Monday, April 19, 2010

A time to reap, and a time to sow.

Persusing the blogosphere, the sense of anticipation and glee from bears is palpable.

After months of self-doubt, the inevitable chain of events and how it will impact the great Canadian housing bubble now seems clear.

But like a watched pot that never seems to boil, be prepared to watch this play out agonizingly slow.

Now don't get me wrong. Those Canadians who have been lured by cheap money over the past decade have pushed credit levels to a record high. For every $1 of disposable income, Canadians owe a record $1.47 and we are fast approaching a day of reckoning.

And when it comes to real estate in the Village on the Edge of the Rainforest, that reckoning will be profound.

I once again re-iterate my prediction that we will see a correction that is a MINIMUM of a 40% drop in single family homes and 50% drop in condos. I believe the reality will be closer to 70-75% for single family homes.

But that reckoning will take time to play out.

Canadians can't simply walk away from mortgages. As the domino's fall, families will move and protect financial assets, delay, dither and extend before finally succumbing to the ultimate remedy - bankruptcy.

After all of this, the foreclosure process in this province can take more than a year and a half to play out.

It took almost 8 years for people to realize that we were in a Depression in the 1930s.

And the effects of the financial earthquake of 2007 will take just as long to be fully felt.

But make no mistake about what is coming. The future for the economy of Canada is written clearly on the wall.

For the first time ever during a recession, Canadians took on more debt during the downtime's. Our nation will rue the day it decided to make borrowing even cheaper than it was before 2008. Household debt has surged three time faster than income in recent years and now stands at a record high of more than $1 trillion. With debt levels this high, even a small hike in interest rates will be ugly for those whose incomes aren't rising fast enough to meet their day-to-day expenses.

Our nation has been astonishingly arrogant during this crisis.

Easier credit terms and fierce competition among lenders have created conditions that, even when the recession hit in late 2008, left Canadians far more confident than Americans. This was due, in part, to a fictitious belief in a better housing market and stronger financial institutions.

Consumer confidence in Canada is only about 20% below where it was in 2007 whereas it's 60% lower in the U.S.

The higher confidence level and stronger banks meant Canadians were far more eager to borrow during the recession than Americans, said Benjamin Tal, senior economist at CIBC World Markets.

In a recent report, Mr. Tal concluded that “Canadian consumer fundamentals are weaker than they have been in almost 15 years.”

“There's been a real frenzy just to get in [to a house] at all cost, because if you don't get in you may never get in,” said Scott Hanah chief executive of the Credit Counselling Society, a non-profit group based in Vancouver that helps people sort out their debts. His organization has seen a 10% increase this year in the number of people seeking help. “Last year we saw an increase in activity of over 50%; So to have a further 10 per cent increase on top of that is significant,” he added.

That's something that concerns officials at the Bank of Canada. If consumers run into trouble with their mortgage payments, that in turn can lead to “wider problems with other consumer loans, such as credit card debt,” David Wolf, a Bank of Canada economist, said in a speech in January. “Consumers may also have to curtail other spending to cope with their debt burdens, creating adverse spillovers to the real economy.”

We haven't avoided the day of reckoning which began when the housing market retreated over a year ago. We've only delayed it.

It will play out.

As of now, “no matter how you look at it, Canadian households are currently in a decent financial position,” says National Bank Financial Group. The cost to carry all that debt has actually fallen (as a percentage of disposable income) to 7.6%, from 10.2% in 1990.

But consumers are squeezed and even a small rise in interest rates will cause them to turn down the taps on their spending. Can you now see what lies ahead for the economic recovery?

A stagnant economy, inflation, higher interest rates and waves of boomers retiring with no savings except for their plans to cash in on the equity in their homes to fund retirement. It is a confluence of circumstances that can only spell disaster for real estate.

A survey last year by the Certified General Accountants Association of Canada showed 21% of respondents could barely meet the interest payments on their loans. The group is about to release a similar survey this year and, said the group's chief executive Anthony Ariganello, the level of those struggling to cope has climbed to about 23%... and the spectre of rising interest rates has only just begun.

Bulls have chortled that the bears have been wrong these past 12 months.

They haven't been wrong about the analysis... just the timing.

To everything there is a season, and a change of season's is in the air. After 10 long years, the era of cheap money is ending.

It's all about interest rates.


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