The Elusive Canadian Housing Bubble

[GRG55]

Re: The Elusive Canadian Housing Bubble

I thought the Canadian crowd might like this ...

The Elusive Canadian Housing Bubble

by Alexandre Pestov - Schulich School of Business

(P.S. - Uploading the PDF kept failing - so you'll have to use the link)

Signs of desperation tinged with hope setting in at the Bank of Canada:

Bank of Canada cuts key interest rate as economy falls into recession

July 15, 20158:06 am

The Bank of Canada cut its trend-setting interest rate to 0.5 per cent on Wednesday to help boost an economy that’s in retreat.

The central bank said it believes the economy entered a recession in the first half of the year.

“The Bank’s estimate of growth in Canada in 2015 has been marked down considerably from its April projection,” the central bank said in a statement.

The rate cut of another 25 basis points or 0.25 percentage points follows one made in January of a quarter of a point as sharply lower global oil prices were first denting growth in Canada.

A cut of 0.25 percentage points might not sound like much, but it will encourage more borrowing by businesses and consumers, the latter of which is already dealing with record debt loads.

The immediate recession seemingly outweighs consumer debt considerations, though, according to the bank’s commentary on Wednesday.

“While vulnerabilities associated with household imbalances remain elevated and could edge higher, Canada’s economy is undergoing a significant and complex adjustment,” the central bank said.

“Additional monetary stimulus is required.”...

...“The downward revision reflects further downgrades of business investment plans in the energy sector, as well as weaker-than-expected exports of non-energy commodities and non-commodities. Real GDP is now projected to have contracted modestly in the first half of the year.”

The bank expects growth to pick up again this summer and through the balance of 2015...

And the Canuck Buck heads lower...soon to be once again renamed "The Northern Peso". But not to worry...I'm confident we'll make it up in house price increases

Bank of Canada rate cut ‘guts’ Canadian dollar

The Globe and Mail
Published

Wednesday, Jul. 15, 2015 2:09AM EDT

Loonie flops

The Canadian dollar tumbled by more than a penny from its open today after the Bank of Canada cut its key rate and painted a picture of a troubled, oil-shocked economy.

The loonie tumbled to about 77.5 cents U.S. in the wake of the rate cut, having opened at 78.57 cents.

“The perfect storm for the loonie has arrived - the Bank of Canada, weak oil, sluggish domestic growth, and an upcoming election,” Rahim Madhavji, president of currency exchange Knightsbridge Foreign Exchange, said in a report titled “Bank of Canada cuts rate, guts loonie.”

“The Canadian dollar has reacted violently to the news - a rate cut means flows of funds out of Canada as yields are now lower in Canada,” he added...

[Fiat Currency]

Re: The Elusive Canadian Housing Bubble

Signs of desperation tinged with hope setting in at the Bank of Canada: ...

And the Canuck Buck heads lower...soon to be once again renamed "The Northern Peso". But not to worry...I'm confident we'll make it up in house price increases

Not to worry, as long as the banks get to keep 60% of the benefit, I'm sure the little people will benefit somewhere down the road ...

TD pares prime rate by 10 basis points after Bank of Canada cut

TDToronto-Dominion Bank, Canada’s second-largest lender, was the first of the big banks to reduce rate, but fell short of passing on the full cut to consumers.


The Bank of Canada’s cut its overnight lending rate Wednesday and once again the country’s financial institutions seem unlikely to pass on the full extent of the reduction to consumers.

The central bank reduced its overnight lending rate to 0.5 per cent, despite some concern lower rates could heat up housing markets in key Canadian markets by making debt cheaper.

That concern may turn out to be misplaced as one major bank immediately announced it was only lowering its prime lending rate to 2.75 per cent — passing on 10 basis points of the 25 basis point reduction.

Consumers borrowing with a variable rate mortgage — about one quarter of the country — are immediately impacted by any changes to the floating prime rate. The rest of the country chooses fixed rate mortgages.

Toronto-Dominion Bank was the first out of the block Wednesday after being one of the last major banks to agree to a rate reduction when the central bank lowered in March.

“It will be interesting to see if other banks follow suit or someone will take a more competitive approach,” said Penelope Graham, editor of RateSupermarket.ca. “Remember, TD last time was the initial hold out and said we are not going to change rates at all. They followed when everybody else implemented cuts.”

In March, when the central bank lowered its key landing rate to 0.75 per cent, financial institutions initially refused to pass on the reduction. After some pressure, the banks buckled and lowered their prime rate to 2.85 per cent.

Vince Gaetano, principal at monstermortgage.ca, figures the banks likely assume it’s the middle of the summer and they don’t have to do much to lower rates to attract consumers.

“You only get a portion of it. They bring it back to 2.75 per cent and that’s where it should have been before,” said Gaetano, “The banks continue to make billions and strikes me as a concern that consumers are not more up in arms over this stuff.

Gaetano does think when the central bank eventually starts raising rates, the banks probably won’t be increasing rates as quickly.

In the interim, RateSupermarket.ca says variable rate mortgages are already below 2 per cent while some fixed rate mortgages are as low as 2.3 per cent.

[santafe2]

Re: The Elusive Canadian Housing Bubble

“The Canadian dollar has reacted violently to the news - a rate cut means flows of funds out of Canada as yields are now lower in Canada,” he added...

I love the hyperbole, "violently"...the Canadian dollar is down 27% in US$ terms in the last four years. What's another percent among friends? Since the Yuan is substantially pegged to the US$ the lower Canadian dollar helps explain the resiliency of Canadian home prices. In both US and Chinese terms, Vancouver hasn't been goin' up for a while.

[GRG55]

Re: The Elusive Canadian Housing Bubble

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

Who could have imagined such things happening in Canada, eh!

Home Capital says it cut ties with 45 mortgage brokers after discovering borrower income was falsified

July 30, 2015 9:26 AM

Home Capital Group Inc. said its recent decision to suspend its relationship with dozens of brokers happened after an external source tipped the company off that brokers were falsifying borrower incomes.

Home Capital, one of Canada’s largest alternative mortgage lenders, said approximately 45 individual third-party brokers are no longer dealing with the company following an internal investigation. Sixty per cent of the mortgages created using false documents were part of its “Accelerator” line of insured mortgage products...

...A total of 53 brokers were suspended from September 2014 to March 2015, from a total of 4,000 brokers in Home Capital’s network. The company noted, however, that over 300 new brokers were added over the same period.

The 45 brokers that were specifically cut off for false documentation brought in nearly $1 billion worth of single-family residential mortgages in 2014 — roughly 12 per cent of all new mortgages created that year...

...Khan said further questions include whether the insured mortgages will continue to be insured since they were created using falsified income documents. He also said investors will want clarity about whether management thinks this is an isolated problem, rather than a broader industry issue in the Canadian housing market...

...Home Capital, which operates through Home Trust Co., has 40,000 uninsured mortgages on its books and an additional 25,000 insured mortgages, some of which are securitized and sold. The company has a footprint in Canada’s hottest housing markets, including cities in British Columbia, Alberta and Ontario.


Home Capital defends mortgage practices

Canada's largest alternative mortgage provider says loans based on false income claims are safe.

Canada’s largest alternative mortgage provider moved swiftly to reassure investors Thursday that loans made to borrowers based on falsified income documents were not at risk.

Home Capital Group Inc. also said most of the mortgages in question were insured and that mortgage insurers, such as CMHC, would cover them if they went into default, despite being issued on a false basis.

[lektrode]

Re: The Elusive Canadian Housing Bubble

interesting/insightful comment (#3) on this one, by www.wolfstreet.com - over at 0C:

Liar Loans Pop up in Canada’s Magnificent Housing Bubble

[Polish_Silver]

Who is paying for this?

Who could have imagined such things happening in Canada, eh!


"

Home Capital says it cut ties with 45 mortgage brokers after discovering borrower income was falsified

external source tipped the company off that brokers were falsifying borrower incomes.

. . .


Canada’s largest alternative mortgage provider moved swiftly to reassure investors Thursday that loans made to borrowers based on falsified income documents were not at risk.

Home Capital Group Inc. also said most of the mortgages in question were insured and that mortgage insurers, such as CMHC, would cover them if they went into default, . . .

1) The brokers got commissions by falsifying (or not checking) mortgage documents.

2) The bank got fees by issuing mortgages based on false documents.

3) The mortgages will still be insured.

4) The only party who did wrong is the brokers, who have now have their "ties cut".

So the mortgage fraud seems to have no downside to anyone but taxpayers, am I right on this?

[GRG55]

Re: Who is paying for this?

1) The brokers got commissions by falsifying (or not checking) mortgage documents.

2) The bank got fees by issuing mortgages based on false documents.

3) The mortgages will still be insured.

4) The only party who did wrong is the brokers, who have now have their "ties cut".

So the mortgage fraud seems to have no downside to anyone but taxpayers, am I right on this?

Nothin' to worry about. There's at least 3/4 of a Billion people in China that haven't yet bought a home in Vancouver, so Canadians figure that'll bail out any home grown problems we might create.

[Milton Kuo]

Re: The Elusive Canadian Housing Bubble

Who could have imagined such things happening in Canada, eh!

I must say that I'm very surprised. Being right next door to us here in the U.S.A. and having seen the mayhem our fraud-induced housing bubble wrought on our own and the world's economy, I gave Canada far too much credit for sensibility and honesty. For whatever reason, Canada wants to join the U.S. in economic limbo.

Whatever, I guess. Party on.

[GRG55]

Re: The Elusive Canadian Housing Bubble

I must say that I'm very surprised. Being right next door to us here in the U.S.A. and having seen the mayhem our fraud-induced housing bubble wrought on our own and the world's economy, I gave Canada far too much credit for sensibility and honesty. For whatever reason, Canada wants to join the U.S. in economic limbo.

Whatever, I guess. Party on.

Human nature is constant. Around the world. What tempers it is cultural norms in the different places. We smug Canadians don't want to be confused with the USA, but at the same time we seem to have an increasing predilection to aspire to have everything our American cousins have. Including record credit card, mortgage and other forms of consumer debt.

[santafe2]

Re: Who is paying for this?

Nothin' to worry about. There's at least 3/4 of a Billion people in China that haven't yet bought a home in Vancouver, so Canadians figure that'll bail out any home grown problems we might create.

Review of the information in the chart below will help explain why, in Canadian dollar terms, Vancouver is still goin' up. Possibly why a detached home in Vancouver costs about $1.25MM Canadian and has moved up almost 16% in the last year. It must seem crazy to a citizen of Vancouver that housing continues to move up in price when a mortgage on an average home in Vancouver would take 80% of the average Canadian family's income to cover. The answer of course is that the buyers aren't average Canadian citizens any more than buyers in Manhattan or Paris. Welcome to the world of international fame.

If you are a citizen of China, prices have actually moderated a bit over the last year due to the change in exchange rate.

[don]

Canadian Only Need to Look South

The Bay Area goes full mania

Here in SoCal, we are home to the most expensive real estate relative to household incomes. We out do San Francisco and New York because overall, they earn more there. This is why recent sales are going largely to big money from abroad and big time investors. The sales that go to regular households are folks stretching every inch of their budget to buy a crap shack. But a SoCal crap shack might look like Taj Mahal compared to what is going on in the Bay Area:

“(Bloomberg) The Wharton School graduate’s 160-square-foot box has a camp stove and a shower made of old boat hulls. It’s one of 11 miniature residences inside a warehouse he leases across the Bay Bridge from the city, where his tenants share communal toilets and a sense of adventure. Legal? No, but he’s eluded code enforcers who rousted what he calls cargotopia from two other sites. If all goes according to plan, he’ll get a startup out of his response to the most expensive U.S. housing market.”

Why in the world would people pay absurd prices to what amounts to camping?

“That’s a towering goal where costs are so high people of average means get inventive or get out. The median rent in June jumped 16 percent from a year earlier in San Francisco to $4,272 and climbed 15 percent to $3,237 in the metro area, Zillow Group Inc. reported Thursday. The median sales price is $1.14 million in the city and $660,000 areawide.”

This is sardine living taken up to the next level. With the median rent hitting $4,272 per month, people are getting creative. Living out of a shipping container is definitely creative. I find it poetically tragic that these shipping containers were/are largely used to ship products from China (a country that is now buying up a ton of the available real estate in California and has also chipped away at US manufacturing).Living in shipping containers isn’t the only housing “hack” that is happening in Northern California:

“The market is so crazy it’s spawned innovations that keep inspectors up at night. Garages are converted to studios, offices to lofts, living rooms to rentable units, many without permits. As many as 60,000 San Franciscans live in illegal housing, according to the Department of Building Inspection.”

This nonsense is also happening here with your Taco Tuesday baby boomers renting out rooms in Santa Monica and Culver City. But leave it to the Bay Area to get wickedly creative:

“In Mountain View, home to Google Inc. and LinkedIn Corp., John Potter advertised a backyard tent on AirBnB for $900 a month, spurring a dozen copycats. He got a cease-and-desist order because the tent was an unlicensed structure, but is undeterred. “My next thing is a tree house,” said Potter, 22, who runs an animal photography studio and avoids the housing-price problem by living with his parents.”

The next million dollar zip code in the Bay Area

Bwahahaha! We’ve talked about the 2.3 million adult children living back home with parents because they are too broke to rent. Now you can generate extra income by having tenants “camp” out in your backyard or live in a freaking tree house. By the way, where do they go to the restroom? Your crap shack of course. Yes sir! No mania here. Maybe I’ll list my trash bin on AirBnB and go for the Oscar the Grouch living arrangement. Just be careful on Monday as to not get taken away by Waste Management.And this is a neighborhood where you want to plant roots? Neighbors turning their homes into make-shift camp grounds or hotels? Yeah, sounds like an awesome plan. Maybe a shipping container makes more sense. No wonder California residents are leaving the state in droves.

[GRG55]

Re: Who is paying for this?

Review of the information in the chart below will help explain why, in Canadian dollar terms, Vancouver is still goin' up. Possibly why a detached home in Vancouver costs about $1.25MM Canadian and has moved up almost 16% in the last year. It must seem crazy to a citizen of Vancouver that housing continues to move up in price when a mortgage on an average home in Vancouver would take 80% of the average Canadian family's income to cover. The answer of course is that the buyers aren't average Canadian citizens any more than buyers in Manhattan or Paris. Welcome to the world of international fame.

If you are a citizen of China, prices have actually moderated a bit over the last year due to the change in exchange rate.

I will gently disagree:

1. Transactions are in Canadian $ and nobody in Canada except for importers of Chinese products gives a damn what the Yuan exchange rate is.

2. The Chinese who are converting yuan to CAN$ to purchase homes will certainly see the exchange benefit. So will anybody from the USA, which has always been a much closer and larger source of buyers of B.C. properties every time the Canadian $ collapses.

3. Having said that, the Chinese or the Americans are not buying up every damn house in Vancouver. Not by a long shot. The overwhelming majority of mortgages being written to purchase Vancouver region real estate are to Canadian residents who already live in the Lower Mainland.

They are doing it to themselves and that is why when the credit support finally exhausts itself so will this insanity, regardless of the Yuan or US$ exchange rate (which I expect will be become even more favourable as property turns down).

[GRG55]

Re: The Elusive Canadian Housing Bubble

July data in (it says Jun in lower right, but it is July data). Woooo hooo!

[santafe2]

Re: Who is paying for this?

I will gently disagree:

1. Transactions are in Canadian $ and nobody in Canada except for importers of Chinese products gives a damn what the Yuan exchange rate is.

2. The Chinese who are converting yuan to CAN$ to purchase homes will certainly see the exchange benefit. So will anybody from the USA, which has always been a much closer and larger source of buyers of B.C. properties every time the Canadian $ collapses.

3. Having said that, the Chinese or the Americans are not buying up every damn house in Vancouver. Not by a long shot. The overwhelming majority of mortgages being written to purchase Vancouver region real estate are to Canadian residents who already live in the Lower Mainland.

They are doing it to themselves and that is why when the credit support finally exhausts itself so will this insanity, regardless of the Yuan or US$ exchange rate (which I expect will be become even more favourable as property turns down).

We might disagree around the edges but without foreign buyers, it's unlikely Vancouver real estate would be even close to these prices. Certainly Canadians didn't all-of-a-sudden find Vancouver irresistible. All markets are finite. In any market where there is more demand than product, the product continues to move up in price. Americans and Chinese buyers have seen a moderated market price from their monetary point of view. Canadian buyers are chasing an unrelenting market price and they're not happy about it.

Here's a resent article:
http://business.financialpost.com/pe...foreign-buyers

It doesn't matter who the buyers are, it's still basic economics. If there are 99 widgets and 100 buyers, the widgets don't go up by 1%. There is nothing linear about markets out of balance. If there are 10% too many buyers a product can easily move up 100% in price. Vancouver housing is a 21st Century tulip.

[Down Under]

Re: Who is paying for this?

It doesn't matter who the buyers are, it's still basic economics. If there are 99 widgets and 100 buyers, the widgets don't go up by 1%. There is nothing linear about markets out of balance. If there are 10% too many buyers a product can easily move up 100% in price. Vancouver housing is a 21st Century tulip.

And, I think the same applies to Sydney.