
#143 Mark
“I think you’re overly dwelling upon the strengthening of the Yen when the Japanese economy was transformed from being war-torn and primitive, to the bubble. Which was not due to debt deflation, but rather, due to domestic ingenuity and productivity.”
No, I’m not dwelling on the bubble. Let me re-phrase what I said. Most of the Yen strengthening occurred prior to the collapse of the bubble. More importantly, prior to Japanese inflation going to zero and interest rates following suit. The ensuing deflation and low interest rate environment over the last twenty years has not produced the corresponding rise in the currency predicted by the International Fisher Effect. Twenty years for a theory not to hold is a long time.
#168 Mark
“We know that Fannie/Freddie, with their much higher standards than the CMHC, blew up. ”
They blew up because they got involved in complex, high risk products, under pressure from both the Government and their shareholders, but they were ill equipped to manage or even understand. They failed to report this and that is the source of the ongoing litigation.
http://www.prmia.org/sites/default/files/references/Fannie_Mae_and_Freddie_Mac_090911_v2.pdf
“I think the “CMHC isn’t subprime” crowd places an over-reliance on personal income and “credit scores” as the delineation between prime and subprime. Rather than equity (ie: LTV) which tends to be far more stable and a far more reliable predictor of default than merely personal metrics which can rise and fall with the economy. Not being able to bring a decent down-payment to the table is prima facie proof that a person is not particularly strong financially, whether it be in their long-term income, or their personal savings habits. ”
Again, you are confusing equity with down payment. Yes, greater equity means more room for a downturn without being affected.
However, a borrower bringing in more down payment on a purchase not only shows the capacity and discipline to save, which is also likely reflected in a better credit score, but also has actual skin in the game. Much more difficult to walk away.
Equity built on rising market alone is not as much a factor.
Again, not all CMHC insured loans are sub prime.
#169 Victoria Real Estate Update
“The same basic lax lending standards that fueled the 2006 US housing bubble have fueled the Canadian housing bubble as well, including the “no-documented-income, no-assets, no down payment loans” that you wrote about.”
Where have you seen these loans? Not in the big 6 surely. I understand that there are “no documented income” loans on very low loan/value loans , which goes against the notion that some posters have that only high loan/value loans are sub prime.
“* CMHC insures loans up to $1 million (down from no limit), while Fannie Mae and Freddie Mac insured loans up to about $425 K in most states (that limit is still in effect today)”
Actually, CMHC insures loans for PURCHASES up to $1 million.
“* The minimum down payment in Canada is 5%, but some lenders will allow 2.5% or lower. In the US the minimum down payment is 20%”
Which lenders are those?
In case anyone is interested, this paper provides some analysis on the background of the financial crisis. Available from RMA (Risk Management Association):
http://www.rmahq.org/file%20library/white%20papers/unintended-consequence–ewp.pdf
#173 Victoria Real Estate Update — “The minimum down payment in Canada is 5%, but some lenders will allow 2.5% or lower. In the US the minimum down payment is 20%”
Now let’s not get too carried away overestimating our southern neighbour’s new religion. 3% down is here!
http://themortgagereports.com/16976/97-mortgage-low-downpayment-3-mortgage-rates
As well, there were always low downpayment loans available via the FHA (Federal Housing Administration) — 3.5% DP, currently available for those with a score of 580 or higher. And the VA has a low downpayment program for veterans.
At peak schenanigans, people bought with 0% down, because their downpayment came, indirectly, from the seller/builder, who ‘gifted’ it to an organization which helped get people into homes. After fees were removed, the organization ‘gifted’ the DP to the buyer. And it was legal.
The US instability came from ~30% of mortgages being subprime which led to a defaults when rates rose 4% from 2004 – 2008.
We have 3% subprime penetration and the economy is moving no where near fast enough to see such aggressive rate increases. So it’s hard to think we’ll see even close to the same level of impact here any time soon.
#169 Godth on 04.30.15 at 3:45 pm
Obama’s “No Growth, No Jobs, No Recovery” Economy Gives Up The Ghost
http://www.counterpunch.org/2015/04/30/obamas-no-growth-no-jobs-no-recovery-economy-gives-up-the-ghost/
whoops, let’s wait for the revisions.
++++++++++++++++++++++++++++++++++
And no rate hike.
#178 PM — “The US instability came from ~30% of mortgages being subprime which led to a defaults when rates rose 4% from 2004 – 2008. We have 3% subprime penetration […]”
How can it be that 30% of US mortgages were subprime and only 3% of ours are? At 70% they had similar peak homeownership levels, similar household wealth and income, similar home price levels. And yet a third of them were irresponsible deadbeats, while only three in 100 of us are? I think not.
“We have 3% subprime penetration “
Its much, much higher than that if you go through the trouble of making the “Canadian” definition of ‘subprime’ consistent with that of the US definition.
Perhaps calling all CMHC mortgages ‘subprime’ is extreme (if you use the US definition), but they are far more aggressive than Fannie Mae/Freddie Mac in the USA in their housing bubble in terms of insuring low-grade mortgages.
Not sure why the term ‘subprime’ brings up so much emotion either. It simply refers to overall credit quality. And it defies logic that Canadians can be more indebted as a percentage of income than was experienced at the peak in the US, but for little subprime to exist.
There will be no more 2.6% five-year mortgages this autumn.
*****************************************
Thats right, you know why….they’ll be 1.99.
Sad but true.
“Which lenders are those?”
Certain provincially regulated Credit Unions for starters. See Garth’s previous blogs on the topic.
Not sure why the term ‘subprime’ brings up so much emotion either. It simply refers to overall credit quality.
Those were the lenders that were coming up with more exotic mortgage products that allowed these subprime candidates to qualify (because who cares, it’s not staying on your books, you’re packaging it off and selling it off something discouraged here). Things like ridiculous teaser rates the made the slightest of interest ticks cause people to miss payments. That’s why their default rate was 10x in 2008.
We’ve got similar debt levels to the US and are due for a correction but not in the “everything explodes” kind of way you saw down south.
cmhc says vancouver home prices are not overvalued. here i thought house prices rising 500 – 600% over 12 years was looking a bit toppy. I’m wrong…cmhc says its ok
#153 Ralph Cramdown
Moreover, defaults are a distant trailing indicator. If that’s what you’re looking at, shit has already hit the fan.
I’ll give this one to Garth:
Preferred shares are moving back up.
In reaction of the treasury yields moving higher.
Look at $ZPR
Put $TNX in your iPhone. The higher it moves, the more mortgages will get expensive, the more money insurers and banks will make.
well calgary house sellers are holding their asking price and that is pushing up days on market.
any good house (close to move in ready) is selling within a week or two if priced right.
if it is not selling then it is because seller is asking for a bit too much and then not reducing asking price, instead waiting it out.