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Tuesday, December 22, 2009

Finally... an admission.

It's been interesting watching the reaction to Finance Minister Jim Flaherty's comments that that the Federal Government will, if necessary, further tighten the conditions under which the Canada Mortgage Housing Corporation insures mortgages.

But Flaherty made a significant comment today and it seems to have escaped notice in all the hand-wringing over what changes the Finance Minister could possibly introduce. Flaherty said,

  • “The Governor (of the Bank of Canada) and I have both encouraged the banks to maintain their lending standards, that’s important. We don’t ever want to end up in a situation like the Americans ended up with — people getting into a lot of trouble with the interest rates on their mortgages.”

Did you catch the significance of the comment?

We'll come back to it in a second.

Flaherty's nascent attitude on dealing with the housing issue (increasing minimum downpayments, reducing amortization periods) is clearly at odds with what he really wants to do... which is nothing.

Everyone knows there are mortgage brokers out there, like this one, who are getting Canadians into the market with nothing down and spreading the loans over 35 years.

That's how payments have been made affordable.

Scotiabank estimates 18% of Canadian mortgages are for terms longer than 25 years, and 10% are amortized over 35 or 40 years.

Broker acquaintances suggest the 35 ams are even higher.

Flaherty and Carney are clearly trying to strike fear into the industry in hopes that the industry will clean up it's act when it comes to manipulating the 'lending standards'.

Personally I don't think it's going to work.

And as 2009 comes to a close, its interesting Flaherty and Carney feel they can no longer publicly ignore what is going on.

Perhaps more startling, however, was Flaherty's startling admission.

Did anyone notice that he finally acknowledged that the conditions surrounding the American housing collapse are not all that different from the conditions looming in Canada?

Flaherty did not dismiss the American housing collapse by blaming it on 'subprime mortgages' and an 'irresponsible banking system' like so many times before.

Isn't that the snake oil government and the real estate industry has been selling us all year long?

No... for the first time we have seen a Canadian official publicly admit what really caused the American collapse:

"People getting into a lot of trouble with the interest rates on their mortgages.”

In America it was teaser rates that reset, first with subprime mortgages and then with regular mortgages.

In Canada it is ultra-low emergency rates that will reset.

Bloggers like this page have been saying all year that Canada is really no different than the United States.

We have thousands of Canadian homeowners who have been using their homes as ATM's, just like the Americans. They have renewed their mortgages, maxed out their equity, and are clinging to low variable rates.

In addition, we have thousands of Canadian homeowners who have jumped into the market with little or nothing down and cannot deal with interest rates returning to their historic norms.

The American condition was rotten with these factors and what set the collapse in motion was a resetting of interest rates. First it took down the subprimers, then the regular mortgage holders.

Now that very condition threatens not only the Canadian housing market, but the Canadian economy as well.

Today's news is not that Flaherty may change the rules for mortgages. Today's news is that Flaherty finally admitted that the Canadian situation is no different from that in America.

But we already knew that, didn't we?

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2 comments:

  1. The painful truth is that recent Canadian growth is driven by real estate activity and retail sale. Growth predicated on debt and stimulus spending. As a result, household debt reach historical high. How much longer can Canadian continue to spend? At current household debt to income ratio of 145%, by the end of 2010, if the current pace hold we will reach above 150%, which make Canadian among the highest indebted household in the world; just behind Ireland at 173%, U.K at 170% and Australia at 160%. In the short term, banks will benefit from the huge mortgage activity, government from the property tax and jobs from the construction sector. In the long term, combining deficits spending with the politicians wasting tax payer money and the bank hiking interest rate, most Canadian will feel the squeeze. Handicap by record debt, a rising interest rate and decimated manufacturing sector that traditionally support jobs and real economic growth, the consequence of our short sightedness will become obvious.

    By now, you must be asking why is he painting such gloomy picture on the most cheerful time of the year? Well, instead of using charts, graphs and numbers, I rather quote Hemingway, who said "a man goes broke slowly and then all at once". As debt leverage reach a ceiling, everything is coming to a halt and crashing down. Along with housing slump, our econmy is also affected, but the biggest bomb of all is the CMHC. By then, government liquidity injections will be hamper by rising interest rate or force to monetize the loonies, both very unsavory options for all Canadian. Hopefully, such scenario will never come to pass. As Canadian we need to rebuild our manufacturing and technology base sector and become more competitive on the world stage instead of solely relying on our natural resources and a consumer spending to drive our economy.

    Happy Holidays and have a wonderful 2010 to all. I am looking forward to read more from this great blog next year.

    Warm regards,
    Patrick

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