Over the course of the last year the Vancouver Real Estate Market has rebounded in stunning style. As lotusland R/E values achieve breathtaking new highs, some have taken to doubting what we all know: that Vancouver R/E is in a massive bubble that will burst in spectacular fashion.
Deep down we all know what's happening.
Emergency interest rates have acted like crack cocaine to house-lusting buyers who have irrationally reinflated the housing bubble. All fueled by a federal government that has plowed $70 billion tax dollars into a ravaged Canadian financial system so that they could buy up mortgages from the big five banks through the Canadian Mortgage and Housing Corporation and hide the bad debt by taking it off the books of the banks.
Another $200 billion was then used to establish a fund to backstop the banks – money the banks could borrow if they needed it.
The Harper government called it the 'Emergency Financing Framework'.
Yet so many on the Wet Coast have ignored the obvious and rationalize that our Canadian banking system is among the soundest in the world. This fairy tale has convinced us that the R/E market resuscitation is legitimate and actually the work of the free market directing overseas investment into the prosperous and undervalued Olympic City of Vancouver.
Uh-huh... Balderdash!
Last week, in the Burnaby Newsleader paper, we got a taste of what has really been driving the market.
According to Angela Calla, a mortgage broker with Dominion Lending Systems and the host of CKNW’s Mortgage Show, 70% of the province’s real estate purchases last year were first-time buyers.
“The average income we were seeing last year was $45,000, either combined or from one person,” said Calla. “And a 5% down payment was the average from that same demographic.”
Given that we are the 'land-of-the-million-dollar-single-family-homes', those are chilling statistics.
Our housing market is being driven by over leveraged buyers who exist solely because the federal government now insures virtually all mortgages through CMHC.
This bit of fiscal magic is what has greased the wheels of the credit machinery in Canada and put the North America real estate collapse in abeyance here in Canada.
As Murray Dobbin noted on his blog, the Harper-lead federal government did all of this as deliberate political policy.
In an effort to prop up the real estate market in 2008, the Harper government directed the CMHC to approve as many high-risk borrowers as possible to keep credit flowing. CMHC described these risky loans as “high ratio homeowner units approved to address less-served markets and/or to serve specific government priorities.”
The approval rate for these risky loans went from 33% in 2007 to 42% in 2008. By mid-2007, average equity as a share of home value was down to 6% — from 48% in 2003.
According to CMHC numbers Canadian banks increased their total mortgage credit outstanding by only 0.01 per cent from the beginning of 2007 to January 2009.
It means the Canadian government has been almost 100% responsible for all the mortgages issued over the last three years.
And in 2009, as we have just learned from Ms. Calla, 70% of the province’s real estate purchases were from first-time buyers whose average income was only $45,000, either combined or from one person.
Classic sub-primers.
Canadians have been borrowing money at unprecedented levels and now owe a record $1.41 trillion, putting Canada in the No. 1 spot among OECD nations in terms of consumer debt to financial assets.
Every week I get emails from people asking me for investment advice.
It's simple.
Understand what is going on around you and position yourself to take advantage of it.
Real Estate is about to implode massively, hundreds of thousands of Canadians are going to be financially ruined and the Canadian government will be on the hook so badly we will make the Greeks look like fiscal conservatives.
Read the writing on the wall... a once-in-a-multi-generational opportunity is about to present itself.
Get out of debt, get liquid and invest in that which will explode in in value in this environment.
You can't prevent what's coming nor can you help those who are going to be wiped out. But since you can see what lies ahead, get ready to take advantage of it.
What more do you need to know?
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Email: village_whisperer@live.ca
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Great post... those are some seriously scary estimates from that mortgage broker in the article (average age of first-time buyer being 25-32, average income $45k, and this is 70% of the market!).
ReplyDeleteI will correct one point though:
"average equity as a share of home value was down to 6% — from 48% in 2003"
This is not an accurate statistic. It is an often-misquoted number from this blog post:
http://americacanada.blogspot.com/2009/07/cmhc-and-our-government.html
Bigger chart here:
http://2.bp.blogspot.com/_0YOsyi5WbLY/SmTDnZtunCI/AAAAAAAAAFs/Ry833Eeho_0/s1600-h/Home+Equity+5%25.Bmp
The values show in that chart are not actual market data -- they are some goofy "what if" scenario that CMHC put in a report to try and show the concept of mortgage holders gaining equity over time. I believe that CMHC wanted to show this as a positive thing, but that chart has been used on countless blogs to try and show a sudden decline in down payments.
according to http://www.chpc.biz/index.htm the CMHC stopped buying mortgages in april 2010 which is why the banks raised the 5 year fix to now follow the 10 year CDN bond.
ReplyDeleteCMHC quit buying mortgages out of the market on April 1st and so banks, now have to rely on the Bond Market to value debt.
wondering if this is true because i haven't seen a link for this.
CMHC stopped *buying* mortgages directly - yes... that was the "IMPP" program where Flaherty gave $100B-$200B or so to the banks.
ReplyDeleteCMHC definitely has not stopped *insuring* highly-leveraged and extended-amortization mortgages.
so if the government gave the banks 100-200b then isn't that almost the same as cmhc buying the mortgages, its not like the banks are taking the risk yet.
ReplyDeletewith the only difference being that the banks are making a bit more with the raise in interest rates and they forced the gov to change the laws a bit for a min of 10to1 leverage and lowering how much people can borrow based on their income.
So what will 'explode in value' in this environment?
ReplyDeleteAlso, what will the future hold for this blog once the 'massive correction' is well under way? I hope you keep talking real estate primarily, but evolve into something unique and helpful.
Cheers,
Mike
I take it you are talking about P.M.s ("once-in-a-multi-generational opportunity is about to present itself"). You qoute Sinclair and have an open spot price running on your site. Unlike the "Garth" who is always disparging us as bullion bunnies or tin foil hatters. Garth you can not eat stocks or bonds all that ink will kill even a politcian. Prepare for an explosion in P.M.s this summer or fall or spring pssst when ever it happens don't forget you heard it from me first.
ReplyDeletethe pm paper price will collapse, you will see physical shortages as the paper contract of gold falls until they are all cash settleted.
ReplyDelete08 was your opportunity to see this. long physical short paper.
In the event of a large enough default, the entire world of paper gold trading will be forced into full cash settlement. The question will be presented: "if there isn't enough gold around to settle these commitments, then there isn't any point in letting the price rise further to effect still no metal settlement",,,,,,, "This was a contract trading market anyway, not a gold market"! Further, the international banking industry, in accords with their governments, will enforce a kind of "position limit" on the amount of gold liability they or their customers can carry. Both long and short. It will have nothing to do with the exchanges, rather it will be a bookkeeping problem being addressed by the banks. Still, it will impact the illusion price we use for gold,,,, downward. The net effect of this will be just the opposite of what paper gold players expect as positions are "force liquidated" prior to even a "cash settlement". This sudden dumping of major contract commitments onto the markets will drive the cash settlement price of gold,,,,, ?.