Some Damn Fine Research

I hate reading articles like this!!!

Currently I'm looking for a home in Calgary and this just makes the hair on the back of my neck stand up.

Do I hold back and wait, or jump in and hope there's no "inevitable" crash?

For now time is on my side. I can still wait for the fall and into the early winter if need be.

This is extremely interesting. I'm going to look into gettin some puts on my Cdn bank stocks. Always remember friends, when youve got cash, youre the king.

Looking forward to the distress sales on Muskoka cottages. Always wanted one of those.

I put down 25% on my first home so I never used CMHC. I always thought they only helped out with a home owners first home/mortgage?

@ ATLANTIC JIM

After playing in the calgary houseing market and winning some here and losing some there i was able to upgrade and put 25% down on my home as well basically for free as i sold off housing asset's and paid debt's and loans and my capitol gains so on and so forth when the smoke cleared i was able to do that and man it felt great !!!

I still owe alot on my home i am currently doing the smith manouver and it works unbeleivabley well my home will be paid off completley in 5-8 years i will have a huge line of credit but that will all be a write off as well i will be stimulating the economy becasue that line of credit is all investment's in small medium and large canadian busnesses and some international buisnesses . pretty cool .

But basedo n this info i think i will wait to build a workshop/garage and a fence on my home home ..lol. but i wonder if and when it will be safe to do so?

I read with interest ... until I came the the part where they quoted the Canadian Center for Policy Alternatives. That was the end of the credibility of the report for me. For those who don't know, the Canadian Center for Policy Alternatives is a Union backed, left wing "think" tank. Their solution is always more and bigger government and their "Policy Alternatives" are always socialism.

My concern is with the number of people who's house is a key component of their retirement portfolio.

I don't think the bubble will burst because they won't be able to pay their mortgage. I fear that it will burst when the market gets flooded with homes to fund these peoples retirements.

With the first of the babyboomers turning 65 this year. I think we will see a significant decline in housing values over the next 7 years.

Great article. I've been saying "the pain train is coming to Canada" for a long time. People have laughed at me outright, but make no mistake: as soon as the conditions present themselves, our economy is going to crater.

Makes me want to sell and rent for a few years.

Hi Rick,

I would still give it some credence. It's from the MIses institute. VERY conservative/libertine outfit.

The last time I used CMHC even though I had a 10% down-payment they made me jump through many hoops and were very thorough in proving my income and ability to pay. This is unlike the Sub primes in the US were people did not even have to prove ability to pay to qualify for a mortgage.
And after all that I got my mortgage and had to pay them a large fee for this service. I swore I would never use them again, and the 2 property's I have bought since I put down 25% or more.

paul in calgary: Smith Maneuver?

Good article, but I think there is a major difference between Canada and U.S. that was at the root of the problem in the U.S. -- Canada doesn't have a special social program to force banks to finance mortages for people who are so poor that they are a serious credit risk. I think that's why U.S. bankers started to cheat and literally "gamble" with the mortgages -- there was no feasible way these people could keep up with the payments. Bankers had to find creative -- and often illegal -- methods to make money off the mortages. The massive failure was due to a stupid ill-thought government social program to "help the poor", I think dating back to the Clinton years.

I could be wrong, but does Canada have a "sub-prime" mortage market as the U.S. did?

(whoops, I think I mis-spelled "mortgage" about ten times)

Fred 2,

I think the Smith maneuver is like the Corbomite Maneuver but Canadian, eh.

ps haven't got a clue

When the bubble pops be ready to for the government to blame a non-existent 'free market'.

Ricardo, I'm not so sure about a sub-prime mortgage *market* but there are quite a few sub-prime mortgages out there.

The matter of being over-leveraged is one of degree. Yes, some po' folk in America should never have received mortgages, but as the Mises data shows, Canadians are just as (over)leveraged as Americans were/are, the main difference being our employment levels haven't plummeted.

There are two main triggers for a Canadian housing/mortgage meltdown: 1) America not buying and the resulting loss of jobs, and 2) increasing interest rates. Either will result in a crisis, but the consequences of the sum would be hitherto unmatched.

The Smith Maneuver (SM) is a way to convert your non-deductible debt (your Mortgage) into deductible debt (interest on investments) by using a HELOC mortgage.

http://www.milliondollarjourney.com/the-smith-manoeuvre-a-wealth-strategy-part-1.htm

The US/Canadian solution to this problem will be financial repression. This is very important concept for those who think holding cash is a prudent move at this time.

http://politicalmetals.com/financial-repression-what-is-it-and-how-does-it-silently-steal-from-you/

Kevin @ 3:42- the article was interesting: financial repression. I'll have to think it over.

This is why I cut my credit cards up years ago.
Slave interest rates acumilate. Than you become one for life.

Kevin, thanks for the financial repression article. This should motivate me to take my RRSP money and invest it in something tangible. Good thing I'm never planning on retiring and, unless I develop dementia, I won't be out of work. Maybe after the big crash and subsequent rebuilding we'll have Larry Niven's autodocs, but then it might be time to start doing something else.

loki - the problem I see is that moving funds into tangible assets may / would be (legally) altered to some extent: to make it illegal in a easy manner. Call me a pessimist, etc - I really wouldn't put it past our (US) government or your's. That's why I'm still divided with what to do to protect my families assets.

At any rate, the article was interesting and I agree with 75% of the analysis and outcomes.

I'm kicking in my advanced strategeric position.

Cheers...

OK, let's dissect some of the things here:

1 - "The savings rate has plunged". What, precisely, is the "savings rate"? It's not defined in the article, and it's a number which can be manipulated in many ways. Some people define "savings" as anything that's not consumption; others suggest it's what left over after consumption AND investment. Here, we don't know which definition is used, and it makes a difference. When interest rates are at historic lows, as they are now, who "saves"? We all know the CPI is really much higher than reported by the government, so does it make sense to sock your money into T-bills at 1%, when the value of your money is falling by 4% a year? Only if you're an economic fool. I'd suggest the low savings rate is a perfectly rational response to low interest rates and an under-reported CPI.

2 - The problem with Fannie and Freddie was not the number or amount of mortgages they insured; it was the QUALITY of the mortgages in the first place. "NINA" (no income, no assets) mortgages came to represent an alarming number of new mortgages in the US in 2005-6. Canada has never had that problem to any real extent; our banks are much more diligent at making sure that you have the real income and the real down payment, and that the ratio of mortgage payment to income is within limits. Of course, the crappy mortgages sold by Countrywide et al in the US were destined to fail in large numbers. I doubt we have anywhere near that problem.

3 - Canadian home prices are rising. So what? This is the problem with percentage vs. absolute charts. Here, from 2009 are the ten most expensive cities for residential real estate, according to CNBC (US$):

Monaco 6550
London, UK 3670
New York City 2160
Moscow 2120
Paris 2100
Tokyo 2080
Hong Kong 2060
Rome 1770
Singapore 1550
Sydney 1440

Now, some Canadian figures from this year (C$):

Calgary 328
Toronto condo GTA 532
Toronto condo core 800
Vancouver 750

Now, I've been to Sydney. It's a lovely city, but you can't tell me it's worth twice as much as Vancouver or Toronto. People all over the world are discovering what a bargain Canadian real estate is, and they are moving in, particularly in Toronto and Vancouver.

I think the linked post is completely overblown.

The difference between us and the USA is we have equity in our homes. In the US they only did interest only loans as they could write off all of the yearly payments. A 20 percent drop in value meant they were all underwater. We went through that same 20% drop and we weathered it
and now values have regained some of that back.

Sorry, should have mentioned the figures in my post were $/sq ft of residential real estate

Assume that any "public servant" is a criminal until proven otherwise.

That sounds about right...consider it thinking outside the tax..

2 - The problem with Fannie and Freddie was not the number or amount of mortgages they insured; it was the QUALITY of the mortgages in the first place. "NINA" (no income, no assets) mortgages came to represent an alarming number of new mortgages in the US in 2005-6. Canada has never had that problem to any real extent; our banks are much more diligent at making sure that you have the real income and the real down payment, and that the ratio of mortgage payment to income is within limits. Of course, the crappy mortgages sold by Countrywide et al in the US were destined to fail in large numbers. I doubt we have anywhere near that problem.

I think the linked post is completely overblown.
Posted by: KevinB at June 21, 2011 7:08 PM

Quite correct, KevinB. With 14 years experience in the financial services industry, most of that on the retail side dealing with residential mortgages, I can attest to the quality you cite. Mortgages that are CMHC-insured have to be approved not only by the bank, but by CMHC as well.

I had situations where the deal couldn't be written because CMHC declined it, even though the bank may have approved it.

Sub prime mortgages were never more than 5% (if that) of the Canadian market, where in the U.S. I've read as much as one in five mortgages were sub prime.

@KevinB: concerning savings rates: you're missing the point: of course saving rates are plunging-very much a bad thing-because the government is artificially holding down interest rates. This was the primary driver of the US bubble and its our primary bubble driver too. Further, cherry-picking of select cities aside, the Canadian housing prices have moved up to where the US housing prices were before the crash.

The comment above about Freddie Mac and Fannie Mae sub prime mortgages was spot on.

But as someone who just now bought a home in Calgary, I lost a lot of sleep after reading this article because it did bring to light some fears I have had. I put 25% down, because I wanted to get past the CMHC nonsense. But how many larger homes are leveraged to the hilt and the people are counting on their home value and hold tenuous jobs?

One item that the article addresses and does not appear to have been mentioned here is that of what is happening and may be coming to Canada's economy as a result of the recession in the US. In other words, if the US is Canada's greatest largest export market, and their recession is getting deeper, it WILL have an increasingly greater effect on Canada's economy. This will result in higher unemployment levels especially in areas like Ontario's mfg sector. If the US does in fact go into the second dip of the "W" shaped recovery as it presently appears, expect that this to get worse and unemployment to rise here in the north.

That means that not only will folk in the US lose their homes due to a lack of income, their homes will also be worth less due to the glut in the market place. Declining value assets - and then how will the banks generate income?

In other news:

The banks in the US have been very slow to release properties for sale; this is apparently due to the backlog of paperwork and the volume of properties to be sold. (I think that they are reluctant to move the properties to close out a deal and are releasing the properties to keep the prices just a bit higher than they should be. Yes, I have a demented and paranoid old mind - I'm OK with that). Right now there are a lot of Canadians who are chasing the US market and the prices are staying relatively firm in the SW states.

Working in Calgary as an engineer in the "oil bidneth" I hope I will have a job for a while yet. Things look good right now for me, but I have enough experience in this career to know that business changes weekly. Best keep the savings going.

I think there are also some structural factors that affect CMHC and other mortgage lender recovery rates compared to the United States. For example, CMHC and other mortgage insurers can pursue borrowers for the deficiency on their homes against personal assets. This makes the recovery rate on defaulting loans higher. I have the distinct impression this is not the case in the US.

Also, the deductibility of mortgage interest in the United States is a major structural difference that will always keep US mortgage borrowing higher than in Canada.

Horsesh!t.

There are so many differences between the two country's sytem it's hard to know where to start.

First of all, incentives. Sounds like a prudent place to begin. In the US, since you have a tax deduction for mortgage interest AND you have liability limited to the house itself, there is no incentive to pay your mortgage off early. In Canada, there is no limit to your liability and no tax deduction. Thus, you have incentive to pay down the loan.

Second of all, the portion of mortgages of extemely high debt/equity levels insured by CMHC are low. The majority of mortgages were lent under the rules stating a 10% down payment.

Thirdly, if 10% defaulted (not gonna happen) it doesn't cost 10% of the total exposure cause you have this really cool thing called a house to sell to cover most if not all of the loss. What you lose is the difference between what the house is worth and the mortgage outstanding. It is no way likely to have such a huge gap as they only ran low downpayment mortgages for a few years and those mortgages have getting (very slowly) paid down as they age.

So, if 10% default, and you lose an average of 10% on the loan principle, you need 1% of your exposure on reserve to pay it off. Put another way, 1:100. Or 9 billion of the 900 billion the author lists.

I see no problem here.