Monday, December 14, 2009

Follow the pea

It's the Christmas season and time to navigate the holiday party circuit.

Headlining much of the party chatter angst is every one's favorite topic - real estate.

But this year the fears and trepidation that were all too commonplace this time last year are gone. Replaced by a re-birth in speculative frenzy bordering on religious fervor.

Hobnobbing over eggnog I am amazed at how everyone is convinced that the Village on the Edge of the Rainforest has escaped the market meltdown fate of our American cousins.

R/E defenders trumpet that - despite a near Depression - real estate only suffered a modest drop in prices, prices which have since rebounded.

There is a palpable sense of invincibility growing again, a faith in the manifest destiny of the Vancouver market.

Once again I find myself holding court as the lone naysayer in a room filled with re-born real estate evangelists.

Particularly amazing is how so many have glommed onto the report released by the Federal Reserve Bank of Cleveland titled "Why Didn’t Canada’s Housing Market Go Bust?"

That report concluded that it was primarily the lack of a subprime lending industry in Canada that kept the housing market in this country from imploding. When combined with the oft-repeated mantra of the superior Canadian banking system, it is stunning to see how it has people gushing again about a non-stop, upward trajectory for real estate.

I shake my head.

First of all our vaunted Canadian banks aren't quite as secure as we may like to believe.

Faithful readers have already seen the post on the Sprott Asset Management report which clearly outlines how our Canadian banks barely escaped the 2008 meltdown.

They received $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP) (meaning CMHC purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets), the Bank of Canada provided them with an additional $45 billion in temporary liquidity facilities and there was also assistance from the Canada Pension Plan (CPP) through the purchase of $4 billion in mortgages prior to the IMPP program for a total government expenditure of $114 billion.

All five Canadian banks are levered at an average of 31:1. According to Sprott this implies that if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out.

But despite this precarious position, Canadian banks are still facilitating mortgages for both current mortgage holders and eager new buyers whereas in the United States potential buyers struggle for financing and foreclosures reign supreme on current mortgage holders who need to renegotiate.

How can this be?

The Federal Bank of Cleveland says it's all due to the lack of a subprime lending industry in Canada.

Au contraire mon frere!

The only reason our real estate market hasn't tanked like it has in the United States is because of the way our government has intervened in this crisis.

While both countries have slashed interest rates to dirt to stimulate both the economy and the real estate market; in Canada we have also have the CMHC.

The CMHC publicly admitted that it was ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing.
  • In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.
  • Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% -- possibly the smallest amount of change in post WWII history.
Because of the way these mortgages are being securitized by CMHC, credit is flowing from our banks into the real estate industry. And all of these mortgages are backed by the Federal Government.
  • The Canadian mortgage securitizaton market has grown from $100 billion in 2006 to $295 billion by mid-June 2009.
  • CHMC plans to expand securitization of debt to $370 billion by the end of 2009 as per the conservative government request.
  • CMHC indicates in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of 2009.
  • According to CHMC figures from 2008 and 2007 it is clear that CMHC has drastically exceeded their planned figures. It is expected that $812 billion is more than likely to be a minimum target.
  • At these rates of progression the Government of Canada will in effect be insuring well over $500 billion in securitized mortgages and lines of credit by the end of 2010. The Canadian Government will also have issued over $600 billion in outstanding mortgage insurance.
The Canadian real estate market is flourishing while the American real estate market is floundering because credit is flowing to homebuyers in Canada.

In the United States, it is not.

I'll repeat the key statistic again: between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% -- possibly the smallest amount of change in post WWII history.

It means our banks aren't on the hook for all the mortgages that have been issued, the Federal Government is. That's why credit is available for real estate in Canada when it isn't in the United States.

Uncle Sam is too busy bailing out Wall Street instead of Main Street.

The reality is that our so-called 'solid' real estate market exists only because of massive federal government subsidization. The whole industry sits on a precarious foundation of quicksand that is part of an intricate shell game of asset protection being played by the Federal Government.

That's why Bank of Canada Governor Mark Carney 'urges prudence' but won't take action to raise interest rates and why Finance Minister Jim Flaherty won't tighten up mortgage lending requirements as an alternative to BOC action.

I suspect many of my fellow party-goers, those who are all too ready to ooze that elusive 'market confidence' that officials were so desperate to restore last Christmas, will not fully realize what is going on until it is too late.

Classic 'marks' in what to me is clearly a 'confidence' game.


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  1. well written... it's sad how few in the media have even attempted to shed light on this CMHC-built bubble.

    Harper and Flaherty (and, to a lesser extent Carney) betting 100% of the "economic recovery" on this housing debacle is just ridiculous -- not only have you put risky borrowers out there ready to default if the market goes down even 5-10%, but you've insured these mortgages with taxpayer money. They have literally doubled-down on this RE bubble and killed housing unaffordability at the same time!

  2. agree with your article, however nobody seems to lay out a senario how all this might end.
    1) will home prices crash banckrupting the canadian taxpayer or
    2) will the canadian dollar devalue by 50% bringing home prices in line with the US
    3) or other suggestion

    How do you profit from the coming crises, keep cash, buy a house now....

  3. Excellent article!

    The recent Canadian bank bonuses of 8.3 billion make me wonder: Why is the taxpayer taking 100% of the risk while the banks are making huge profits and bonuses? Make no wonder there's a real estate bubble waiting to pop. Afterall, 370 billion in securitized mortgages for 2009 is approximately half the total for CMHC in it's history since 1954!

    I totally agree with T.O. Bubbleboy how few in the media have attempted to shed light on this CMHC-built bubble. The average person will eventually connect the dots and see the government(taxpayer) stimulus is making the bankers rich.

    Thanks again for another excellent blog.

  4. I received the link to this blog from a friend and I am just now checking it out. This is an excellent article and an interesting blog.