Canada Is Walking Right Into A Subprime Mortgage Crisis

The website blog Business Insider published an analysis of the Canadian Housing Market yesterday.

Titled "Canada Is Walking Right Into A Subprime Mortgage Crisis", the article is reposted here for your convenience.

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Canada Is Walking Right Into A Subprime Mortgage Crisis

Joelle Fricot and Chris Callahan, Euro Pacific Capital

It is almost four years after the global financial meltdown of 2008 and many parts of the world are still trying to recover. Given the impact of the crisis, which rocked financial markets across the globe, it is shocking to many that Canada seems to be following many of the same lending trends as we saw in the United States in 2006. These trends were at the core of the subprime mortgage crisis, which led to the global recession of 2008.

In the year and a half leading up to the crash, housing prices rapidly increased in the United States, with a corresponding increase in subprime lending. We are now seeing the same trends in Canada. When analyzing the Canadian housing market, housing prices increased almost 100 percent since 2000, with the average home in Canada costing roughly $348,000. 

This is almost double our U.S. counterparts.

Big banks have become stricter with lending policies, and have upped the stakes for those looking for mortgage financing. This has created a huge market for sub-prime lenders in the marketplace that didn’t exist before because more and more people who would have been approved five years ago are now being turned away. There is now a huge shift in the lending marketplace. Once small, Canada`s subprime mortgage industry is now booming. More and more Canadians with highly questionable credit are highly benefiting from the available financing.

The Canadian Government has been moving quite aggressively in attempts to cool down the Canadian housing market. As home prices are soaring there are fears that there is a bubble in the making. This is evident through the recent actions of Finance Minister Jim Flaherty who is now acting for a fourth time, reducing the maximum amortization period for government issued mortgages from 30 to 25 years. On top of this he is also lowering the amount of equity that can be borrowed against a property to 80 percent down from 85 percent.

More than $500B of Canada's estimated $1.1T housing market are considered to be high-risk mortgages. Recently Ottawa began increasing its scrutiny of the CMHC for allowing this level of high-risk mortgages to rise to the level that it’s at now.

The Conservative Government has started putting stops to banks using mortgages insured by the CHMC as collateral on covered bonds. In addition new legislation will be implemented to ensure that corporations will have to give more consideration to the broader implications of their decisions. Essentially the CHMC is being told that, for every mortgage they insure, they will have to put consideration into the potential risk that mortgage put on the full Canadian economy.

The CMHC has dramatically expanded use of insurance by banks for covered bonds. These securities are made up of a package of mortgages, which is partly due to the steep rise in CMHC`s mortgage portfolio according to Jim Flaherty, Canada's Finance Minister. CMHC has a legal limit of 600B for mortgage insurance which it is fast approaching. The $600B limit has already been raised twice since the end of 2007.

Another significant type of lending in Canada is Home Equity Lines of Credit (HELOCs). HELOCs are loans which are secured by the equity of a borrower’s home. These types of loans in Canada have increased almost 170 percent since 2001 (which is double the rate of increase on Canadian mortgages). In 2011 they accounted for approximately half of total Canadian consumer credit.

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Mon Post #1: Like ripples from a rock cast into a still pond...

On Saturday we shared with you a blog post by well known US blogger Mike 'Mish' Shedlock as he compared the bubble in Vancouver with the bursting bubble in Ireland.

In a reflection of the power of the global village that is the internet, the story has been picked up by a number of sources including the website Business Insider.

Headlined 'See What $890,000 Buys in a Housing Bubble and After the Bubble Pops', it's further evidence that Vancouver's reputation as a city firmly ensconced in a housing bubble is now solidifying in the mindset of investors around the world.

It is only a matter of time before investors, even potential wealthy Asian HAM buyers, begin to completely shun our market. Catching such a public and well known 'falling knife' is not something savvy investors do.

You can almost hear the ticking of the housing time bomb, MOPE not withstanding.

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Tues Post #2: More signs Australia Housing is T/U

Over on Business Insider, we are offered another look at how the Australia Housing Bubble has begun it's decline in earnest.

The much-hyped “Flip that House” program The Block held a nationally televised auction to sell four houses. In the program couples purchase a house, renovate it, and then try to 'flip' it for a profit.

And as a 400 person live audience watched (and over 3 million  tuned in on TV), only 3 of the 4 properties available in the auction actually sold. As the Sydney Morning Hearld newspaper observed:

• "Whatever the lure of a celebrity house, the would-be buyers in Fitzroy Town Hall were just as jittery as the would-be buyers at any other auction in recent weeks. "

The remaining three properties sold in the week after the failed auction, but at a substantial loss compared to the initial purchase prices plus the sums expended on them by the 4 couples in their 2 months of televised renovations (not to mention the advertising budget).

Naturally there are those who don't see the fate of these flippers as a sign that the in the Australian housing market bubble is bursting.

In Australia's online Business Spectator, readers are told that the median forecast of the “21 leading market economists” polled was for 5% growth in nominal Australian house prices per annum for the next ten years. 

The column's author notes this would suggest “that [housing prices] will likely be 55% higher in 10 years’ time”.

Good luck with that. As the Business Insider observes they expect a fall in house prices of about 40% over the same time period.

And the reason for the difference? The role of debt in driving house prices.

B.I argues that debt drove prices up over the last 15 years, and now debt will drive them down again.

• "The mechanism is simple - but it’s not part of conventional “Neoclassical” economics, which is why [the] surveyed market economists don’t consider it. Aggregate demand is the sum of income plus the change in debt, and this is spent this is spent on both goods and services and assets. There is thus a link between the change in debt and the level of asset prices."

We continue to watch the events in the Land of Oz as a harbinger of what is to come here.

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