Friday, February 21, 2014

Canada's Crisis (part 2) –C.M.H.C and the outdated “Must Own A Property to Be Successful” Mindset

“Contrary to popular belief C.M.H.C does not insure home buyers, but lenders. With this new cap in place, mortgage financing will be somewhat tougher.  My partners and I just made a bunch of money as this new policy will make mortgage qualification more difficult for would-be home buyers, thus create more renters, longer.  Land lords rejoice as rents go up and rental property values!  Did you financial "advisor" tell you lately that you, too, should own some rental properties?”

“C.M.H.C is not a lender. It is primarily an insurance firm for banks”.

“The C.M.H.C is a government sponsored profit machine for the big banks.  The homeowner pays the C.M.H.C premium, the taxpayers take on the risks, and the banks take on the profits. What could possibly go wrong with this?”

“Approved mortgage lenders are happy to provide high loan to value ratio guaranteed mortgages. Other than the 30%-40% payment servicing rules and that the borrower has reasonable job security, they can continue to lend maximum amounts comfortably with minimum risk and make lots of money. However, C.M.H.C if they wanted to, can pull back by ordering the lenders to require an upfront equity of 25% on the appraised value, and then the C.M.H.C insurance and related fees could probably be dispensed off or reduced to only 50% of the value). It would then become increasingly difficult to securitize such mortgages. Last but not least, the C.M.H.C. is ultimately funded by the Canadian Tax payer”.
“The perfect storm of:
1) lower tax base
2) higher retirement
3) higher debt
4) excess market speculation globally
5) higher real inflation
6) C.M.H.C insurance exposure on tax payers
7) higher interests looming - makes home ownership less and less attractive.
For those of you who have done well on a binge of speculation we salute you but please don't drag down the younger folks who will be destroyed by this folly. Mark Carney warned before leaving for his final venture
"people can get sucked into a balance sheet analysis that says 'I'm very wealthy because my assets are worth more than my debts,' but they are 'illiquid' and they can't service their debts because they lose their jobs or interest rates go up or both".  Re- investments have served us well in the past but the economic climate has drastically changed. The accumulated wealth from 1980’s, where debt to income ratio was 66% (now at 150%), is not being directed back into the hands of consumers. That is now obvious. This spread demands a re-assessment of future plans”
“The problem is not that there are too many home buyers but these home buyers put all their money and life savings into a home or more than one property. This makes debt even at 3.39% enemy number one. We all know that 3.39% is not a long-term sustainable fixed mortgage rate. It is more like 4.89%, 5.39% or 6.39%.  Many people do not factor in all the electricity, water, gas, insurance, repair, maintenance, property taxes, condominium fees etc. to own a home or condominium. The rate of increase year after year catches the majority of people by surprise over decades.  Electricity, water, and gas will easily triple in 20 years.  Property taxes will double in 15 years.  Condominium fees will triple in 20 years.  These are averages so it can be worse than this”.

"Unfortunately all those Toronto high rise condos being built have their construction financing guaranteed by taxpayers through C.M.H.C, and when the Chinese buyers walk away from their deposits as prices fall to economic values for rental properties, we will be left with huge, huge losses"

 “If you want the banks to take on all the risk, then the home buyer has to put 20% down as a down payment when purchasing a home. A $300,000 home requires $60,000 cash down plus closing costs. I do not know too many first time buyers that have that much money. The government comes along years ago and introduces C.M.H.C as the risk insurer. Banks are not allowed to take on riskier loans with less than 20% down.  This spurs the home buyers market, the builders, renovations, real estate, employs millions of people, etc. Helps the economy and people get to own homes instead of renting”.

"New home sales are at the lowest level since the 1992 recession. Prices will start to decline soon enough. Mortgage rates have risen by 3/4% in the past month. Things will get much worse, especially once 50,000 condos are delivered this year”

"Toronto has had an 18 year run of prices rising well above incomes so what do people expect?  Toronto condo sales suffer 46-per-cent drop in June. Just wait till mortgage rates increase and you will see many file for personal bankruptcy.  This problem has a double sword effect. When mortgage rates increase and they will, house prices will also drop in value. For example, a house now selling at $400,000 with a 3% mortgage rate will more than likely fall in value to around $350,000 when rates increase to 6%. This means that those trying to get out of the market when rates increase will also take a loss on their sale.  Imagine you bought this $400,000 house at 3% mortgage rate - now the mortgage rate goes up to 6% - your interest payments have gone from $12,000 annually to $24,000 annually. You can't afford it so you try to sell - now your house only sells for $350,000 due to the higher mortgage rates and your real estate agent charges you a 5% commission to sell this house or $17,500.  The bottom line is that you will take a bath and lose at least $67,500 on your initial purchase of only $400,000 - imagine the losses of someone who bought at $500,000, $600,000 etc.  You know who wins - right - always the Real Estate Agents".

"In the bankruptcy, secured creditors (wealthy bondholders with special rights bonds) are protected.  The people who will lose everything are the people who worked an hourly wage, (ex: grandma who invested in unsecured bonds, etc.).  It's never the wealthy".

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