Entries from April 2017 ↓

Where there’s smoke…

It doesn’t take a lot to topple a house of cards. Or in this case, a nation of toppy houses floating on a foundation of debt. Maybe it’s just another week of excess borrowing and undisciplined spending as real bloats higher. Or, perhaps, this is it. The moment of capitulation. Over the cliff.

In case you missed it, big news. Shares in Canada’s premier non-bank mortgage lender, Home Capital Group, just collapsed 64.5%. Stunning. Historic. That rolled back 14 years of corporate growth during which HCG loaned tens of billions in mortgages, an unknown number of which were liar loans, falsely documented, fraudulently taken and now the very poison killing the company.

Meanwhile yield-hungry investors who plowed their money into Home Trust or Home Bank high-interest accounts and GICs are getting out as fast as they can, worried the entire operate may blow up. About $600 million has been snatched back in the last few weeks, and the run could accelerate tomorrow.

The damage being done to the mortgage sector doesn’t end there. Pulled down in sympathy and terror were the shares of Equitable Group, Street Capital, First National Financial and Genworth. Remember all the buzz a while back about ‘bonus’ interest being paid by EQ Bank? Yup. Same guys. This blog warned you then the company behind those rates – Equitable – was an Alt mortgage lender with a giant portfolio of risk-drenched loans made to people who probably never should have been given home loans.

Home Capital was found to be making liar loans almost two years ago, punted at least fifty brokers, had a boardroom bloodletting and has been targeted by the tough-nuts regulators at the OSC. Now hemorrhaging depositors and facing serious securities charges, the company took a rescue package from an unnamed source with terms so punitive they’ll likely destroy it. What was an investment-grade, deposit-taking institution a few days ago is now a tatty rabble on life support forced to pay 22.5% interest on a borrowed billion.

This may be an interesting implosion of a rogue lender. Or more. Over the past year we have passed many milestones on a dangerous journey. Canadians owe more personally than the size of the entire economy. We’ve allowed housing to become the dominant part of the national GDP. The average home price shot ahead 33% in a single year in our largest urban area. Real estate values, and the borrowing to support them, have detached from economic fundamentals. Personal savings are down. A third of us are in worse shape than last year. Half are living paycheque-to-paycheque. Now the non-bank mortgage industry is on fire.

And it gets worse. On Friday Donald Trump tears up NAFTA.

The Canadian dollar lost more ground (and the Mexican peso croaked) on reports the Trumpster will sign an executive order Friday removing the US from the North American Free Trade Agreement. It’s a shocking second shoe after the White House slapped a fat tariff on our lumber industry this week. The ugly face of protectionism, nationalism and America-first populism is now countenanced towards Canada. So much for the three amigos, for thirty years of free trade and the efforts of our current prime minister to protect our most vital interests.

In fact as the news of the NAFTA bomb broke, Justin Trudeau’s cover-story interview with Bloomberg’s global magazine was being published. When asked about our most critical trade agreement, here was his somewhat incomprehensible response:

Nafta has been improved a dozen times over the past 20 years, and we’re always looking for ways to improve the benefits for all of our citizens. One of the things with Canada is we’re of a modest enough size that we never feel that the ideal outcome of any given deal is, we win and you lose. I mean, I think we’re always looking for ways where there is mutual benefit. And I think we’ve been able to demonstrate time and time again that trade can benefit both partners.

Take that, America. But he did pose for a fetching picture.


Update – Wednesday 10:40 pm EDT: White House now says US will not leave NAFTA ‘at this time’. Link


To summarize. We’ve become economically-dependent on real estate and now a key portion of the industry financing it is in a state of meltdown. Savers will be worried about billions sitting in the GICs and deposits of these companies. The most important trade agreement we’ve ever had, with our largest partner, could be about to end. And Canadians have amassed $2 trillion in personal debt as the greatest asset bubble of our times nears its climax.

This may pass without incident. But don’t count on it.


Imagine buying a house worth $1.5 million to $2 million in 15 minutes. Without seeing it. Not built yet. And the deal’s firm. No second thoughts. No backing out or cooling off. No conditions, No second-guessing.

Come early. Line up for a couple hours with a few hundred strangers. No bathroom. Feel stressed and competitive. Bring at least five personal cheques for deposits. Plus photo ID. And you’d better be pre-qualified for a mortgage, or have bundles of cash. Because – did I mention? – there are no conditions. You sign it. You bought it. Thirty-eight-foot lot. Move-in date is two years out. Maybe.

Such is the reality for new-house buyers in the GTA. Yes, it’s insane, illogical, demeaning and fraught with risk. But the three builders who will unleash this madness on the morning of Saturday, May 13th know that supplicants will camp out overnight and the new ‘Impressions in the Village of Kleinberg’ will sell out in a day. Maybe two.

K village, by the way, is about 50 km from downtown Toronto, and the drive takes between one hour (good day) and 90 minutes (regular day) in traffic which can best be described as lethal. Also, to carry a $2 million house requires a minimum downpayment of $450,000 and an income of $260,000 – and that’s with the lowest mortgage rates ever, around 2.5% for a fixed-rate loan.

No sane person, even a rich one, would agree to buy a major property under such conditions. And yet purchasers believe the moment they walk out and climb into their CLA or E-class that they’ve just made money. Appreciation is relentless, unstoppable, expected and a mandate from God. After all, the price romp in that hood has exceeded even the shacks down the road in urban 416, as speculative buying has exploded in the exurbs and hinterland where cows, groundhogs and rustic rednecks in F150s were driven from their natural habitat.

This is why residential real estate is assuming more and more and more of Canada’s overall GDP. Actually, it’s scary. The entire economy is worth about $2.07 trillion, and personal debt (two-thirds of it mortgages) is now at $2.08 trillion. Never happened before. Residential real estate accounts for half of all economic growth, as we busily sell each other houses. At 13.2% of the GDP housing exceeds all manufacturing (10.5%), oil & gas (8%) and even the banks (7%). And yet it’s held together with the gossamer threads of emotion and confidence, and reinforced with the duct tape of cheap money.

We’re more dependent on housing than was the US before the real estate crash that peeled 32% off valuations. Before California’s property plunge, taking the state (larger than Canada) to the brink of bankruptcy. Canadians carry more debt than Americans did at the height of the Ninja mortgage, use-your-house-as-an-ATM madness of 2005-6. With each passing day the overall risk to the economy grows, since the housing boom cannot last. When half the growth is related to real estate (there are 48,000 realtors in the GTA alone and 110,000 in Canada) any reversal in this industry is serious stuff. And it all runs on hormones.

Needless to say, the threats are growing. Governments are seeking ways of ‘cooling off’ the market and, if they succeed, the landing will not be soft. US tax cuts (announcement Wednesday) will help expand the US, drive interest rates higher and increase mortgages here. The protectionist poop just thrown at our lumber industry by the Trump White House could be a harbinger or what’s yet to come – an assault on dairy or the gutting of NAFTA. Our dollar has gone into reverse, stoking inflation (thank goodness fresh cauliflower season’s at hand). And our main export, oil, is at the mercy of US overproduction. Wage growth is stagnant. Nik Nanos (I told you yesterday) finds a third of people say their finances are deteriorating. So all of housing’s gains are coming on the back of fresh debt.

Just as sane people do not spend $2 million on the strength of a salesman and a brochure in a few minutes, smart folks who have scored windfall gains in an unprecedented housing mania should seriously consider rexit. Nobody ever was destroyed by selling too soon. Millions have seen it happen by getting out too late.

See you on the 13th.  Historic.

Like watching the last bison go over the edge.