The Elusive Canadian Housing Bubble

[don]

Re: The Elusive Canadian Housing Bubble

THE CANADIAN HOUSING MARKET – IN CHARTS

1) Canada’s housing market is 63% overvalued relative to its historical average…

2) Home prices in Vancouver are more expensive than they are in Sydney, London, and New York…


3) “Canada is in serious trouble” because its households never deleveraged…


4) Since 2000, growth in assets held by Canadian banks is as follows…
Personal lines of credit: + ~650%
Credit card loans: + ~400%
Mortgages: + ~250%
Disposable income: + ~100%


5) In Canada, multifamily construction is at record highs…


6) Canadian workers are twice as reliant on housing construction…


In conclusion…
– The Canadian housing market is very expensive.
– Median house price to median household income is higher in Vancouver than it is in Sydney, London, and New York.
– Canadian households – unlike their US counterparts – never deleveraged after the financial crisis.
– Credit is growing a lot faster than income is.
– There’s a lot of supply coming onto the market.
– The share of Canadian workers in housing construction is twice what it is in the US.
If rates rise or if commodity prices continue to fall then it’s likely that Canada’s housing market will come under pressure.

[GRG55]

Re: The Elusive Canadian Housing Bubble

January data in:

[GRG55]

Re: The Elusive Canadian Housing Bubble

And on and on it goes...

"...The TV anchorettes piled on, and this week viewers were breathlessly marched through beater houses with slanty walls and pink toilets, told that they are all now worth seven figures..."


Subprimal

March 5th, 2015

Last April the realtors’ cartel in Toronto reported that the average detached house in 416, the best place in the galaxy, ever, hit $1,012,172. This happened on the back of the latest mortgage wars, punctuated by the first 1.99% home loan offered in Canada.

After that, prices fell. In fact, they dipped about 12%, perfectly understandable in a city where average incomes remain stagnant and citizens have become nicely pickled in world-class debt. This changed in January, when the Bank of Canada panicked over oil and dropped its key rate a quarter point. Mortgages didn’t change much, but that’s not what people thought.

So this week the cartel announced the average 416 house had regained the level of almost a year ago, to $1,040,018. It issued a media release claiming this constituted “an increase of 8.9%”. The Globe and Mail, easily duped, reported that for the first time ever, “houses in Toronto cost $1 million.” The Financial Post said, “Housing sales across the Greater Toronto Area climbed 11.3% in February from a year ago, helping to push the average sale price of detached homes in the city past the $1 million mark for the first time.” The TV anchorettes piled on, and this week viewers were breathlessly marched through beater houses with slanty walls and pink toilets, told that they are all now worth seven figures.

Meanwhile most families still make about $72,000.

It’s hard to know who to be the most disappointed with. The real estate board for its duplicitous Frankenumbers, including its misleading annual gain stat. Or the big-city reporters who have the investigative talents of foot stools.

In any case, it’s more evidence of a perfect negative correlation between house prices and interest rates. When the cost of money falls, people borrow more and real estate goes up. Without 2.6% five-year mortgages, houses in 416 would not cost $1 million. In any case, this is not what the reporters told us. Instead the news was of a milestone, the start of a new era in property insanity, so you’d better buy now...

...Subprime lenders are typically not regulated by the federal government, charge rates determined by competition, not the Bank of Canada, and can decide capriciously not to renew your borrowing when the term expires. The subprime lending market is estimated to have grown by a quarter over the past year.

You read that right. The 12-month growth in Canadian subprime lending is 25%, and while it amounts to less than 3% of outstanding mortgages, expect that to change. Benny Tal, big economist at CIBC, was saying this week that the million-dollar CMHC cutoff limit is leading to a surge in subprime lenders entering the market which, of course, is what happened in the US prior to the crash there. Tal also says he sees more and more families forced to borrow downpayments to buy million-dollar-plus homes, because (a) they don’t have the money and (b) that’s what houses cost...

[jk]

Re: The Elusive Canadian Housing Bubble

Subprimal

March 5th, 2015

You read that right. The 12-month growth in Canadian subprime lending is 25%, and while it amounts to less than 3% of outstanding mortgages, expect that to change. Benny Tal, big economist at CIBC, was saying this week that the million-dollar CMHC cutoff limit is leading to a surge in subprime lenders entering the market which, of course, is what happened in the US prior to the crash there. Tal also says he sees more and more families forced to borrow downpayments to buy million-dollar-plus homes, because (a) they don’t have the money and (b) that’s what houses cost...

do you know what is happening with the subprime paper? are the lenders holding it? who is, and in what form? in the u.s., it was the securitization and slice and dice cdo's which really propagated the risk through the rest of the financial system.

[Fiat Currency]

Re: The Elusive Canadian Housing Bubble

do you know what is happening with the subprime paper? are the lenders holding it? who is, and in what form? in the u.s., it was the securitization and slice and dice cdo's which really propagated the risk through the rest of the financial system.

Most of it is immediately flipped to CMHC or Genworth. The banks don't even hide that fact ...

Screen Shot 2015-03-08 at Sun8 9.48AM.jpg

[jk]

Re: The Elusive Canadian Housing Bubble

Most of it is immediately flipped to CMHC or Genworth. The banks don't even hide that fact ...

[ATTACH=CONFIG]5606[/ATTACH]

so when the subprime mortgages blow up, what happens to cmhc and genworth? is cmhc private, public or some hybrid? and will the canadian central bank say cmhc and genworth are too big to fail? and, btw, did this start on carney's watch? and, theoretically, does the bank of canada have the regulatory authority to have prevented this bubble? [sorry for so many questions, but i really don't know the answers to any of them, and rather than spend a chunk of time trying to find the answers, i figure there are likely people here who know this stuff.]

i guess what i'm trying to understand are 2 things: does canada's incipient subprime bubble represent the same abdication of regulatory authority as the u.s. subprime bubble did?
and what happens when it blows up? who, ultimately, is left holding the bag? a quick google tells me that cmhc is a creature of the gov't, though i don't know if it like fanny and freddy or a fully governmental agency. if it goes, though, it's clear the canadian taxpayer is left holding the bag. genworth is a mortgage INSURER, not a mortgage investor. so if it goes broke, who is holding the paper?

[Fiat Currency]

Re: The Elusive Canadian Housing Bubble

so when the subprime mortgages blow up, what happens to cmhc and genworth? is cmhc private, public or some hybrid? and will the canadian central bank say cmhc and genworth are too big to fail? and,

Yes - CMHC is backstopped by Canadian Taxpayers and Genworth with be declared TBTF (or "back door" bailed-out most likely)

btw, did this start on carney's watch?

Yes, but Jim Flaherty (previous FinMin) & the sitting gov't get their share of the blame too ... but gov't & the banks are partners n'est pas?

and, theoretically, does the bank of canada have the regulatory authority to have prevented this bubble?

Yes - but the gov't has the pen on regulatory authority so they could have forced it to stop too if they had wanted to ... partners in crime & deception

i guess what i'm trying to understand are 2 things: does canada's incipient subprime bubble represent the same abdication of regulatory authority as the u.s. subprime bubble did?

Yes - the proper term is malfeasance

and what happens when it blows up? who, ultimately, is left holding the bag? a quick google tells me that cmhc is a creature of the gov't, though i don't know if it like fanny and freddy or a fully governmental agency. if it goes, though, it's clear the canadian taxpayer is left holding the bag. genworth is a mortgage INSURER, not a mortgage investor. so if it goes broke, who is holding the paper?

I think we'll find out in due course. Timing unknown. Taxpayers for sure will eat it in increased debt obligations via bailouts. Some of it will have been repackaged & resold, diced into derivatives etc. ... as these are Financial Firms with "yield" to sell - "low risk" to boot

So ... keep some cash and wait for the great fire sale is all you can do (control the controllables) ... it will be gov't officials getting "twitchy" to "solve" problems that will be the real bean ball to the head.

Baseball Catcher Happy Face.gif

[GRG55]

Re: The Elusive Canadian Housing Bubble

so when the subprime mortgages blow up, what happens to cmhc and genworth? is cmhc private, public or some hybrid? and will the canadian central bank say cmhc and genworth are too big to fail? and, btw, did this start on carney's watch? and, theoretically, does the bank of canada have the regulatory authority to have prevented this bubble? [sorry for so many questions, but i really don't know the answers to any of them, and rather than spend a chunk of time trying to find the answers, i figure there are likely people here who know this stuff.]

i guess what i'm trying to understand are 2 things: does canada's incipient subprime bubble represent the same abdication of regulatory authority as the u.s. subprime bubble did?
and what happens when it blows up? who, ultimately, is left holding the bag? a quick google tells me that cmhc is a creature of the gov't, though i don't know if it like fanny and freddy or a fully governmental agency. if it goes, though, it's clear the canadian taxpayer is left holding the bag. genworth is a mortgage INSURER, not a mortgage investor. so if it goes broke, who is holding the paper?

It's a complex web, but on the whole not directly comparable to Mozilo's Countrywide Financial, et al.

Canada Mortgage and Housing Corporation (CMHC) is a Canadian Crown corporation owned and backstopped 100% by the beleaguered Federal taxpayers of Canada (although the National Housing Act Statutes actually say the obligations of CMHC are the responsibility of "Her Majesty" ).

CMHC is the personal plaything, and comes under the authority, of the Minister of Finance. The Bank of Canada has no direct authority over CMHC. The BoC role in all this is restricted to the manipulation of bond market interest rates so the Canadian Big Six bank oligopoly (RBC, CIBC, BoM, TD, Scotia and National) can repeatedly trumpet yet another all time record low mortgage interest rate as a good reason to buy a house. NOW! Before it's too late, and one is resigned to a lifetime of living in the inlaw's basement suite.

CMHC directly insures qualifying mortgages and charges a premium to the borrower for that insurance. There is an argument that by insuring high ratio mortgages (as little as 5% down), CMHC contributes to "reckless lending" by absolving The Banks of the consequences of irrationally exuberant lending practices. The Ministry of Finance has responded to such stinging criticism by limiting the maximum high ratio mortgage that CMHC is allowed to insure to CAD $1 million (given recent currency exchange rate trends this will soon be equivalent to about US $1.49).

CMHC also acts as trustee for National Housing Act qualifying Mortgage Backed Securities (NHA MBS). In this role it guarantees timely payment of interest and principal to private investors in these MBS. Under this part of its mandate CMHC does not take actual ownership of any MBS paper. It charges fees to the issuers of these MB securities; the issuers and the mortgages in the MBS pools have to meet certain CMHC eligibility criteria, including that all loans within a pool have to be insured, and by the same insurer (which quite often is CMHC itself).

Rashly assuming you are still with me, CMHC also administers the Canada Housing Trust. The CHT issues Canada Mortgage Bonds (CMBs, "a new and innovative mortgage funding vehicle" - yes, Virginia, this is what it sez in the CHT propaganda, er, literature) the proceeds of which are used to purchase...wait for it...NHA MBS paper.

Before we close out this tour through the incestuous world of Canadian mortgage finance, there is the wee matter of the IMPP. This "temporary" 2008 program was the brilliant concoction of the minions in the diminutive (in height, not political influence) Jim Flaherty's Finance Ministry in the wake of the global financial crisis. Although some claim the acronym was inspired by the elfin Flaherty himself, it actually stands for Insured Mortgage Purchase Program, and involved the CMHC taking loans from the Govt of Canada (Her Majesty?) and using the funds to clean up The Banks balance sheets by purchasing every known remaining NHS MBS in the Dominion not already on CMHC books. It is supposed to wind up some time this year with all securities having reached maturity and the loans paid back to the Queen.

Some closing words from former Federal Government Minister of National Revenue, Garth Turner, on his "Greater Fool" blog on Friday:

...The latest trade numbers were the second-worst ever, showing a massive deficit as imports swamped exports. Oil revenues alone were off 23%, and with crude back below fifty bucks, this won’t get better soon.

This is a problem. A dithering economy here with people borrowing their buns off to buy million-dollar houses means it’s tough for the Bank of Canada to unhook us from cheap mortgages, or our own stupidity. But as the States powers ahead, with a surging currency and a rate increase, without higher Canadian rates a 79-cent dollar will soon turn into 75. Up goes the price of imports, sandwiching indebted families.

It gets worse, which is why you love reading this blog. RBC now says idiot Canadians took on $80 billion worth of new debt in the past year alone. Guess when most of it appeared? You bet. In the period since the Bank of Canada dropped its key rate in January. This is what I meant yesterday about the perfect negative correlation between rates and house prices.

In fact the Bank said as much: “We saw mortgage rates fall in the month (January) to the lowest they’ve been in 10 years. So that may be encouraging some activity to be brought forward in the market.”...

[jk]

Re: The Elusive Canadian Housing Bubble

it's interesting to watch the canadian bubble when every economist and gov't official should be able to see how they are following in the u.s.' tracks. you'd think that the disaster of the u.s. subprime bubble would give the canadians adequate warning, but apparently that is not the case.

is there talk in the mainstream canadian press about this, or is the rather obvious comparison confined to some voice-in-the-wilderness blogs, as it tended to be in the u.s.? in thinking about how this can be allowed to go on, when the object lesson is right next door, all i can think of is that the gov't is thinking very short-term [surprise!] and trying to maintain an illusion of health for an economy that is in trouble at this moment because of the fall of commodity prices.

otoh, i suppose no canadian politician is going to win an election by saying peoples' homes are worth a lot less than they think, and that the only thing providing momentum to the canadian economy is a danger and should be shut down.

no worries, eh?

[gorinv]

Re: The Elusive Canadian Housing Bubble

Some closing words from former Federal Government Minister of National Revenue, Garth Turner, on his "Greater Fool" blog on Friday:

The Irish are reflecting on what caused the collapse of their economy in 2008.

Sure enough they had their Garth Turner's sounding the warning bells in advance...

http://www.irishtimes.com/business/financial-services/david-mcwilliams-irish-economy-set-up-to-fail-1.2118484

[GRG55]

Re: The Elusive Canadian Housing Bubble

it's interesting to watch the canadian bubble when every economist and gov't official should be able to see how they are following in the u.s.' tracks. you'd think that the disaster of the u.s. subprime bubble would give the canadians adequate warning, but apparently that is not the case.

is there talk in the mainstream canadian press about this, or is the rather obvious comparison confined to some voice-in-the-wilderness blogs, as it tended to be in the u.s.? in thinking about how this can be allowed to go on, when the object lesson is right next door, all i can think of is that the gov't is thinking very short-term [surprise!] and trying to maintain an illusion of health for an economy that is in trouble at this moment because of the fall of commodity prices...

"All people are most credulous when they are most happy"
Walter Bagehot

...otoh, i suppose no canadian politician is going to win an election by saying peoples' homes are worth a lot less than they think, and that the only thing providing momentum to the canadian economy is a danger and should be shut down.

no worries, eh?

If there is one book worth reading to put the situation of the past fifteen odd years in perspective it is J.K. Galbraith's 1955 book "The Great Crash 1929". I go back to it often, especially on recent days when the markets have just made yet another new all time high. I am quite sure I have quoted some of his words in the past.

"In our democracy an election is in the offing even on the day after an election. The avoidance of depression and the prevention of unemployment have become for the politician the most critical of all questions of public policy...Booms, it must be noted, are not stopped until after they have started. And after they have started the action will always look, as it did to the frightened men in the Federal Reserve Board in February, 1929, like a decision in favor of immediate as against ultimate death. As we have seen, the immediate death not only has the disadvantage of being immediate but of identifying the executioner."

[jk]

Re: The Elusive Canadian Housing Bubble

i've read that book twice, but it's been a while, and i don't recall that passage. galbraith, along with everything else, was a wonderful and entertaining writer.

[GRG55]

Re: The Elusive Canadian Housing Bubble

The Irish are reflecting on what caused the collapse of their economy in 2008.

Sure enough they had their Garth Turner's sounding the warning bells in advance...

http://www.irishtimes.com/business/financial-services/david-mcwilliams-irish-economy-set-up-to-fail-1.2118484

Nice find.

During every really good bubble, discrediting those who refuse to indulge in vacuous optimism is common sport.

[santafe2]

Re: The Elusive Canadian Housing Bubble

So this week the cartel announced the average 416 house had regained the level of almost a year ago, to $1,040,018.

It must be partly due to the ~20% fall in the value of the Canadian dollar. Maybe it's time to skip the 416 and head south to Buffalo. Buy a nice place, a Cessna 172 and commute. You could do that for about half the price. With your spare change, have a limo waiting for you at the airport. Problem solved.

[GRG55]

Re: The Elusive Canadian Housing Bubble

It must be partly due to the ~20% fall in the value of the Canadian dollar. Maybe it's time to skip the 416 and head south to Buffalo. Buy a nice place, a Cessna 172 and commute. You could do that for about half the price. With your spare change, have a limo waiting for you at the airport. Problem solved.

If I was in Toronto, and managed to get out of Toronto (to Buffalo, or anywhere else), the last thing I would want to do is return to Toronto. I might be tempted to dig a tunnel...