Sunday, April 26, 2009

Why the housing collapse could be worse for Canadians

So far, at least, Canada has not suffered the same devesating housing collapse as have our American cousins.

But as we have cautioned more than once on this blog, Vancouver is only 11 months into this collapse. The USA is 4 years into the process. And the precipitous drop in value over the first 11 months for Vancouver Real Estate is steeper than virtually all American cities in their first 11 months.

The fact that our real estate is loosing value at a faster rate than US cities is not the only concern we should have.

According to a new survey hyped yesterday by the local media, Canadians - particularly Vancouverites - have more than two-thirds more equity in their home than Americans.

This is supposed to be positive, reassuring news because it suggests we are less likely to default and trigger a wave of foreclosures which will crush the housing market.

The study for the Canadian Association of Accredited Mortgage Professionals shows Canadian homeowners have, on average, 72% equity in their house, compared with 43% for Americans. "It is a very positive part of the Canadian housing story," said Jim Murphy, chief executive of Toronto-based CAAMP. "Canadians pay down their mortgages. Canadians are just more conservative than Americans."

And despite the drop in prices in the Canadians marketplace, the report notes that only 2% of Canadian mortgage holders currently have negative equity.

But while Murphy (and our local media) hype these virtues as something good for the individual and collective well-being of Canadians, it could also be a catastrophic poison pill.

Their rosy outlook pre-suposes housing will not drop any further than it already has.

It all comes down to having faith that Canada will be able to keep the housing bubble from deflating further. At the current levels, so the theory goes, the strong Canadian equity position will prevent the cascading waves of mortgage defaults that sank the American market.

Just one problem.

11 months into their collapse, 75% of Americans were also in a strong equity position. That position evaporated when housing values collapsed.

If the Vancouver housing bubble does burst to pre-2002 levels (as we predicted it must in our 'Anatomy of a Bubble' post), then thousands of Vancouverites will see their personal fortunes (and retirement funds) vitrually wiped out.

The vast amount of Canadians have little or no actual retirement savings. More than 80% are counting on the value of their homes to fund their retirement. So while Canadians currently have dramatically more equity in their homes than Americans, that so called 'equity' is entirely dependant on housing values remaining exactly where they are.

If housing prices drop, Presto Chango!... that equity is gone.

And since Canadians don't have anything else to fall back on, a significant housing collapse could be far more devestating to Canadians than to Americans.

It's curious that Murphy cannot see the seeds for further collapse within his own survey.

Murphy attempts to accentuate the positive in his data by noting that the study also found that Canadians have dramatically reduced the amount of equity they are taking out of their home. A year ago 22% of Canadians had accessed the equity in their home through measures such as lines of credit. Today that number is down to 15%.

"This speaks to the whole thing about people belt-tightening," said Mr. Murphy.

Meanwhile, about the only new risk Canadians seem to be taking on is longer amortizations. While 83% of Canadians have an amortizations of 25 years or less, the number with 30-year and 35-year amortizations is rising. In the past six months, 46% of new mortgages have been for amortization of more than 25 years.

"I don't think it's a worry because [Canadians] are paying down their mortgages," said Will Dunning, chief economist with CAAMP.

Earth to Jim & Will... that half full glass of yours is half empty and draining fast. Don't you see the problem here?

Our governments are gambling all of their efforts on jump starting the economy by plunging our country into generational debt in a futile strategy that needs us to go back to spending like drunken sailors.

Yet your survey shows we are cutting back and saving like never before. Canadians simply won't re-mortgage their homes to carry on with the reckless spending ways of the past because they are petrified about their homes and the economy.

It also shows that Canadians have been taking out longer and longer term mortgages. That's because everything younger and middle-aged Canadians have is tied up in the value of their house. 30, 35 and 40 year mortgages is the only way they could make it work and they went 'all-in' with that mortgage.

We have put all of our eggs in one basket.

And because we are tightening up on individual spending, government stimulus plans are destined to fail.

And the failure of the stimulus plans mean more collapsing businesses, more lost jobs, more bankruptcies, more missed mortgage payments... and more foreclosures.

That means lower and lower housing prices.

The end result? A new survey in three years that shows we are in deep doo-doo because that superior Canadian equity position is gone.

The real estate stakes for individual Canadians are far higher than for individual Americans.

And if values do, in fact, continue to collapse... most of us are screwed.



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