When it comes...

"There is no doubt an eerie parallelism (exists) between the Canadian situation today and that in the States before the bust... The crucial question in my mind is: when housing prices start to fall, is a Canadian with no or negative equity (assuming he/she still has a job and the ability to pay) more likely to A) walk away (if there are no legal ramifications); B) keep paying thereby turning himself to a debt slave virtually for life; or C) declare bankruptcy? This may determine the velocity of the downturn - a crash versus a protracted deflation. Any feedback would be much appreciated."

This question was asked in response to Saturday morning's post.

We promised to address it today and as fate would have it, Garth Turner touched on this with his post on Saturday night. You can read his full post here.

In a nutshell, in all of Canada (except Alberta) Canadians will be in a significant bind.

Canadian mortgages are known as “recourse” loans, which means the bank has full recourse to collect not only on the debt, but the costs of the debt. If you execute a standard mortgage document, and miss mortgage payments during the term, or fail to fully pay it off at the end of the term, or do not refinance it satisfactorily, then the lender can legally gain title to the property, and sell it. Then they will sue you for the difference between the mortgage amount and the sale proceeds. You will also be sued for costs, including all legal activity, real estate commissions and taxes, and if you cannot pay this amount, banks will get a court order to garnishee your wages for what will probably be the rest of your miserable life.

This will happen even if your mortgage was CMHC insured.

It means that Canadians will, en mass, pursue the only alternate option: Personal Bankruptcy.

By declaring personal bankruptcy, the bank gets the house and you get a black mark that lasts for seven years. It will mean no credit cards, no loans, no new mortgage, no new car, no running for political office. It will mean difficulty finding almost any white collar job and even hassles trying to rent.

But it will get you out from your mortgage obligation.

The problem is that it's not an immediately implemented solution.

In British Columbia the foreclosure process can be A drawn out affair and then the bankruptcy process will take even more time to wind it's way through the system.

And because so many people will be forced to pursue this option (rather than simply handing over the keys to your home to the bank as in the United States), once it gets going the sequence of events could plunge BC real estate into a morass that compounds and intensifies the collapse (just look at how the collapse in confidence froze up the market this past winter).

When it comes to pass one thing will be certain.

It will be ugly.

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Email: village_whisperer@live.ca
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Prechter: Next Wave Down Will Be Bigger

Robert Prechter is a longtime technical analyst who forecast the 1987 stock market crash and authored a book in 2002 ("Conquer the Crash") in which he warned of the dangers of a U.S. debt bubble and deflationary depression.

In late February, Prechter said "cover your shorts," and predicted a sharp rally that would take the S&P into the 1000 to 1100 range.

With that prediction having come to pass, Prechter is now saying investors should "step aside" from long positions, and speculators should "start looking at the short side."

"The big question is whether the rally is over," Prechter says, suggesting "countertrend moves can be tricky" to predict. But the veteran market watcher is "quite sure the next wave down is going to be larger than what we've already experienced," and take major averages well below their March 2009 lows.

That's right, Prechter is one of those who believes the late 2007- early 2009 market crash was just a warm-up to what Prechter believes will be the bear market's main attraction. In this regard, he says the current cycle will echo past post-bubble periods such as America in the 1930s and England in the 1720s, after the bursting of the South Sea bubble.

Prechter calls the 2000 market peak market a "major trend change" for the market from a very long-term cycle perspective, and the downside is going to continue to be painful well into the next decade. "The extreme overvaluation, the manic buying and bubbles in the late 1990s [and] mid-2000s are for the history books - they're very large," he says. "The bear market is going to have balance that out with some sort of significant retrenchment."

His recent thoughts on video...


Meanwhile in Canada

Canadian personal bankruptcies soared by 54.3% in June according to the Office of the Superintendent of Bankruptcy Canada.

An earlier report released by Toronto Dominion Economics in May suggested that as many as 160,000 people will walk away from their bills in 2009 and 2010 because of high unemployment and debt.

"Unemployment and heightened household debt will drive a substantial increase in consumer insolvencies over the next two years," Craig Alexander, TD's deputy chief economist, said in the report.

Businesses, however, weren't hit as hard as consumers. In June business bankruptcies were up 10.8% year-over-year.

Alexander warned that even if business conditions improve, it may not help the individual bankruptcy situation, as consumers are still carrying a greater debt load and run a greater risk of falling prey to insolvency.

The fact of the matter is that the spectre of rising interest rates remains a massive ticking time bomb for individual Canadians.

If, heaven help us, the market crashes in tandem with a loss of confidence in US debt (triggering spikes in interest rates), the sonic boom against real estate will be profound.

Tick... tick...tick.

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Email: village_whisperer@live.ca
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Please read disclaimer at bottom of blog.

More Condo Developers Filing for Bankruptcy

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Real estate sales may be up from the number of sales in February but they're still well below last year's levels which has caused a spike in the number of condominium developers seeking creditor protection and/or going into receivership.

One of the appointed receivers for these failed developers, Bowra Group, has been involved in 12 seperate developments that are either in receivership or are struggling and have sought creditor protection.

“I think it’s just a sign of the economy. The forest industry has been in trouble for some time and has its casualties, and the real estate industry has been challenged for a while now,” Bowra group president David Bowra said in an interview with the Vancouver Sun today.

Across the Lower Mainland more and more developments are running out of money and being forced to have a receiver appointed. The receiver finishes the building and gets the best price it can for the units.

Others seek creditor protection, asking the court for time to get their financial houses in order before the lender comes knocking.

As we noted last week, there are currently 2,391 unabsorbed housing units on the market in the Lower Mainland with another 25,907 under construction.

Look for more and more developers to go under as the year moves along.