Apparently the Bank of Canada published an interesting study this week, a study which found the recent new, tougher mortgage-lending standards put in place last summer have done a credible job of putting the brakes on Canadians household debt – but only to a point.
The Bank of Canada’s study suggests that to take the next big step – actually reversing the course of household debts, sending them lower – policy makers are actually going to want a significant downward correction in home prices.
There's a jolting statement from a Bank of Canada study. They are actually saying that the next big step for policy makers is a significant downward correction in home prices!
Wow!
A substantial downturn in prices – say, 10 to 20 per cent – would, in theory, not only reduce mortgage debts for new home buyers, but, significantly, push down non-mortgage debt to the tune of 4 to 8 per cent. That would get Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney a lot closer to solving the country’s household debt problem, reducing what is considered a serious risk to the stability of the Canadian economy.
As we mentioned yesterday, some real estate agents have already admitted some segments of the Vancouver market are already down 25%.
Will 2013 bring a further reduction of 20% nationally, potentially 25-30% locally?
In the long term, this is the price to pay to get Canadians back living within their means, and the economy on more solid footing. But in the nearer term, the medicine could well feel worse than the disease.
How's that for a chilling proposition? Still think that now may be the time to jump into the market?
The BoC, which has kept rates at a near-record low of 1% since September 2010, started mentioning last week that a rate increase might be needed because of a stronger economy and underlying inflationary pressures.
More intriguingly, Carney touched base on the real threat lying underneath the surface in Canada. He stressed Canadians cannot keep borrowing so heavily against the value of their homes.
He said financial authorities were looking closely at levels of household debt and ways to contain the problem.
He also made it clear that too tight a clampdown could hurt economic growth.
So what is to be done?
“Authorities — the bank, the superintendent, CMHC, Government of Canada — are cooperating closely and monitoring the situation … there had been a number of measures that had been taken both by the superintendent, by the government. We have a heightened vigilance with the underwriting practices of the banks. So on a supply side there are a variety of measures that have been taken and are resulting in a slowing of the accumulation. There’s always more that could potentially be done. But these measures, there has to be an element of prudence in balancing the pace of slowing of this phenomena with the underlying growth of the economy.”
Many will howl in protest that Carney is being too slow to turn the taps off.
He knows the damage that is going to be caused and he is trying to cushion it as best he can.
"The Bank of Canada has renewed its warning that debt-laden Canadians could face a 'significant shock' if housing prices fall."
Whoa... whoa!
If housing prices fall? Housing prices don't fall, what are you talking about Mark?
In a series of special reports the Bank of Canada reviewed household debt and changes in the value of Canadian's "single-most important asset" — their homes.
While there has been a steady rise in the ratio of household debt to personal disposable income, house prices have been steadily increasing since 2000, the review said.
"These facts are interrelated, since rising house prices can facilitate the accumulation of debt. Households could, therefore, experience a significant shock if house prices were to reverse."
Whoa, wha??? There he goes again. Significant shock if house prices were to reverse???
But real estate always goes up! And what about the Asians?... the rich Asians are going to keep prices high, right?
"The evidence indicates that a significant share of borrowed funds from home-equity extraction was used to finance consumption and home renovation in Canada from 1999 to 2010. Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in house prices."
Mike, baby, what are you saying? That Canadians have been using their homes like ATM machines just like the Americans did?
Then there was Federal Finance Minister Jim Flaherty:
On Thursday, Flaherty said "people have to be wise . . . in how they look at things."
"Interest rates are going to go up. They have nowhere to go but up. So people need to ensure that they can afford higher mortgage interest. It isn't necessarily for everyone to have most expensive house they could possibly buy, maxing out the 10-year mortgage they can get from a financial institution."
ALRIGHT... STOP RIGHT THERE! Interest rates are going up????
NO WAY... US Federal Reserve Chairman Ben Bernanke said rates were staying low until 2014. Rates are NOT going to go up. You wouldn't do that to us... it would hurt the economy too much.
Clearly Carney and Flaherty must have been munching on magic mushrooms or something before the last press conference. I mean, what the hell???
If you ever have any doubts about what looms on the horizon in the months ahead for Vancouver Real Estate (in general) and the North America economy (in particular), bookmark today's post and refer back to it.
Last week, after the U.S. debt panel failed to agree on measures to create more than $4 trillion in budget cuts over the next 10 years, BNN spoke to David Stockman, the former Director of the U.S. Office of Management and Budget under President Ronald Reagan.
If there ever was a proponent of the current measures to repair the American economy, you would figure an architect of Reagan's trickle down economics would be it.
You'd be dead wrong.
Stockman spoke about the American situation and where America goes from here. He has a stark analysis of his country's situation.
You will not find a more succinct and insightful analysis of the current economic situation in 12 minutes anywhere. Click here to see the interview, and I highly encourage you to watch the full clip before it cycles off BNN's archive list.
You will have no doubt, after watching this, about the direction that the economy will ultimately follow.
A couple of quickly transcribed excerpts:
"It's just a further confirmation that we have a total paralysis/stalemate in our fiscal governance process, the whole process is in denial... What is actually happening is that Washington will be ADDING $350 Billion to next year's deficit (instead of cutting). They will extend the Bush tax cuts, they are going to extend the so called external tax patch - that's $60 Billion - they're going to extend a lot of the tax credits - that's 10's of Billions of dollars - what's more they're going to extend unemployment insurance for another year - that's another $60 Billion... and it gets worse from there.
We're really rolling the dice thinking that somehow we can borrow another $5-6 Trillion - that's really what's baked in the cake - and that somebody's going to buy all these bonds. The fact is the only buyer on margin all of these bonds, hundreds of billions a month, is the Federal Reserve, in this so-called QE2. But it's just out and out money printing, monetization, and when they stop I think there is going to be a real day of reckoning in the global bond and currency markets because there is no indication anyone in Washington recognizes the gravity of the situation."
Stockman goes on the suggest both the Democrats and Republicans are completely unable to grapple with the breadth and depth of cuts that are needed combined with the massive amount of taxes that have to be increased. As a result America is...
"... drifting towards the wall waiting for the bond market system to wake up and take action. I don't know when that is going to happen, it may be in the next months, it may be in the next years, it may take longer but sooner or later there is going to be a day of reckoning."
Stockman then discounts those who believe the Reagan era of 'trickle down economics' is a solution to the current problem.
"I think the Fed went off the deep end in the 90s and especially in the last 4 or 5 years with very easy monetary policy of low, low interest rates that were inappropriate and encouraged businesses and the household sector to massively leverage up, that led to the crisis in 2008 and we're still only begining to dig our way out of that... We're going to have a significant day of reckoning here, there is no recovery."
The most chilling part is Stockman's assertion that the bond market is going to force America's hand before long.
As I said yesterday, this is EXACTLY the fear expressed by former US Federal Reserve Chairman Alan Greenspan.
We are seeing the effects of what happens when the bond market does this. Just look at Ireland, Iceland, Spain, Portugal and Greece.
Are you ready for double digit interest rates yet? They're coming.
Of course naysayers will simply dismiss this as yet another post from a disgruntled bear blogger fearmongering about interest rates.
In the December issue of its Financial System Review, the Bank of Canada warned Thursday that the risk of another global economic shock is rising and Canadians may not be prepared for it.
And in a veiled hint that the Bank of Canada won't shield Canadians they way they did after the 2008 crisis, the Bank said "Canadians won't be spared another shock because during the current period of tough economic times, they have continued to take on debt."
How can that be, Mr. Carney? How could be possibly suffer? I mean... you will slash interest rates to dirt so the impact won't be felt, right?
Apparently not.
"Developments since (June) suggest that the vulnerability of the Canadian household sector has increased."
"The probability of an adverse labour market shock materializing is judged to have edged higher in recent months, owing to the downward revision... to the outlook for the global and Canadian economies."
Sal Guatieri, senior economist with BMO Capital Markets, said in a commentary the review suggests the bank won't resume increasing rates until the global economy picks up and Europe's credit crisis ebbs.
"However the bank is also cognizant of the risk to household finances (and the economy) of keeping rates too low for too long. This suggests it has every intention of guiding rates back toward more normal levels at the earliest opportunity, which in our view, is likely in May."
Hiking interest rates come May? Is this why Carney issues another direct warning to Canadians by saying:
“Households bear ultimate responsibility for ensuring that they will be able to service that debt in the future.”
Umm... why do you say that Mark? Are you getting ready to hand us debt serfs out to dry?
What about our 'sound Canadian banks', if I can't pay my debts, won't that hurt them?
Well it seems the BOC goes to great lengths to warn that the potential for harm to our 'sound banks' this time around might be severe.
Carney suggests that high household debt this time around is going to get kicked by high interest rates. This will affect Canada's banks 'as borrowers lose their ability to make debt payments.'
Now why would Carney hike interest rates this time around when he didn't in the last crisis?
The source of the problems all stem from from other countries, the bank said.
(Ahhh... time to start connecting the dots... see Stockman's comments above re: bond vigilantes wrath being unleashed on the United States)
The BOC forsee's the very real possiblity of a global trade war. It also foresee's the looming threat of much higher interest rates.
Carney see's them coming. He's warned you time after time and given you almost a year's advance warning.
The good news?
Re/Max was far more effective in manipulating the P/R machine two days ago and got far more coverage in the press to convinced you that Real Estate everywhere in Canada can only go up, up up (at least 10% next year) and that interest rates are going to stay low for a while.
Thus, if you are smart, it should be easy to dump your massively leveraged real estate on some simpleton or wealthy Asian and prepare for what's coming.
Jarislowsky offered his thoughts on the next lurking financial disaster.
"In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels, salaries are shrinking and a lot of Canadians are heavily indebted. There’s a lurking disaster, to the extent that you have reduction of purchasing power and we are just not saving hardly anything as a nation. That’s pretty bearish. I think things are going to get a hell of a lot worse. We still have a trade deficit today despite the fact that commodity prices are incredibly high. I hope I’m wrong but I think Canada is on the edge of a lot of trouble."
What drivel, eh?
You can either connect the dots or you can dismiss Stockman, Carney and Jarislowsky et al as wanker renters who live in their parents basements while hiding behind their computers to dump on real estate investors.
If you do dismiss them, tho, don't say you weren't warned.
Yesterday was an interesting day and I would be remiss not to touch on a couple of significant real estate developments.
First off there was a survey by the well respected Economist magazine which shows Canadian real estate overpriced by 23.9%. If that's the national average, how overpriced do you think real estate is in this town? To say at least 50% wouldn't be far off the mark.
Meanwhile, in Ottawa, Bank of Canada Governor Mark Carney was appearing before the Commons finance committee and was asked the following question:
"Do you think the housing market could collapse here, as it did in the States?"
Replied Carney:
"I am not predicting a significant drop in prices, but given how far prices have risen and the high level of Canadians’ household debt, an abrupt drop in the housing market cannot be ruled out."
An abrupt drop in the housing market cannot be ruled out!
Now... if you know anything about the Governor of the Bank of Canada, you know that markets can rise and fall on what this man says. Speeches and statements are very, very carefully worded for just that reason.
This was no slip of the tongue by Carney. It's significant and telling.
A few words on Silver
As you know, one of the topics I speak about regularly on this blog is Quantitative Easing, aka money printing.
I have stated in the past that, with all the money printing and currency devaluing going on, it is a no-brainer that the price of Gold and Silver is going to rise significantly in the years ahead. How far it will rise is a matter of debate.
And within that debate there is a sub debate that rages about price fixing that goes on in the paper Gold and Silver markets.
Now, I'm not going to delve into that debate, but an interesting development surfaced yesterday.
As reported by Reuters, a commissioner of the Commodity Futures Trading Commission made a stunning accusation.
Giving credence to the claims of critics, CFTC Commissioner Bart Chilton said, "there have been fraudulent efforts to persuade and deviously control that price (of silver)." Chilton's prepared remarks were made before a Commodity Futures Trading Commission meeting on Tuesday as events heat up for a full scale investigation into manipulation in the silver markets.
Critics has longed maintained the the metal has been suppressed. Historically silver has always floated at a 16:1 ratio with Gold.
Currently Silver fluctuates between $23 and $24 an ounce (US$). If the historic 16:1 ratio were at play, critics argue Silver should be at $82 an ounce today.
Many claim the dramatic gains Silver has made recently are due, in part, to the heightened scrutiny the manipulation claims have been getting.
Last month Garth Turner suggested Gold could go to $3,000 an ounce. If Silver were to float back to it's 16:1 ratio with Gold, at that level Silver would sit at almost $190 an ounce.
I know I'll be watching the investigation by the CFTC with keen interest.
You will recall the other day that I commented on the fact that the finances of most Canadian households are in abysmal shape.
It is one of the key factors that will contribute to Vancouver's status as ground zero in a monumental housing collapse.
Last Friday I said that numerous economic reports have cited that debt is out of control in this country. Canadians have saddled themselves with record mortgage debt as household liabilities are now equal to 145% of earned income. Six in ten Canadians now live paycheque to paycheque. 40% are not even trying to save money anymore because there is no money left over after daily expenses.
As faithful readers know, my number one recommendation over the past two years has been that, if you are in debt, get out of it... now!
And today Mark Carney, the Governor of the Bank of Canada - and the man who plays a large role in influencing interest rates, issued yet another warning to Canadians on just this subject.
Using particularly strong language (for the head of a Central Bank), Carney warned Canadians today to curb their enthusiasm for debt. In a midday speech to the Windsor-Essex Regional Chamber of Commerce, Carney echoed my warning about the perils of the fact that the ratio of household debt to disposable income hit 146% in the first quarter of the year, a record and a level that is closing in on that of the U.S.
"This cannot continue," the central bank chief warned, adding that while the net worth of Canadians is about six times the level of average disposable income, asset prices rise and fall but "debt endures."
Carney can see what I see.
We're in a tenuous position. Real Estate doesn't always go up. And many believe real estate is set to go down. How much it will go down depends on your particular slant. And as many of you know, my slant is 50 - 70%, minimum. And I lean heavily to the 70% minimum end.
Any kind of decline in asset prices will amplify and exacerbate this precarious Canadian debt position.
"House prices matter principally because of the “financial-accelerator effect.” When the value of a house rises, the owner can typically borrow against this increased equity to fund home renovations, a second house, or other goods and services. These expenditures can “accelerate” a rise in house prices, reinforcing the increase in collateral values, access to additional borrowing, and, thus, an increase in household spending. Of course, this accelerator effect can also work in reverse: a decrease in house price tends to reduce household borrowing capacity and amplify the decline in spending."
Carney also noted that,
"With Canadians working, but not as much as they would like, they have been borrowing. Real household credit expanded rapidly throughout the recession, in contrast to previous downturns, and has continued to grow through the recovery. Canadian households have now collectively run a net financial deficit for 37 consecutive quarters. That is, their investment in housing has outstripped their total savings for over nine straight years. In effect, households are demanding funds from the rest of the economy, rather than providing them, as had been the case through the 1960s, 1970s, 1980s and 1990s."
This focus on plunging all our eggs into home mortgages is important. With more and more of our disposable income going to monthly mortgage payments, Carney observed that household balance sheets are growing "increasingly stretched."
But what about our economy? Isn't it growing? Aren't we out of the recession with everything getting better and our paycheques growing?
Carney noted that while Canada’s recovery has been the envy of the Group of 7, but that recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.
Translation: The economy has relied on the fact we have been borrowing our asses off and plunging ourselves into record debt - courtesy of Carney's emergency level, record low, interest rates.
Carney's warning was simple and straightforward and he reduced it to 3 simple words:
"This cannot continue."
You would be wise to take heed, if you haven't already.
First off is the Bank of Canada rate increase today of a quarter point to 1%. This is the third consecutive increase in rates and the BOC rate is now quadruple what it was four months ago.
The focus today is on the language used by the Governor, Mark Carney. Everyone seems to think the message is that this will be the last rate hike for a while.
The central bank said, the global bounce-back from the worst downturn since the Depression is "proceeding but remains uneven, balancing strong activity in emerging market economies" (such as China and India, though the central bank didn’t name them) against "weak growth in some advanced economies."
At the same time, the central bank appeared to downplay the effect that the global turmoil is having on Canada, calling the country’s 2-per-cent annual growth rate in the second quarter "slightly softer" than what policy makers had expected, even though their latest forecast in July was for a 3-per-cent pace.
The Canadian recovery will be "slightly more gradual" than the central bank expected in July, but consumer spending and investment have "evolved largely as anticipated," it said, reflecting the fact Mr. Carney’s forecasts have warned of a slowdown for several months because of factors such as the fading impact of government stimulus and the cooler real-estate market.
In the future, consumption growth will "remain solid" and business investment - which had a surprisingly strong pickup in the second quarter, Statistics Canada data last week showed - will "rise strongly," the central bank said. For now, as the U.S. recovery proceeds in fits and starts, investor demand for safer investments such as bonds is pushing borrowing costs down and helping consumers and companies, the bank noted.
"Financial conditions in Canada have tightened modestly but remain exceptionally stimulative," the central bank said. Policy makers also said dynamics affecting inflation in the country-- which has been tame for months - are "essentially unchanged" from their July forecast.
As the Globe notes, all this suggests that the Bank of Canada is still uncomfortable with an overnight lending rate so far away from what most economists consider "neutral," or about 3.5% to 4%.
Both the Globe and I took Carney’s comments on the Canadian economy as a sign the BOC still leans towards raising rates.
On another front, I attend a retirement luncheon today where one retiring colleague, age 60, was asked about several properties he owns and whether he intends to sell any of them (two houses in the Dunbar area and a vacation property).
Naturally I offered my opinion.
His response? "Every time I talked about buying, I was told I was making a mistake, that prices were going to be going down. They were the best moves I could have ever made. I'm content to sit on what I have, I can afford to wait out a 5 year recession"
A comment I think speaks volumes.
Despite the continuing coverage of a possible housing bubble in Canada, and the lessons of the United States, the general public is still completely oblivious to what is going on and the paradigm shift that is taking place.
Finally there is the North Delta condo for sale by a friend that I mentioned in yesterday's post.
Spoke with him today and he said he didn't mind if I gave some more information on this blog. Believing that any publicity is good publicity, he sent me the MLS listing link which you can see here.
Curiously the property is still listed at $144,000 on MLS, but on other sites the price has been reduced to $139,000.
Bought about 5 years ago for $54,000, my friend (who does read this blog) is firm in his belief that this almost 40 year old property (although completely renovated) is worth the price he is asking and he is hesitant to consider offers much below that price.
He dropped the asking price from $144,000 to $139,000 (the price which he feels is the lowest he is prepared to go) because the MLS listing has received zero hits in the past 3 weeks.
I told him that the vast majority of people who visit this site may boost traffic numbers to the listing, but I suspect few would be interested in meeting his price.
As he reiterated to me, any publicity is good publicity.
So what is quickly developing as the central story in world finances right now?
Sovereign debt.
And yesterday there was a dramatic worsening of the eurozone sovereign debt crisis as Standard and Poor's downgraded Greece's credit rating by three notches to junk status, citing concerns about the country's ability to implement the reforms needed to slash its budget deficit.
The agency also cut Portugal's rating by two notches to A minus.
This, of course, led to heavy falls for European and US equities as investors sought sanctuary in German and US government debt, gold and the dollar.
The moves came towards the end of a European session that saw mounting uncertainty over whether Greece would secure financial aid in time to meet a refinancing deadline on May 19.
In view of the popular opposition in Germany to helping Greece, markets have grown increasingly concerned about just how Angela Merkel, Germany's chancellor, can push the country towards participating in a bail-out.
Jane Foley at Forex.com said: "If Germany doesn't come through with a loan for Greece, it would seem unreasonable to expect cash-strapped economies such as Spain, Ireland and Portugal to help make good the shortfall - meaning that an EU loan could yet fail. Even if Germany does present a loan to Greece, there would be no guarantee that there would be an end to Greece's problems. Until Greece can prove it can live within its means its bond yields will carry an inflated risk premium on the open market reflective of higher default risk."
Five-year credit default swaps on Greek government debt, a measure of insuring against debt default, hit a record yesterday of 800 basis points, up from 710bp on Monday. The spread of Greek 10-year government bond yields over Bunds - the premium demanded by investors to hold Greek rather than German debt - hit a record wide of 718bp.
"Risks are mounting and governments should move swiftly to take additional corrective measures to improve their outlook and bolster market confidence."
What is most interesting is the way investors are seeking sanctuary in the the US dollar and US Treasuries.
Mark my words... it will be a shortlived strategy.
As has been stated on this blog earlier this year, the UK and the US are not that far removed from Greece and Portugal.
In fact on the very day all this transpires, US Federal Reserve Chairman Ben Bernanke is warning the United States that America's debt is unsustainable.
And perhaps the most significant quote was this little gem: "Failure to cut the deficits would push interest rates higher - not only for Americans buying cars, homes and other things - but also for the government to service its debt payments," Bernanke said.
Which brings us to our insular little world in the Village on the Edge of the Rainforest.
So many of the R/E cheerleaders living in denial and delusion have clung to Bernanke's comments about keeping the Federal funds rate low for an extended period of time, even as the economy appears to be recovering.
But as I have cautioned time and time again, that does not mean interest rates for the common mortgage holder won't rise.
Today Bernanke came out and said so.
What is happening in Greece and Portugal today will - soon enough - play out in the UK and the United States.
Many of the individual States in America are in dire financial straights. And the federal balance sheet, as Bernanke notes, is unsustainable.
"No laws are more basic than the laws of arithmetic: For fiscal sustainability, whatever level of spending is chosen, revenues must be sufficient to sustain that spending in the long run," Bernanke told President Barack Obama’s commission to tackle the soaring deficit yesterday.
The bond market is going to drive interest rates up.
And I don't think it's a stretch to imagine that if the Bank of Canada raises the BoC rate by 3% over the next six months that the bond market also won't drive up rates an additional 3% as well (we've already seen them boost rates 1% with no raises from the BoC).
That would be a rate increase of 6% added to the current five year rate of 6.25%; for a mortgage rate of 12.5%.
Perhaps that's why BoC Governor Mark Carney was telling a Parliamentary committee that Canadians should get ready for more expensive money and less expensive houses. “We see a marked weakening in housing over the course of our projection (into 2012), starting from the second quarter of this year and over the balance,” he said.
Central Bankers choose their words with extraordinary care.
And when Carney says he sees a "marked weakening in housing" between now and 2012, you should pay particular attention.
Perhaps he sees what a 12.5% mortgage rate will do to it.
"Don't be fooled by the quick recovery". That's Bank of Canada Governor's bit of sage advice to Canadians.
Carney went to great pains on this weekend to tell consumers, executives and investors that they would be wrong to conclude it is business as usual these days.
“Anyone who sits and looks at what happened and says, ‘Well, that wasn’t a Great Recession,’ hasn’t appreciated the scale of what was done to ensure an outcome that wasn’t as extreme as before,” Carney told reporters on Saturday. “Particularly on the fiscal side. Anyone who doesn’t appreciate the gravity of the last couple of years hasn’t thought through or appreciated the scale of what will be required to adjust fiscal back to normal.”
Think about that for a moment.
Carney is emphasising what we have been saying on this blog all year. And 'adjusting' back to 'normal' isn't going to be an easy process.
And what concerns Carney most of all?
Why... sovereign debt, of course.
“We’ve seen war-like spending in peacetime,” Mr. Carney said. And the fact of the matter is that the world economy still is being powered mostly by hundreds of billions in government spending and extraordinary monetary stimulus. The growing debt – mostly public, but also private, as consumers in countries such as Canada took advantage of record-low interest rates to borrow and spend – is fundamentally changing the makeup of the global economy.
“What we are seeing with Greece, and what we have been seeing over the last few weeks, are the indications of the limits of fiscal stimulus,” Mr. Carney said. “There are a number of countries that are having to make adjustments, or will have to make adjustments, to more sustainable fiscal paths and I think that is an increasingly shared realization.”
And two of the countries foremost on the list of those that are going to have to make adjustments are the UK and the United States.
“We have to look at that and think of how to rebalance our own economic activity,” he said, referring to the relative weakness of Canada’s primary trading markets in the U.S. and Europe.
Make no mistake... there are serious hard times ahead. We're in a false recovery, and no one is more acutely aware of that than is Mark Carney.
On a day when the Bank of Canada makes news for what it doesn't say, and Macleans magazine states the obvious, the item that catches my eye is a poll by the Investors Group which concludes that Canadians "may be overly confident that they can take higher borrowing costs in stride."
You got that one right!
Discussing Canadians' apparent confidence to deal with rising mortgage rates, Peter Veselinovich (the Investors Group's vice-president of banking and mortgage operations) said: "Part of that may be because they are fully knowledgeable about what's going on because they have a financial plan, they've had discussions, they've looked at what their risk tolerance is and what their affordability tolerances are. Or part of it may be some blissful lack of knowledge."
The reason for the overconfidence/blissful ignorance?
No one believes rates will rise more that about 3%.
This also comes on the day we learn that, in the UK, inflation rose at a higher rate than expected. It's up sharply to 3.4% in March from 3% the month before.
Watch for a similar scenario to start becoming evident in North America as well. As we pointed out last week, reports are surfacing that significant inflation is working it's way through the inventory replacement process.
After summarizing his experiences, one volume importer of industrial hardware (mostly out of Asia), who just received his April ocean freight rate update, concluded that "anyone who tells me that there is no inflation on the horizon is delusional and in for one hell of a shock.”
That's going to be pretty much every person with a mortgage in this country.
Some may be blissfully blind, but others appear to be gleefully blind.
And throughout it all, our American cousins shake their heads in disbelief.
Over at seekingalpha.com Rolfe Winkler looks at the Canadian housing bubble and declares, "so much for Canadian sobriety."
Winkler notes that the average price for a single detached home in the Village on the Edge of the Rainforest now exceeds $1 million, that prices have climbed 23.3% in just 12 months, and that prices are now nearly 3% higher than they were before the housing market crashed.
The Americans know where we are headed.
Of course the gleefully blind proudly proclaim that "because of the economic rebound. And the Olympics. And the warm winter [here]. Vancouver is different."
The rational is always, "it's different here".
Meanwhile Winkler makes the point that all R/E contrarians make:
"Household debt to income in Canada is now more than in the US. All the usual metrics to gauge whether housing is overvalued, eg House Price/Income or House Price/Rent are at levels up to over 30% from their long-run average. These are normally consistent with an overpriced market that is due for a correction; the question is when, as often these things persist for much longer than most people dare to guess. If Canada’s banks are behaving so responsibly, where are households getting so much leverage?"
Cause for concern?
Not according to the Bank of Canada who, according to Reuters, says "Canada's housing market is not in a price bubble but seems firmly valued."
That will be a quote for the ages.
This all comes just days after a CIBC study found that household debt - mostly mortgage debt - is growing three times faster than income.
And all of this comes at a time when many analyst share the sentiment that "the current rebound in the economy is a statistical mirage orchestrated by record amounts of monetary and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years."
One blogger I follow compares the current economic conditions to the Titanic disaster and suggests that we are at about same point in time as that famous ship was after it struck the iceberg.
Instead of a band playing on deck as the vessel took on water, we have the equivalent of an IMAX theater, complete with surround sound, to keep us occupied as we meet our fate.
Over the next few years keep the polaroid camera handy.
Because there are sure to be many classic photo opportunities from friends in a situation like this one from Dany Cote of Calgary.
Our buddy Dan put down $20,000 on a Calgary condo in 2007 when he signed a presale contract to buy for $420,000.
Cote was pre-approved for the money and Canada Mortgage and Housing Corporation (CMHC) agreed to insure the loan - so no worries, right?
Now we all know that the real estate market took a bit of a dive in 2008 and while it has completely re-inflated itself in Vancouver... apparently that's not the case in Calgary.
According to a recent appraisal, Cote's condo is only worth $335,000 now - down from the presale purchase price of $420,000.
And with that appraisal, CMHC will only insure a loan of up to $313,000.
What about CMHC's pre-approval, you ask?
Richard Cho, a spokesperson for CHMC, breaks the bad news.
"Typically, when a property is approved for CMHC insurance, CMHC does tend to honour that agreement during that period. However, there are times when an application is reassessed."
Ummm... reassessed?
Well, Dany-boy fell into the reassessment category and is seems that he's on the hook for the difference when the market went cold.
For our buddy Dany, that means he must come up with an $84,000 donation to complete the sale.
Does he have that kinda cash sitting around?
"My wife and I aren't in the position to advance the money and get over the bad situation. We're just regular people trying to get by." says Cote.
On Tuesday, the builder sued Cote for breach of contract seeking both the $20,000 deposit and the difference between the presale contract price and the condo's current market value.
Watch for this type of story to play itself over and over again once interest rates shoot up and trigger a drop in real estate values.
More and more Regular people just trying to get by are gonna be regular people just gettin screwed.
Isn't funny you don't see that scenario in the sales brochures?
Just a few months ago, economists were predicting interest rates wouldn’t rise until the fourth quarter of 2010 or early 2011.
But the breezy days of March (and a series of hawkish economic reports) appear to have changed expectations.
The Governor of the Bank of Canada spoke one word this week and market's stirred.
Carney went out of his way to remind Canadians that the promise of low rates is “expressly conditional” on low inflation. And inflation has been stronger than expected.
But it was the addition of that one adverb in a 3,131-word speech (prior to this low rates were merely 'conditional' on low inflation) that had the power to jolt financial markets.
And jolt they did.
Banker’s acceptance yields (which drives variable mortgage rates) hit a new 10-month high. 1-year bond rates are at a 13-month high. And Bloomberg says Canada’s 6-month overnight index swap rate, a gauge of what the overnight rate will average over that period, is at a one-year high.
Also up is the 5-year bond yield, which influences fixed mortgage rates. It made a new 5-month high this week.
Note the comments of economists now:
"It increasingly seems as though the Bank of Canada is very tempted toward a June hike." - Eric Lascelles, chief rates strategist at TD Securities.
“I cannot imagine a lower inflation forecast being unveiled come April, but can easily see a higher and sooner forecast.” - Derek Holt, economist at Scotia Capital. Holt thinks Carney may raise rates in June—possibly even April.
"We still look for a first move in July, but the odds of something happening earlier are increasing a bit." - Michael Gregory, senior economist at BMO Capital Markets.
Who could have seen that coming? It's almost enough to send a chill up your spine, isn't it?
For those faithful readers for whom the fear of rising rates causes distress, consider this new option from TD Bank: a 10-year fixed rate of 4.99%.
In April of 2009, Statistics Canada conducted a survey on financial capability.
The survey found that more than 1/3 of Canadians said they were either struggling or unable to keep up with their finances.
And you can bet your bottom dollar, dear blog reader, that a good portion of the other 2/3's (the ones that said they were not struggling to keep up with their finances) are probably in the blissfully ignorant camp.
Self-assessment scales need to be taken with a grain of salt. Most of us will report that we are good drivers. Not all of us are.
As I have said time and time before, the story of Canadian Real Estate is going to be the story of interest rates. And those rates are going to be going up. The only question is... how high are they going to go?
Over the past week I have tried show that the current economic 'recovery' is all based on massive amounts of government stimulus. That western governments were within hours of a complete meltdown of the world's financial system and - in a desperate attempt to prevent a nuclear meltdown - the braintrusts of our national finances responded with knee-jerk reactions to halt a complete financial collapse.
Now they are struggling with the repercussions of those moves.
Worse... key members of that braintrust now admit that they made key mistakes that lead us to this precipice in the first place.
This is important since the 'emergency measures' taken in September/October 2008 were based on the those very flawed strategies, strategies which were once again drawn upon and taken to the extreme in the heat of potential disaster.
In Canada our own 'braintrust' made several catasrophic moves that are going to wreak havoc on our country in the years ahead.
When the 2007 real estate crash swept across the United States, Canadians smugly looked down at their noses at our American cousins and exalted in the superiority of our Canadian banking system.
But as we would come to learn, our Canadian banks barely escaped their own meltdown in 2008.
All five Canadian banks are levered at an average of 31:1. According to a report by Sprott Asset Management this implies that, if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out.
When the recession started to appear in Canada, and real estate values began dropping here; government moved quickly to intercede.
If asset prices could be protected, it was rationalized, our nation could weather the recession and minimize the fallout.
To achieve this 'asset protection', Canadian Banks received $65 billion in liquidity injections from the Insured Mortgage Purchase Program. This is the official way of saying the Canadian Government, through CMHC, purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.
The Bank of Canada then our Canadian Banks with an additional $45 billion in temporary liquidity facilities and there was also assistance from the Canada Pension Plan through the purchase of $4 billion in mortgages prior to the IMPP program for a total government expenditure of $114 billion.
But real estate values in Canada were plunging nothwithstanding. Que the next phase of the 'asset protection' strategy.
The CMHC was ordered by the Federal Government to approve as many high risk borrowers as possible to prop up the housing market (with entry level buyers) 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.
This bit of financial magic to securitized all these mortgages by the CMHC is the only reason credit continues to flow to our real estate industry.
And it worked. Canadians jumped on the cheap, easy money and continued with a debt orgy that started in 2001.
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.
Make no mistake, the moves that the Canadian Federal Government took in 2008 forestalled the US financial meltdown from spreading to Canada.
By preventing the collapse of our real estate market; our financial system did not follow the path of our American cousins.
But at what cost?
Last Thursday we outlined the gigantic hole that Canadian households have plunged themselves into.
Debt held by Canadians is at an all-time high. Especially mortgage debt.
The policy of emergency interest rates and the moves to 'support' the Canadian banks can only succeed it there is a dramatic increase in the economic fortunes of the world economy.
But as I have outlined before, in order for the world economy to properly restructure we must still undergo a tremendous amount of deleveraging.
This will be a drag on any economic rebound for years to come.
Meanwhile, when the central banks start tightening monetary policy to mop up excess liquidity and stave off inflationary expectations and when capital markets start pushing back against massive government deficit funding and corporate debt rollovers, interest rates will have nowhere to go but up.
And, with it, will go mortgage servicing costs.
This process will not fully play out for 15 - 20 years, which means we will see very high interest rates for most of that period.
Since 2001 Canadians have been like the kids in the movie Ferris Bueller's Day Off. We have skipped class and finacially partied, having a grand old time.
At the end of that classic movie, Cameron Fry is left to deal with the ultimate reckoning from the reckless adventures of our heroes.
And while the movie glosses over that reckoning for Fry, that won't be the case for the 1/3 of Canadians say they are either struggling or unable to keep up with their finances when interest rates are at the lowest point in our nation's history.
Will Canada become a nation of Cameron Fry's?
When interest rates shoot up, Canadians are going to be caught in a debt vice of historic proportions. If 1/3 of Canadians are either struggling or unable to keep up with their finances now, what's it going to be like when the posted 5 year bank rate sits at 15%?
I distinctly remember a family friend, in the early 1970s, declaring that "the government will never allow mortgage rates to go over 10% because it would inflict too much financial harm on the people!"
By the end of the decade that family friend (as well as my parents) had to renew their home mortgages at 19% and 22% respectively.
How many are rationalizing in a similar delusional way today?
How many will be wiped out trying to service debt at interest rates at half of those 1980s levels?
How many will be uttering that infamous line... "what'd I do?"
==================
Email: village_whisperer@live.ca
Click 'comments' below to contribute to this post.
Last week I started to talk about how I believe the stage is being set for a Canadian real estate collapse of historic and massive proportions.
Since the collapse of the dot-com bubble in the late 1990s, western governments have manipulated economic conditions so that we moved quickly from the unwinding of one bubble and into another.
Within a year of the collapse of the Internet Bubble, we moved seamlessly into the Real Estate Bubble. And within a year of the collapse of the Real Estate Bubble we have moved into another bubble… and it’s as if nobody can see that there are any similarities.
The only reason it worked in 2000 (and it didn’t really work then), is because we were able to borrow the money from the rest of the world and spend it. And we were able to live in the delusion that we were getting richer even when we were getting poorer.
We believed this because we looked at our asset prices (real estate and stocks) and we saw the prices going up and we said “hey, were actually getting wealthier”.
But we weren’t getting richer because we were spending money at the same time instead of saving money. We would borrow on the asset value and spend it consuming. And as we spent money, the government counted that money as GDP.
And as long as our GDP was rising then we thought our economy was growing.
But the whole time our GDP was going up, we weren’t measuring how much our wealth was going up. We thought we were okay because some appraiser said that our house was worth more. Or the stock market was still going up.
The 2008 Financial Crisis was simply the inevitable collapse of this ponzi mindset.
But when that collapse happened, it was SO intense…. SO profound... that our political masters panicked.
What happened in September and October 2008 had previously been considered completely impossible and totally unthinkable. We have always been told that the lessons of 1929 and the Great Depression had resulted in changes to the financial system so that NEVER AGAIN could the financial system come close to totally collapsing.
Yet we were within two hours of a complete collapse of our banking system and of our economy... and governments responded with panic measures.
They responded the same way they did each time there was a ‘financial emergency’ over the past several decades... with stimulus money and bailouts. Only this time they did it on a scale that has never been seen in the history of the world.
In the 1990s the US Federal Reserve had been too easy and loose with money. Interest rates were too low and we created too much money. And that facilitated massive investments in the stock market.
This created the 1997-1999 NASDAQ bubble. When that market crashed the government responded with even lower interest rates and easier access to stimulus money.
And the exact thing that had happened with the Internet Bubble... now starts occurring with real estate.
We had the internet bubble because the US Federal Reserve was too easy with money.
Easy money allowed people to invest in companies that were tremendously overvalued. None of the dot.com stocks were paying dividends because none of the companies had a realistic chance of making money. But it didn’t matter. The frenzy was pushing stock prices up so people grabbed all the money they could and kept investing in them.
Recognizing what was going on, Federal Reserve Chairman Alan Greenspan sought to intervene. In 1996 he talked about irrational exuberance and they took him to the woodshed for saying something negative. But he still went ahead and raised interest rates to correct the imbalance.
And the bubble burst.
Of course, when the stock market crashed, a lot of the malinvestments were exposed. A lot of the people working at the dot.com’s were going to have to be unemployed. A lot of companies who were given a lot of capital who shouldn’t have been given capital, were going to lose it all. And a lot of investors who invested foolishly who were going to lose a lot of money.
We were destined for a long, painful recession. Those malinvestments were going to have to be worked off. Capital would have to be reallocated to where it could be productively used, and labour would have to be laid off and rehired as that capital found productive uses.
As painful as it might be, it would be a necessary recesiion; the free market's way of correcting the imbalances.
But government intervened in the free market.
Rather than permit the painful process to play out, government would ‘stimulate’ the economy... again.
As always, the stimulus money created a catastrophe. This time in real estate.
During the dot-com, if you questioned the wisdom of what was happening, the reply was always, ‘you don’t understand the stock market’. Now, when anyone questioned the wisdom of what was happening in real estate, the reply was, ‘you don’t understand the real estate market’.
People were told rents don’t matter to real estate in the same way they said dividends don’t matter to stocks. What evolved was a rationalization that said all real estate would appreciate, year after year, for no other reason than a belief that real estate appreciates.
Everyone bought into the idea that it was going to go up... year after year... just because.
And it made no sense. Were incomes going up each year? Would you be able to charge 10, 20, 30 percent higher rents each year? No? Then why is the value going to go up 10, 20, 30 percent?
And the answer was... ‘it just will’.
And for the last nine years it has, fueled by easy money which is being invested in something that does not make fiscal sense – other than the value of the ‘asset’ seems to be rising by 10 – 30% each year.
The real estate bubble, and the financial services industry it created, has grown stupendously out of proportion.
The 2008 Financial Crisis is a result of the stimulus that created the dot-com bubble, the stimulus that tried to prevent the correcting of the dot-com bubble and the real estate bubble it all created.
A long, painful recession is needed to correct the imbalances.
But by responding in the same egregious manner to the 2008 Financial crisis, another catastrophe is inevitable.
Not only have we failed to correct the imbalances, western governments have liquefyed the system beyond any rational explanation in response to fears the entire system could collapse.
In the United States, the U.S. money supply has been expanding at an absolutely unprecedented rate (more than doubling the monetary base since the collapse of Lehman Brothers).
Fears of inflation – even hyperinflation – have been propagated throughout the blogosphere.
So why are we not experiencing rampant inflation?
Why is the U.S. dollar not falling through the floor?
Well, the truth is that all of this new money has gotten into the U.S. financial system but it is not getting into the hands of U.S. businesses and consumers. In fact, even though the money supply is exploding, U.S. banks have dramatically decreased lending. This has brought us to a very bizarre financial situation.
What we have seen is the U.S. government shovel massive amounts of cash into the U.S. financial system and then watch as the big banks sit on that cash and refuse to lend it. The biggest banks in the U.S. reduced their collective small business lending balance by another 1 billion dollars in November 2009.
That drop was the seventh monthly decline in a row. In fact, in 2009 as a whole U.S. banks posted their sharpest decline in lending since 1942.
So all of this money that the U.S. government pumped into the financial system has been doing American businesses and consumers very little good. That is why we can have a vastly increased money supply and very little inflation.
So if the banks are not lending the money to the American people, what are they doing with it?
One of the things they are doing with it is buying U.S. government debt. While U.S. banks have cut business lending by approximately 350 billion dollars since early 2009, they have meanwhile been purchasing approximately 300 billion dollars worth of U.S. Treasury securities.
So instead of loaning money to American businesses and consumers who desperately need it, a ton of this new money is being used to pump up yet another bubble. This time the bubble is in U.S. Treasuries. Asia Times recently described how this trillion-dollar carry trade in U.S. government securities works...
Remarkably, the most aggressive buyers of US government debt during the past several months have been global banks domiciled in London and the Cayman Islands. They borrow at 20 basis points (a fifth of a percentage point) and buy Treasury securities paying 1% to 3%, depending on maturity. This is the famous "carry trade", by which banks or hedge funds borrow short-term at a very low rate and lend medium- or long-term at a higher rate. This works as long as short-tem rates remain extremely low. The moment that borrowing costs begin to rise, the trillion-dollar carry trade in US government securities will collapse.
Anyone who has dealt with carry trades in the past knows that when carry trades unwind they can do so very, very quickly and the results can be nightmarish.
And this one will unwind too, causing the bubble it is supporting (US Treasuries) to collapse.
You’ve heard it said that doctors 'practice' medicine and lawyers 'practice' law?
They say this for a reason. These 'professionals' never really know their craft. They learn about past mistakes and try to utilize tried techniques to address problems. When something goes wrong, they learn from it and ‘tweak’ their responses.
It is no different for economists, even those entrusted with running the Bank of Canada and the US Federal Reserve (recall Saturday’s post of a paper by Alan Greenspan admitting how the Federal Reserve had failed).
The ‘experts’ panicked when the crisis of 2008 hit.
And they responded with tried techniques (plus a few new tricks) to address the problem.
The truth is that the U.S. financial system is a house of cards that could fall at any time. A lot of economic pain is on the horizon - it is only a matter of when it comes and how bad it is going to get.
And when it does come, interest rates are going to shoot up like nothing we have seen in over 30 years.
You may recall that back on February 10th, we noted that the heads of the country's six largest banks had privately told federal government policy makers that they fear the wide-ranging economic fallout of a U.S. style binge-and-collapse in housing hitting Canada.
These pressures lead to the change in Canadian mortgage rules that were announced on February 16th.
It may interest you to know that those aren't the only pressures being exerted for change.
The C.D. Howe Institute put out this paper last week urging the Bank of Canada to raise rates aggressively once its rate hike moratorium ends on June 30.
The report stated:
The Bank (of Canada) should keep its conditional commitment, but should thereafter raise the overnight rate sharply by 50 basis points at every announcement date (after June 2010) until mid-2011.
If inflation continues to rise, the BoC should be prepared to hike rates proportionately more. This assertive policy style is based on the 'Taylor Principle' - after U.S. economist, John B. Taylor.
Heading off inflation will necessitate “aggressive” rate increases (50 basis points per BoC meeting), starting this summer.
This report comes on the heels of the latest rate hike by the Reserve Bank of Australia which raised it's central rate by a quarter percent to 4%.
Canada's rate, by contrast, remains at 0.25%.
If the advice were implimented, you would have a five year rate rising to near the historical 20 year average of 8.25%.
You can almost hear the ticking sound now, can't you?
It comes as no surprise to readers of this blog to know that I firmly believe that higher interest rates loom in the not too distant future.
And when that circumstance comes to pass, Canadians are gonna get crushed financially.
Just look at how much debt Canadian households are carrying relative to their personal disposable income.
We like to say we are different from Americans, but it's hard to buy into that malarkey when you study the Bank of Canada (BOC) data. According to the BOC, the debt-to-income ratio of households in this country stood at 142% in the second quarter of 2009. That means for every dollar Canadians earned, Canadians owed $1.42 in debt.
In 2005 that figure stood at 116%.
Not only is that debt level exploding, but the BOC estimates that the ratio will rise to 160% in two years!
That's basically where it is for American households. And when it comes to household debt relative to GDP, Canadians and Americans are already neck and neck.
Shockingly, Canada is virtually the only country where households have taken on more debt during this recession. While total household debt in foreclosure-ravaged America shrank 1.7% over the last year, debt levels here jumped 7%. According to Statistics Canada, in November personal lines of credit surged 20% from the year before, loans for home renovations were up 31%, and balances of credit cards jumped another 6.9%.
But by far the most interesting statistic is that, in dollar terms, most of the increase in household debt has come as the result of the huge mortgages people are taking out to buy homes at today’s soaring prices. Over the past two difficult years of the economy, the total residential mortgage debt load in Canada ballooned 18.
“We’re the anomaly in global markets,” says Derek Holt, an economist at Scotia Capital. “We continue to climb to new highs with house prices and we haven’t seen any deleveraging among households. What’s so special about Canada that we should be experiencing this while every other industrialized economy went down and stayed down?”
Now we've talked at length here about how the BOC has been pounding warning drums to warn Canadians not to get used to the abnormally low interest rates of the last year.
And the 800lb gorilla in the room is those skyrocketing debt levels.
When interest rates begin to rise from their record lows (have I mentioned how this is, IMHO, a certainty?), borrowing costs will rise and hundreds of thousands of Canadian families will face a brutal cash crunch.
How bad is it going to be?
Recall that the BOC conducted a series of theoretical stress tests to see how Canadian households will fare should interest rates rise.
I wasn't aware of the values applied, but I am now advised that the stress tests analyzed what would happen if rates rose between 3.2% and 4.5% by mid-2012.
With the BOC benchmark rate currently at just 0.25 per cent, that is a sizable jump. And when a household’s debt-to-service ratio, a measure of monthly payments relative to income, breaks past the 40% mark, it’s considered to be “financially vulnerable” to financial shock.
What the bank found in its review was that if rates rose to the higher level, 9.6% of households would find themselves in that danger zone.
Amazingly, the BOC's test scenario of a jump in rates to even as high as 4.5% would still leave mortgage rates low by historical standards. Especially if, as many fear, the trillions of dollars in emergency liquidity that’s been pumped into the economy sparks inflation. But according to Ian Lee, a former mortgage banker turned Carleton University professor, given today’s insanely low levels, rates don’t need to jump that much to wreak havoc on Canada’s debtor class. “I was in the industry when mortgage rates went through the roof and I was throwing middle class owners out of their homes,” he says. “We’ve seen this movie before."
Yes we have... and it wasn't pretty.
In fact we only have to look across the Pacific Ocean for a preview of how our future will be playing out.
In this Bloomberg story we get a glimpse of what is happening in Australia. The Aussies, like Canada, took emergency measures to stave off a collapse in their real estate industry.
And just like in Canada, the result was rampant price speculation in real estate.
But when the incentives to buy ended and now that interest rates have risen (the Australian central bank rate is now 3.25%), the Australian real estate market is starting to get hit.
As the Bloomberg story notes, rising rates are starting to trigger default conditions on Australian mortgages.
Last week a survey found 45% of all buyers who purchased in the last 18 months are under severe mortgage stress, with many forced to use credit cards to keep up their home loans.
And - what a surprise - when we take a closer look we find that Australians have a debt-to-disposable income ratio of 156% - almost identical to Canada's (145%).
The scary thing is that the 3.25% Australian central bank rate is nowhere near to topping out.
I find it fascinating to watch how so many people think the Canadian real estate collapse is all but over, the fall in values last year merely a hiccup.
Twelve months ago many speculated that Canada's housing market would inevitably follow the U.S. into the same sort of catastrophe that began there more than three years ago.
But after a brief dip, Canadian real estate is up an average of 19% from a year ago, perching at about the same elevated level it reached at the 2008 peak.
Even more intriguing has been the number of media articles that reinforce what bloggers have been saying all along; that these levels are unsustainable because average incomes are rising at a small fraction of this pace.
But while article after article points out the basic economic fact: when prices rise faster than incomes for long, homes become unaffordable, sales falter, prices stagnate and ultimately values fall sharply... the general sense of euphoria is unshakable and the sense of 'buy now or be priced out forever' reigns.
It's driven by the mantra that says our conservative Canadian banks have saved the day with their stodgy ways and have guided us past the housing meltdown that struck the U.S, Britain, Ireland, Spain and others.
We are bombarded with the rationalization that, in Canada, sub-prime loans represented only about one-quarter the proportion of lending it did in the U.S, and sub-prime in this country had a different meaning: it included people who didn't quite qualify for prime loans, but were never hopeless deadbeats.
We are also told that the securitization phenomenon that let U.S. banks sell dubious mortgages to unsuspecting buyers never developed in Canada. Only about one-quarter of Canadian mortgages were securitized in 2007 (it was 60% in the U.S.), and they were solid, government-insured mortgages, not sliced, diced, leveraged subprime junk.
The 'solid' Canadian banking system saved the day, goes the platitude, and that's why in the U.S. (and elsewhere) near-zero interest rates haven't inflated housing prices. Their banking system is so sick that there just isn't much lending, while ours is healthy.
I've said it before, and I'll say it again... what a crock.
Our day of reckoning hasn't been avoided, it's only been delayed.
The fact is our government threw everything they could at the crisis in order to keep our real estate market juiced and our banks afloat.
They changed mortgage rules from 10% down and a maximum 25 year amortization to zero down and first 35, then 40 year amortizations.
Then came emergency interest rates.
Next, a blatant blind eye has been turned to Canadian banks who are authorizing zero-down arrangements (with their 5% cash back offers) and allowing what amounts to liar loans.
Then there is the way the government back funded the CMHC and ordered them to dramatically hike their high-risk loan exposure and approve Canadians for loans who normally never would have qualified.
Then, at the height of the crisis, the Canadian government plowed tens of billions in funding to the banks by buying mortgages so room could be made for more to lend.
That's why credit continues to flow in this country. The Federal government is guaranteeing all that money.
We've thrown so much money at the problem that Kevin Page, the controversial Parliamentary Budget Officer has come out and said that the Federal Government's orginally announced 2 year deficit (since expanded to 5 years) is now worse. He says there's no way we’ll be balancing our books in 2014. It's impossible.
Canada now has a deficit so large it is now structural and will probably be with us for an entire generation.
And what has all of this bought us?
Before the crisis we had a large number of Canadians who assuming massive household debt. With the 'stimulus', Canadians have intensified this trend and many are max'ing out on the size of mortgage they can assume when rates are the lowest in history.
This, in turn, has spiked housing values up 19% in the last year. As Garth Turner noted on his site last Friday, "when inflation is 1.6% and the prime’s 2.25%... it means the cost of shelter increased at more than 10 times the cost of living, and acquiring it put Canadian families in a deeper debt hole than has ever existed before... if the price of food had increased 19% in a year, there’d be a Royal Commission and moms torching Loblaws. If taxes had gone up 19%, we’d be in a revolution. If cars had jumped 19% in price, the dealerships would be abandoned."
It's all considered good, thought, because this 'asset reflation' is what is keeping our nation ahead of the recession curve - for the time being.
Meanwhile outstanding Canadian mortgages have skyrocketed and Canadians now have more debt compared to income than at any other time in our nation's history.
Our nation's Achilles heel sits behind the future of interest rates.
As the Bank of Canada said, "using the current path of household indebtedness, and alternative assumptions about how quickly interest rates may increase... by the middle of 2012, almost one in ten Canadian households would have a debt-service ratio that makes them vulnerable to economic shocks."
If rates stay low we will remain protected and secure.
But if they go up... look out. The economic carnage in this country will be on par with the physical carnage that has hit Haiti.
'Devastating' won't even begin to properly describe it.
“The Federal Reserve is now a government within a government. It is totally out of control. Congress doesn't control it. It's funded by the banks and we either have constitutional government or we don't."
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