Friday, February 21, 2014

Canada's Crisis (part 1) –The Housing Bubble

The Canadian Housing Bubble                                                                 
"C.M.H.C:  Fannie and Freddie's Canadian Cousin -For example, while it is technically true that Canada does not have its own publicly-traded GSEs such as Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) to artificially inflate its housing market, it has the next best thing. The Canadian Mortgage and Housing Corporation (C.M.H.C) is Canada's national housing agency used to provide mortgage insurance, which is fully integrated by the federal government".

Is a Canadian housing bubble poised to burst?
"In America, even in the bubble years, the price/income relationship never rose by more that 11 per cent. That same I.M.F study concluded that Canadian house prices were 60 per cent above their historical average.  It gets even worse. He flat out says that the median Canadian house - which is the price at which exactly half are cheaper and half are more expensive - is "certifiably unaffordable." A typical house eats up just more than 40 per cent of income. In Vancouver, it's more like 73 per cent.  He quotes our own Bank of Canada: "The household debt-to-income ratio has remained on an upward trend ... as debt accumulation continues to outpace the growth in disposable income".  But households aren't the only entity overextended. CMHC, which insures these mortgages, has about $9 billion in equity, while it guarantees - get this - $770 billion in mortgages.  That's more leverage that we saw from any U.S. bank or lending institution, by the way".

Canada's Housing Bubble: It’s Not Different This Time
In Canada, a significant amount of fiscal and monetary resources were committed to ensuring that the real estate market was stabilized. This helped to encourage Canadians to take on record amounts of debt and take advantage of the brief pull back in real estate prices. However, nobody seems to be asking the question “What happens if interest rates go back to normal levels?” .  We are finding out that answer now as we have seen mortgage rates rise more than once within the last month alone.
"3 possibilities now exist – (1) possibility of a market correction through housing price deflation, (2) the possibility of a deeper and longer housing crash, and (3) the possibility of a rapid and steep decline".

Report warns of housing bubble threat
"Canadian consumer debt has risen steadily for several years, reaching new highs as measured by debt as a percentage of disposable income,” they said. “Thus, consumers don’t appear to have the flexibility they might have had in the past"...‘The increasing likelihood of a cooling housing market still poses some risks for investors who are not well-diversified’ 

Why Canada's housing bubble will burst's%20housing%20bubble%20will%20burst
"Few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the C.M.H.C to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world."  "The American real estate experience could be repeated here – not as extreme; not a carbon copy; and not with exactly the same economic implications. But scary, nonetheless. After all, we’ve committed pretty much the same crimes. We overvalued houses through greed and speculation. We relaxed lending standards. We encouraged people without money to buy homes. We brought in teaser mortgage rates destined to reset much higher. We pigged out on household and consumer debt. We had bidding wars and HGTV. And we all bought into a culture of  conspicuous consumption in which a honking big house equated social standing. Now, how is Chicago so different from Toronto, San Francisco from Vancouver, Calgary from Houston, Kelowna from Phoenix or Miami from Victoria?  What does this mean?  Things get more serious in 2011.  For sellers, a brewing nightmare. In the US, prices have dropped from 15% in some markets to 70% in others. And still it’s taking an average of one year to sell a home. This is why real estate is illiquid, and a huge potential destroyer of personal wealth. With sales levels plunging, is it not reasonable to expect similar here?  For lenders and realtors and that part of the economy housing makes up, a crater. Mortgage rates could go from ridiculously low levels today to bizarre new microscopic numbers, and it would matter not a whit. This isn’t about affordability anymore, so dump the economics.  For buyers, a huge gamble. With unemployment rampant, the economy stagnant, taxes rising and confidence shrinking, why borrow a big pile of money to buy an asset that’s declining in value and people are desperate to sell? Wouldn’t it make sense to wait six months, or a year? Won’t homeowners be even more desperate then? In fact, why would you buy anything until you are sure a bottom has arrived and you won’t get creamed?  Right now, of course, it’s all exciting. Bursting bubbles. Dickhead economists. Realtor revenge. Granite and stainless Armageddon. Those people who wondered how 25-year-olds with no savings could afford spacious new digs now know the answer. They couldn’t.  But as I have said a few times, this is but the start".

Canadian Housing Bubble 'Set To Burst,'
"The magazine’s dire prediction comes as Canada’s mortgage brokers’ association is warning that the recent slowdown in home sales will continue and lead to large-scale job losses -- though some parts of the country will continue to see growth in housing and related employment.  Meanwhile, the Canadian Association of Accredited Mortgage Professionals (CAAMP) issued a forecast Wednesday calling for a 25 to 30 per cent decline in home sales by 2015, resulting in 150,000 lost jobs related to the industry.  'Until now, housing has played a major role in the recovery from the 2008/09 recession. That economic driver is disappearing as we see housing related jobs dry up and consumer confidence erode at a time when the national recovery is struggling to pick up steam,' CAAMP chief economist Will Dunning said.  The group predicts a 50-per-cent decline in housing starts in the Greater Toronto Area, leading to a loss of 35,000 jobs by 2015. It expects Vancouver’s housing starts to drop by a third, resulting in 7,500 jobs lost".

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