Thurs Post #2: Concern over Canadian bank exposure to overleveraged consumers

One refrain you have heard constantly during the inflating of our housing bubble in Canada is that 'Canada is different... Canadian banks did not lend money to those who couldn't pay it back.'

That, as this blog as insisted over and over again, is a crock.

Our banks permit liar loans - loans where a self-employed person can 'declare' their annual income to qualify for a mortgage.

Our banks offer cash back for mortgages (as much as 7%) which effectively means we have zero down mortgages. You can take out a mortgage, receive 7% back (which covers the 5% down payment) and this allows you to be PAID to buy a house.

And most significantly, CMHC is absorbing all lender risk.

Take away CMHC and there is no way twenty-something couples would qualify for a 5% down mortgage at the same rate as people with money.  Without access to this easy credit, the housing bubble would collapse.

As these measures have pushed up home values, Canadians have pigged out on an orgy of debt from HELOC's and credit cards fueled by the value of their houses.

Now, according to a report by Moody’s Investors Service, concerns are being raised about Canadian bank exposure to overleveraged consumers.

Observers are asking a question that would have been almost unthinkable a year ago: Would the big banks take a hit if the debt crisis spread here and consumer defaults spiked?

The biggest single asset on Canadian bank balance sheets is residential mortgages, more than 30% of which are insured by the Canada Mortgage and Housing Corp., essentially shifting the risk of default onto the shoulders of the government.

But banks also hold substantial uninsured assets such as credit card debt, and that leaves them vulnerable.

According to David Beattie, Moody’s analyst and author of the report, the Royal Bank of Canada is the most susceptible with 24% of its total managed assets made up of uninsured loans. Next is Bank of Nova Scotia at 21%, CIBC at 20%, Toronto-Dominion Bank and National Bank of Canada both at 18%, with Bank of Montreal the most protected at 14%.

“Canadian household debt as a share of personal disposable income stood at a record 150.8% at the end of June this year.” said Mr. Beattie. “We are concerned that, while taking advantage of low interest rates, consumers are also taking on debt the may not be able to service when rates inevitably go up.”

We haven't begun our downturn yet. And people have no idea how closely tied Canadian mortgage debt and consumer debt is.

As the Financial Post notes, the European debt crisis is already having a negative impact on the global economy.

The fear is that a significant rise in unemployment could leave many households unable to meet their obligations despite the record low interest rates.

Analysts are uncertain how Canadians would react in such a situation, whether they would stop paying their mortgages — as many Americans did when U.S. economy collapsed three years ago — or whether it would be credit card debt or auto loans that would take the hit.

Another area of uncertainty is the makeup of the banks’ consumer loan portfolios. There is limited detailed information on the various categories of loans, making it difficult to guage Canadian banks’ true exposure.

Certainly this blog suspects that if real estate turns in Canada, the resulting fallout will be catastrophic.

Perhaps that's when the ruling federal Conservative government in Canada moved heaven and earth to protect the real estate industry when the US market started going under in 2006.

We've had the zero down, forty year mortgage. The ability to raid the RRSP fund for down payments. The Home Reno Tax Credit. Emergency interest rates. First-time buyer’s closing cost credit. Regulations that permit liar loans. Regulations that permit zero-down payments with cash back from mortgage lenders. And CMHC increasing loan value on their books from just over $100 million to well over $700 million while assuming all lender risk.

Cheap credit, artificially supressed interest rates and government policy have attempted to fuel and protect the real estate boom in the hopes the Great Global Recession would pass before the impacts him home in the Land of the Maple Leaf.

In short our government gambled... much like the Trudeau government gambled on oil in the 1970s.

If it blows up... it is going to be really, really ugly.

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Carney-Speak and Silver-Gate

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.

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Get Ready for Real Estate to Really Catch Fire

Sound incredible?

Consider....

November/December, normally a down time for the industry, have been red hot. Word has it that concerns about possibly missing out on low interest rates, combined with the looming introduction of the HST tax, are pushing many new buyers into bidding wars to get into the market.

Regardless of the shortsightedness of this, I am told it is a definite factor in the current market frenzy.

And if that is indeed the case, then prepare for the market to explode.

In an exclusive interview with Canwest News Service and Global National, Finance Minister Jim Flaherty said the government is closely monitoring the red-hot housing market for signs that it is reaching "irrational" levels.

Now... we already know that the market is irrational and, as we have discussed, this is largely by design.

The government, seeing what happened to real estate based assets in the United States, slashed interest rates to dirt in a desperate attempt to re-inflate the collapsing economy and housing market.

And their actions have been wildly successful.

We've also talked about how they don't want to destroy this momentum... just slow it down a bit.

To this end Bank of Canada Governor Mark Carney has taken to the talk circuit issuing 'warnings' to individual Canadians and financial institutions to be 'prudent'.

Now Flaherty has come out and said that the Federal Government will, if necessary, further tighten the conditions under which the Canada Mortgage Housing Corporation insures mortgages,

The Conservatives have done this once already.

In July 2008 the Finance Department announced that CMHC would shorten the maximum amortization period that it would accept to 35 years from 40, as well as require a down payment of at least 5% of the value of the home. The new rules came into effect in October 2008.

"If we have to, we'll do what we did last year and limit the rate of amortization further than we already did, and require higher down payments,"said Mr. Flaherty.

If Flaherty takes action, it will likely come when the next budget is brought down in March, 2010.

But watch... the mere suggestion will inflame the market and sent another crush of people dashing after cheap rates in a desperate attempt to avoid both the increased costs of the HST and the looming spectre of 10% down and 30 or even 25 year amortizations. Potential new buyers will panic as they try to get the property that they want - regardless of how much they overpay.

Far from helping to moderate the overheated market, the fear is that Flaherty's simply pour gasoline over it.

(Note: Two posts for Saturday. See below for 'Financial Heroin')

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The 'B' Word

Today's post is brought to you by the letter 'B'.

It could be 'B' as in Bubble, as more and more people are starting to acknowledge here in Canada.

As faithful readers know, Bank of Canada Governor Mark Carney’s pledge to freeze record-low borrowing costs through June 2010 is single-handedly responsible for the stunning recovery in home prices.

'The Cabel' disputes this assertion, insisting that the state of the housing market is simply reflecting what Carney has called “an element of pent-up demand” (Carney speech to reporters Nov. 19).

“Rates are exceptionally low, affordability has improved in part because of the low level of interest rates and part because of some former price adjustments, and we are seeing a housing-price response,” said the Governor.

Pundits insist that they don’t believe that there’s a bubble, that most of the market action is from typical Canadians trying to buy their first home or move up. Rising prices? That's just an unintended consequence of the current low, low rates.

But when Canadians are waiving conditions and paying 10% (or more) than a home's asking price you know it's not a regular market - particularly when we sit in one of the worst economic times since the Great Depression of the 1930s.

The most notable thing here is that Carney insists that what's happening in the housing sector is simply an unintended by-product of his attempt to help the economy recover from its first recession in 17 years. Carney says he has given 'clear guidance’ on why he has taken the actions with interest rates he has.

“Rates are exceptionally low, they are exceptionally low for a purpose and we have given pretty clear guidance on how long we expect they will have to remain at these levels in order to achieve the inflation target,” Carney told reporters Oct. 22.

But Eric Lascelles, chief economist and rates strategist with TD Securities Inc., raises a point that more and more people finally raising. In Toronto Lascelles noted that the central bank hasn’t talked much about house prices, “to the bafflement of international investors.”

“It makes perfect sense that there is a good appetite for the housing market,” Lascelles said. What no one seems to want to address is “whether this is a bubble in the making or simply a recovery from earlier softness.”

David Laidler, a former visiting economist and special adviser at the Bank of Canada and now a fellow at the C.D. Howe Institute, a Toronto research group notes that “the worry has got to be that you might be getting a housing bubble out of this.” Laidler is a member of the institutes's Monetary Policy Council, which studies central-bank decisions and said in a Dec. 3 statement that a “possible unintended effect” of Carney’s commitment is “the buoyancy of mortgage lending, particularly variable-rate mortgages, and the housing market."

Unintended... there's that word again.

And it's that word that rankles the most.

Do people truly believe that the astonishing rebound in housing prices - with no intervention from the Bank of Canada - is simply an 'unintended' by-product of Carney's actions to recover from recession?

Maybe today's 'B' word actually stands for 'B' as in Banks.

In a fascinating report from Sprott Asset Management, the average leverage ratio of the Canadian banking system is analysed and compared.

Sprott notes that the average leverage ratio of the Canadian banking system is higher than that of the largest US banks in all periods reviewed.

Now each of the top ten US banks received common equity injections by both shareholders and the US government, thereby improving their respective leverage ratios during this economic crisis.

And the Canadian Banks?

• "Looking at the Canadian system more closely, all five Canadian banks are levered at an average of 31:1, which is actually the lowest leverage ratio during the three years that we reviewed. This implies that if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out.
  
  Now, that doesn’t mean they would go bankrupt per se, but it does give us an indication of how little asset prices would have to decline in order to wipe out their tangible common equity. These leverage ratios worry us because they leave such a razor thin margin for error on the ‘tangible asset’ side of the leverage equation. We are always cautious about investing in companies that have zero or negative common equity - we’ve seen what happens to public companies that trade at those levels, General Motors being a good example.
  
  Acknowledging the leverage levels above, you may wonder how the Canadian banks escaped the 2008 meltdown unscathed. The answer is that they received significant assistance from the Canadian government. First, they received $65 billion in liquidity injections from the Insured Mortgage Purchase Program (IMPP), whereby Canada Mortgage and Housing (CMHC) purchased insured mortgages from Canadian banks to provide additional liquidity on the asset side of their balance sheets.
  
  Next, the Bank of Canada provided them with an additional $45 billion in temporary liquidity facilities. Finally, a Canadian Bank also received assistance from the Canada Pension Plan (CPP) through the purchase of $4 billion in mortgages prior to the IMPP program, for a total government expenditure of $114 billion."

When the Bank of Canada slashed interest rate to dirt they helped to artificially preserve real estate asset prices by creating another irrational housing euphoria in the country.

Unintended... Or a deliberate calculation to preserve the "razor thin margin on the tangible asset side" of the Canadian Banks leverage equation... a group the Canadian Government had just moved heaven and earth to protect?

Sprott goes on to note that,

• "for reference, the entire tangible common equity of the Canadian Banks in 2008 was $68 billion. Can you put two and two together?"
  
  "The Canadian government injected a sum through mortgage purchases worth more than the entire tangible common equity of the Canadian banking system! On top of that, the Bank of Canada provided more than 50% of the tangible common equity of the system in emergency liquidity facilities."

The Canadian housing market continues to baffle observers in the United States and around the world. We are daily fed propaganda that tells us that the dramatic performance of our nation's real estate during this worldwide economic crisis is all a result of the solid foundation of our nation's banks and the virtuous conservatism of the Canadian financial system.

Uh-huh.

The Sprott report is simply the latest that sumarizes the many concerns critics have had about what's happening with Canadian Real Estate, CMHC and the banking system.

Increasingly it seems we are only a couple moves away from the symbiotic relationship that exists between those two other well known 'B' words: Boom and Bust.

The 'Boom' is currently happening and observers are raising alarm bells.

Be wary. The next time you hear "give me a 'B'...", you might just see the market kick back the word investors dread the most... bust! A development which would lead to today's true 'B' word; a word that summarizes our thoughts on all this malarky about 'unintended' consequences .

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Up, Up and Away!!!!

Did you hear? Real estate is set going to launch into the stratosphere.

Tis true, the real estate industry said so.

RE/Max advises that the housing market recovery will accelerate in 2010 and that sales in Vancouver will increase by 45%!

Meanwhile Pascal Gauthier, economist at TD Economics, tells us that home prices will rise another 10% in 2010.

It's this type of news that will have the real estate cabel in overdrive in the next few months cranking out the 'buy now or be left behind forever' propaganda.

Curiously you don't seem many references to a prescient little excerpt from Mr. Gauthier's TD Report.

"Mostly what seems to be stimulating sales is the attractive financing rates and it's really helping the low to medium end," says Mr. Gauthier. "If you are entering this environment and you are already overstretched and later down the road you're facing the interest rate reset … households and lenders should both be doing very hard math here to look at how much they should be taking on."

Indeed they should. But you won't be seeing comments like that from RE/Max anytime soon.

The lesson of the US experience, where the woes associated with interest rate resets have all too clearly played out, are drowned out by the chorus of real estate glee.

The powderkeg continues to build.

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American Graffiti

“The stability we've started to see in U.S. housing was likely a false calm before a bigger storm. There are millions of homeowners under threat of losing their homes in the next two years.”

This is the observation of Derek Holt, vice-president of economics for Scotia Capital.

It seems a record one in seven U.S. mortgages, or four million homeowners, were in foreclosure or at least one payment late in the third quarter.

Even more astonishing is that Americans with solid credit ratings comprised 33% of the quarter's foreclosures.

This is what happens when a huge surge of people default on their mortgages, and the wave of foreclosures causes a big drop in the value of real estate. It puts other homeowners in an 'underwater' position. Throw in the highest jobless rate in 26 years and suddenly its impossible for many homeowners to make their payments in the quarter.

Another Canadian watching the developments closely is Jennifer Lee, an economist at Bank of Montreal. Increased foreclosures among those with good credit is a problem in any recession, said Lee, but this time the increase comes after the subprime crisis forced millions from their homes and pushed prices down as much as 50% in some cities.

Not only are they losing their jobs and falling behind on loan payments, sharply lower prices mean they aren't able to simply sell their homes to pay off their banks.

“We can't say what is typical any more in the housing sector because we've never experienced anything like this,” she said. “People need to start working again, because when they do find work the first thing they do is get back on track with their mortgages. But, that isn't likely to happen soon.”

Most of these have five-year reset rates, and were issued at the height of the market's bubble. They start coming due in January.

Once again Scotiabank's Derek Holt makes a succinct observation. “You didn't have to prove a thing to get [a mortgage],” Mr. Holt said. “They haven't been a problem because they have such long fuses. But those fuses are just about done, and we're heading into entirely uncharted territory.”

It takes a long time for the housing story to play out. For the United States it started in 2006. The full effects won't really start to be seen until next year.

For Canada the writing is on the wall.

It will start with rising interest rates. The first to get caught up will be all those resetting 0/40 mortgages and the huge number of people who "bit off more than they could chew" in the Great Reflation Drive of 2009.

The problem is, too many dismiss the writing on the wall as nothing more than graffiti.

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The Prime Minister responds to CMHC concerns

Faithful readers will recall that back in July we made two posts regarding the Canadian Housing and Mortgage Corportation (see CMHC and CMHC 2)

To summarize - our colleague over at america.canada blogspot made the eloquent case that CMHC's mortgage insurance obligations present a looming credit quagmire that could put Canada in a far more precarious real estate position than the United States was in during 2006.

CMHC is well on it's way to insuring well over $500 billion in securitized mortgages and lines of credit by the end of 2010. It will also have issued over $600 billion in outstanding mortgage insurance.

So what would happen if Canada suffered a dramatic real estate decline (like the United States just suffered)? Who would be on the hook for these insured mortgages?

Why, the Government of Canada of course... meaning you and I.

Now our blogger colleague at america.canada didn't just write about this looming threat on his blog, he actually contacted the Prime Minister directly to express his concerns.

And earlier this month he received the following reply (click on image to enlarge)...

So what do we learn from our esteemed Prime Minister and his government?

It seems a chunk of this CMHC insurance is now protecting loans with a loan-to-value ratio of less than 80%. Rapidly increasing home prices of the past decade account for much of this.

What will happen if real estate values collapse?

More intriguing, however, is the denial mindset of our Prime Minister.

The letter asserts that only a small portion of Canadian homeowners default on their mortgage.

That's all fine and dandy today when the carrying costs of debt have been consistently made cheaper causing home prices to edge higher and higher.

But what happens when interest rates rise and home prices fall? That's when the real defaults will occur.

A problem so callously shrugged off could become a anchor around our collective necks.

If rising interest rates are indeed inevitable, then CMHC is insuring loans that are not sustainable.

CMHC is enabling banks to put people into homes at prices that can not be supported at higher interest rates or shorter amortizations.

According to page 4 of the CMHC Housing Report "Housing Now, Canada", demand for variable rate mortgages began to dramatically increase in 2008. 30% of all Canadian mortgages are now variable rate, up from 3% in 1998.

Fixed 5 year terms account for almost 70% of the mortgage market. Almost all fixed rate loans are insured (100%), securitized and sold to investors.

The reality is that all of these five year mortgages are no different from all those US mortgages that dangled 1,2 and 5 year teaser rates at the front end of them.

As those teaser rate mortgages now reset (with home owners unable to renew with new teaser rate mortgages), the American economy is drowning in a wave of defaults and foreclosures as home owners are unable to make the higher rates work.

And the basket of variable rate mortgages that now comprise 30% of all mortgages?

Even if the mortgage holders are bright enough to lock in to five-year mortgages now (and let me assure you... they are not that bright), all they will be doing is avoiding the inevitable.

This is nothing less than a ticking time bomb that has the potential to devestate government finances. If only 10% of that $600 billion in secured mortgages defaults, our government is on the hook for $60 Billion.

Significant when you consider our government is grabbling at this very moment with the largest deficit in Canadian history: $50 Billion.

Imagine if 25% of those mortgages fail? 40%?

How comforting, then, to know that our Prime Minister (and his government) are basically turning a blind eye to the potential threat.

"La, la, la, la, la..." appears to be the official government line.

Marvelous.

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Interest Rates 3: the impact of rising rates

On Saturday we talked about rising interest rates.

The posted 5-year bank mortgage rate has NEVER been below 5% going back over 60 years. Never... until now.

The housing bubble that has developed the past 9 years has been driven by artificially suppressed interest rates, a course of action which has intensified since the market collapse in 2008.

You can currently get a 5 year fixed mortgage rate of 3.79%, a lure which is triggering record real estate sales while we languish in record unemployment and the worst recession in 80 years.

Canadians are being sold an image that real estate has entered an age of 'affordability', but how long will that age last?

A $580,000 home with a $30,000 down payment (which is 5% down) results in a $550,000 mortgage. At 3.7% the monthly payment (including property taxes) is going to be $2,910.21.

If rates go up a measly 2%, the monthly payment jumps to $3,598.95, almost $700 per month more.

If rates return to the historic norm of 8%, our $550,000 mortgage will require a monthly payment of $4,479.35, almost $1,700 per month more than today.

The result?

The Lower Mainland will almost certainly be hit with a tsunami of defaults and foreclosures. Having already purchased the maximum they could afford at these historic low rates, who will be able to afford a jump of $1,700 (or more) in their monthly payments?

But that is only one aspect of the catastrophe that will ensue.

Consider the plight of the potential home buyer, the one who might purchased our fictitious $580,000 home with 5% down in the era of increased interest rates.

In today's market he qualifies for that $550,000 mortgage loan only because he can (barely) make the $2,910.21 monthly payment at 3.7%.

When interest rates rise, he can still only afford to qualify for a mortgage where he pays approximately $2,900 per month.

The only way he can buy that $580,000 home is if the price comes down - dramatically.

If interest rates rise to 8%, The maximum mortgage he can afford will be $365,000. Factor in his 5% down payment, and that $580,000 home must be reduced to $385,000 if it is to sell to our buyer.

That's a reduction of almost 40%!

If interest rates rise to 12%, the selling price of that home must drop from $580,000 to $274,000, a reduction of almost 50%.

And if interest rates creep back to 15% or higher - just like they did in 1980, '81 and '82 - the selling price of homes in the Lower Mainland will have to drop by 60 - 75% if they are to sell to buyers who must assume large mortgages.

When you combine all of these factors: (1) buyers from the last four years who will default and be foreclosed on as rates start to rise, (2) banks selling foreclosed properties for whatever they can get, (3) potential buyers who will only be able to secure mortgages for 40% - 50% less than the current 2009 market values, and (4) a second surge of inventory from homeowners who can still make payments at the higher rates but who will then default because plunging property values have rendered their bloated mortgages un-renewable...

And you have a potential storm that could utterly devastate the Lower Mainland real estate bubble.

It all comes down to this.

Do you believe interest rates will remain at these historically low levels for the next 35 years?

If the answer is yes, then buying in the current market is a smart move.

If the answer is no... then you can clearly see how the Lower Mainland is being set up to to suffer the mother of all housing collapses.

Which brings us to this interesting article in today's London Telegraph newspaper, Interest rates 'could rise sharply early next year' – and by more than in previous cycles.

Under these circumstances, plucking the cheese from the Lower Mainland's mortgage traps is nothing short of Mission Impossible.

Happy Labour Day!

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An American Blogger's Observations

Mike "Mish" Shedlock is a top indie blogger from the United States. His blog (MISH'S Global Economic Trend Analysis) is consistently rated one of the top blogs on the internet.

On Monday he wrote about an interview he was invited to do with Max Keiser. The topic: deflation and the state of the US economy. During the interview Shedlock offered his thoughts on the Canadian Housing Bubble.

Afterwards he was deluged with email defending Canadian banks and the Canadian housing situation.

Here is Mish's response to those email's...

• "[In my interview with Max Keiser], when I mentioned the Canadian housing bubble, I received numerous emails from people telling me that Canadian banks were in better shape than the US, that lending standards on houses were tighter, and that commodities would support Canadian home prices.
  
  Perhaps banks are in better shape but that does not mean they are in good shape. But the real reason we can say Canadian housing is in a bubble is the same reason the US was in an identifiable bubble:
  
  Home prices are standard deviations above rental prices and wages. That may not be true of every city Canada (it was not true in places like Danville, Illinois either), but judging from housing prices in Toronto, Vancouver, etc, it is crystal clear Canada is in trouble.
  
  I cannot quantify exactly how many standard deviations above norm the major Canadian cities are, but a look at home prices and acceleration in appreciation is telling in and of itself. In the US, homes prices to wages and rent were a whopping 3.5 standard deviations from the norm at the peak.
  
  Canadian home prices are a bubble waiting to pop. When the bubble does pop, it will take as long to fix as in the US, 6-8 years minimum, perhaps way longer, depending on how big the bubbles got in each location and the speed of the declines."

Observations with which we wholeheartedly concur.

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Why Interest Rates Will Collapse Real Estate Prices

We've discussed this before, but it's worth re-iterating.

Rising interest rates will collapse real estate prices in Vancouver.

And make no mistake, interest rates are going up.

Last week the govenor of the Bank of Canada (Mark Carney) urged that "Canadians should be preparing for the day when their borrowing costs eventually return to more normal levels."

Canada's historic 'normal' is 8%. That represents more than a doubling of current rates.

Real estate prices can be set to whatever level the seller desires, however the value of a house will eventually settle to the price that buyers can actually afford.

And since very, very few people buy a house with cash, what people can afford will be determined by interest rates.

A doubling of interest rates will slash what people can afford in half.

Charles Hugh Smith (www.oftwominds.com) has produced these charts to demonstate the see-saw relationship between housing prices and interest rates (click on image to enlarge).

In the graph above, a low interest rate (in this case 4.5%) will produce a monthly mortgage payment of $1,850 on a $500,000 mortgage.

But if the interest rates doubles, in this case to 9%, then...

... then a monthly payment of $1,850 will only allow a buyer to assume a $250,000 mortgage.

Which brings us back to the original issue: "The value of a house will eventually settle to the price that buyers can actually afford."

In the absence of a vibrant economy that generates more income for buyers to assume larger mortgages at higher rates, buyers are forced to reduce the size of a mortgage they can assume.

And a voracious demand for global capital is on the cusp of forcing interest rates back to historic norms (if not higher), it means a return to 'normal' interest rate levels will wipe out the market for average Vancouver homes that sell in the current bubble inflated $800,000 to $1.5 million range.

Buyers will only be able to afford mortgages at half the current amounts... a stalled economic recovery will guarantee this.

(lower, if rates spike to 11% or higher)

Canadians snapping up $600,000 plus mortgages today because they can 'finally' afford them with these historic low interest rates of 3% are making the worst financial decision of their entire lives.

Not only will 'normal' interest rates reduce other homes to half of what they paid for theirs... when these Canadians go to renew their mortgages after their 1-5 year term expires... they will be in a massive underwater position and they will default on their own mortgages.

It's an outcome that will only further depress market prices.

Their only hope lies in interest rates returning to low levels very quickly once they rise to this point.

And that's not going to happen.

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The Capital Trap

When you think about it, interest rates are the story in real estate now... and they are the story in the foreseeable future.

The current mini-boom in real estate sales/values is the artificial creation of the Bank of Canada's stimulus efforts.

The lowest central bank rate in history has Canadians back on the home-buying binge re-creating rising prices and multiple offers from the bubble years. All despite the fact that we are in the middle of the greatest recession since the Great Depression.

But it is these very interest rates that are dooming many buyers who are making the worst financial decision of their entire lives.

The Bank of Canada has lured them into a Capital Trap.

The first key concept here is that a house is only worth what someone can afford to pay for it. The second key concept is that very, very few people buy a house with cash.

The vast majority of real estate purchases are financed with mortgages-- with debt.

And credit is lent to homebuyers at a rate of interest... a rate that is currently at historic lows.

We've all read about the $2 trillion Federal deficit for this fiscal year and I have posted many entries about it. At the right is a US National Debt clock showing the exploding interest on that debt that the US government must service.

But that's only one element you have to consider. Every other government on the planet (yes, even the Chinese government as I posted here recently) is also anxious to borrow huge sums of money from someone to fund their exploding deficit spending.

Don't forget the corporations, local governments, agencies and real estate buyers who want to borrow money.

The point is: the demand for surplus capital far exceeds the supply of global surplus capital.

And as the voracious US government demand for debt servicing continues to grow, surplus money looking for a home is drying up even as the demand for surplus capital skyrockets.

The net result is interest rates will have to rise--and soon. While it is impossible to predict exact dates, simple laws of supply and demand dictate that rates will soon rise and will rise steeply as the shortfall between what governments want to borrow and what's available to borrow becomes visible (not to mention private demand for capital).

Most observers, which include the governor of the Bank of Canada (see post earlier this week), agree rates will double from the current market rate of about 4% to at least 8-9%.

Real estate prices can be set to whatever level the seller desires. However the value of a house will eventually settle to the price the buyers can actually afford.

And since since very, very few people buy a house with cash, when interest rates double, house prices will drop in half, regardless of any other conditions.

Interest rates are driving the buying frenzy/mini-boom now. And shortly interest rates will drive the market collapse.

Tomorrow we will discuss why house prices will be dropping by half in the very near future.

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Please read disclaimer at bottom of blog.

An International Perspective.

There is a annual worldwide investment symposium that has chosen Vancouver as the site of their convention this year. Coincidently they are in town just as the Bank of Canada has declared the recession over.

Care to guess how that declaration is being greeted?

Ian Mathias, managing director of Agora Financial, reported from the symposium on his website yesterday...

"07/24/09 Vancouver, British Columbia. 'The Recession Is Over,' reads the headline of The Globe and Mail today. The staff leaves the paper in front of our rooms here at that Fairmont Vancouver. When we cracked the door open to retrieve the rag, the headline caught our eye… and we thought of just tossing it back in the hallway. If there is any one single theme of this year’s Investment Symposium, it’s that despite the warm feelings and 'green shoots' of summer, this contraction is far from over.

'I think this is really serious, and it’s just beginning,' Doug Casey said during his presentation yesterday. 'Forget about the green shoots. They are weeds. This is the biggest thing since the Industrial Revolution. Stocks will be a good value when dividend yields are around 10%'.

'Real estate? Way too early. Bonds? The bond market is much bigger than the stock market. Interest rates are being artificially depressed. They have to go back up to higher levels to encourage people to save and get out of debt. When interest rates assert themselves, the bond market will collapse, which isn’t good for the stock market, or real estate, either.'

So what’s Doug doing? Going long precious metals, shorting U.S. Treasuries and buying real estate in Thailand and Argentina.

'We are looking for eight signs before we get bullish again,' added Eric Roseman in his presentation:

1) Unemployment must stabilize
2) Home prices must stabilize
3) Domestic consumption must rise
4) Bank lending must grow
5) Toxic assets and bank balance sheets must be fixed
6) Auto sales must stabilize
7) Credit spreads must narrow
8) The dollar has to decline

'Only the last two have occurred. That gives us a very bearish outlook going forward.'

By the way, what did the G&M mean in their 'recession is over' headline? Heh, the Canadian central bank predicted that the economy would grow 1% in the current quarter. Forgive us, but our faith in central bank forecasts ran out a long time ago."

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Two profiles: US Banks, CMHC

Two snapshots of institutions on either side of the 49th parallel for you today.

First we start with with our favorite whipping post, the US Banks.

As our Prime Minister commented on last year, the recovery will not begin until the US Banking system stabilizes.

So what's the outlook?

Yesterday there were four more bank failures on Bank Failure Friday bringing the total to 57 for the year. Unfortunately that may only be a drop in the bucket compared to the tsumani of failures on the horizon.

A report in Forbes.com (see article here), notes that the banking industry is bracing for continued losses from consumer loans due to the rising unemployment rate and an expected wave of commercial real-estate losses.

At a Senate Banking Committee hearing in Washington on Thursday, Sen. Jim Bunning (R-Ky.), repeated a comment relayed to him by Federal Deposit Insurance Corp. Chairman Sheila Bair that another 500 banks could fail "unless something dramatic happens."

So much for stabilizing.

Meanwhile there is the Canada Mortgage and Housing Corporation (CMHC).

As I have already stated the Canadian goverment, in a desperate attempt to prevent a repeat of the US real estate collapse, has thrown massive fiscal stimulus and ultralow interest rates at the Canadian economy in a desperate attempt to supercharge real estate and forestall the collapse of values.

Not only could such a development put the Canadian economy is jeopardy, but the Canadian goverment could be facing a supreme risk as well.

Consider... Canada’s housing insurance agency, run by Ottawa and accountable to the Minister of Finance, provides endless amounts of cheap insurance for high-ratio loans (with minimal down payments). In doing so, CMHC allows Canadian banks to pass off the risk of these home loans to the federal government.

Presumably this allows them to be more willing lenders.

Currently CMHC guarantees about $630 billion in mortgages, an amount of equal in size to half the Canadian economy.

Half! That's an astonishing amount of money.

And what assets stand behind this? Down payments worth about $8 billion (plus the book value of the real estate).

So what happens if the real estate bubble bursts and asset values crash? For starters it will mean that up to 98% of its liabilities will not be covered. Moreover Canada will be facing a situation worse than that which faced US mortgage giants Freddie Mae and Fannie Mac, which lost 90% of their market value.

Some of you have asked why the government is moving heaven and earth to keep the real estate market afloat. That's why.

But as economic recovery takes longer and longer to come into play, we have a situation where the current average home price can only be supported at artificially-low interest rates. And our Canadian banks only make those loans because they are backstopped by a federal government now running its worst-ever deficit.

Over $600 billion in mortgage risk belongs to the taxpayers – and Ottawa is already tapped out. So what is going to happen when interest rates rise?

What we have is Canada's own little subprime crisis in the making. The Bank of Canada has ushered in interest rates that are comparible to the US subprime-style teaser loans.

I say this because the Bank of Canada knows that these rates will be doubled or tripled in the years ahead. Yet, by dropping their key lending rate to the lowest point ever, they have created a situation that allows 3% mortgages to further inflate house values.

And just like the US subprime teaser-rates, when the mortgages reset at the higer rates... a wave of defaults and foreclosures will result.

When that first wave hits, the banking system will seize up, credit will stop dead in it's tracks, and the goverment will be pushed to the brink of insolvency.

A series of dominos are building. And when they start to tumble, the result is going to be devestating.

The housing crisis has not been avoided in Canada. It's only been delayed as officials pray for a swift economic recovery that is not coming.

One only has to look at the US Banking system's failure to stabilze for that evidence.

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Who ya gonna trust?

Canadian Real Estate Association president Dale Ripplinger tells us “the worst of the recession may be behind us.”

On the basis of this heady news, "potential buyers who moved to the sidelines late last year when economic uncertainty peaked are returning to the housing market."

The government engineered cheap mortgage rates have created a mini real estate frenzy and, according to the CREA, prices have just reached a new all-time high, surpassing the record set in the second quarter of 2008.

To these shills, er... economists... buying at the peak right now is the thing to do because tomorrow there will be a new peak.

So, faithful reader, who are you gonna trust? These salesmen... or your own logic.

Is the recession behind us?

There will be no recovery in Canada until there is recovery in the land of our largest trading partner, the United States.

And what is happening in America?

The US Bureau of Labor Statistics preliminary estimate for job losses for June at 467,000, which means 7.2 million Americans have lost their jobs since the start of the recession. The cumulative job losses over the last six months have been greater than for any other half year period since World War II, including the military demobilization after the war. The job losses are also now equal to the net job gains over the previous nine years, making this the only recession since the Great Depression to wipe out all job growth from the previous expansion.

The first major mistake these 'salesmen' are making is viewing this recession like previous ones.

This isn't like past recessions. If you are going to compare circumstances you have to compare this recession to those that started with the bursting of a giant speculative bubble. When you do you, see slow recoveries. The reason you see slow recoveries is that asset values at bottom are so low that investor confidence returns only gradually.

But even those who predict a more gradual recovery as investors slowly tiptoe back into the market, will be proven to be wrong.

This recession is very deep.

And in a recession this deep, recovery doesn't depend on investors. It depends on consumers who, after all, are 70% of the U.S. economy. Consumers have been crushed in this recession and until they start spending again, you can forget any recovery.

The problem is, consumers won't start spending until they have money in their pockets, or until they feel reasonably secure.

They don't have the money, and it's hard to see where it will come from.

In recent times, Americans found myriad ways to fuel spending, even as incomes stagnated: borrowing against the once rising price of their homes and tapping plentiful credit cards.

No longer. They can't borrow like that because one out of ten home US owners is under water - owing more on their homes than their homes are worth. American homes are worth a fraction of what they were before, so say goodbye to home equity loans and refinancings.

The paycheck has returned as the primary source of spending, and pay is eroding even for those who have jobs. This process is nowhere near complete, and, until it is, the economy will barely grow, if at all, and may well oscillate between sluggish growth and modest decline for the next several years until the rebalancing of the excessive debt has been completed. Until then, the private economy will be deprived of adequate profits and cash flow, and businesses will not start to hire. Nor will they race to make capital expenditures when they have vast idle capacity.

US unemployment continues to rise, and number of hours at work continues to drop. Those who can are saving. Those who can't are hunkering down, as they must.

Meanwhile in Canada unemployment is also rising quickly, over 2 million people are out of work and household debt equals almost 140% of disposable income.

A new federal report warns our budget deficit will top $50 billion for at least a couple of years, and then Ottawa’s finances will be in the red for a decade. This, says economist Dale Orr, will add $200 billion to the federal debt, wiping away what 15 years of the GST and higher taxes were supposed to eliminate.

Don't you remember those times?

Our immediate future will be one of slashed government spending. And as our goverment must borrow more and more, interest rates will soar back to double digit rates as the mushrooming debt becomes more expensive to finance.

Economic growth alone (if there is much) won’t balance the books so governments will have to raise taxes – BC is already pounding the war drums on cutting services in health care due to lack of funds.

And this economy can't get back on track because the track we were on for years -featuring flat or declining median wages and mounting consumer debt - simply cannot be sustained.

Low interest rates and government stimulus can only delay an economic reckoning until the economy begins to recover. But that economy won't "recover" because it can't go back to where it was before the crash.

It means there is still a lot of "economic adjustment" ahead of us, regardless of what these polished R/E salesmen... err... economists may say.

In other words, there are many more reasons today to expect the downturn to continue than to expect a turnaround.

You only have to look at what is happening around us to see this yourself.

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"Blue Horseshoe Loves Anacott Steel"

There are days I like to pick up three or four newspapers and put my feet up in the backyard and simply read.

Today was one of those days. And it is amazing to see the similarity in news articles sometimes.

You can understand it for a major event, but it never ceases to amaze me when I see it for something like real estate.

Don't get me wrong, I understand what is happening. About 10 years ago I got a major lesson in 'public communications' when I took on a cause I cared about. I found it fascinating to watch the intimate behind-the-scenes moves that a major government bureaucracy undertook as it artfully managed both the press and their political masters.

And I was a quick study. The reality is that most reporters are lazy. Once you recognize this, and you tailor your information to spoon feed those journalists you develop a successful relationship with, PR truly becomes a game.

Almost weekly a comment was made here, a phone call there, and suddenly what I said today would appear in tomorrow's newspapers written by someone else.

It is truly an artform.

And that's what public relations has become... an artform.

The problem comes when you tread that very fine line between artful public relations and machiavellian manipulation.

Yesterday I posted an article on David Lereah. For those who do not know, David Lehreah was the chief economist for the US National Association of Realtors. David was the consumate machiavellian PR hack who did more than issue rosy forecasts. He regularly trumpeted the infallibility of housing as an investment. In countless interviews, on TV and in even in his fateful 2005 book, "Are You Missing the Real Estate Boom?", Lereah tirelessly pumped the housing market.

Lereah was so successful at prodding wary consumers into committing to making housing purchases that Time Magazine named him as one of the '25 People to Blame for the Financial Crisis'.

A dubious distinction to be sure.

But as one of the 'blog dogs' posted in response to yesterday's post... this is old news.

What makes him relevent, tho, is his forthright acknowledgement as a corporate shill on the part of the Real Estate Industy. Under the guise as a 'market economist', Lereah pumped the Industy as any other high pressure salesman would in many other fields.

Understand... he promoted a product (real estate), as a salesman, hidden under the guise of a fancy title (chief economist). And in doing so he dangerously treaded that fine line between promotion and deception.

It's important you understand this.

Because what is happening in Real Estate in British Columbia and Canada now is no different from what was going on in the United States in 2007.

A mere year after the US real estate market had begun a spectacular downward slide, Lereah pulled out all the stops as he manipulated the national media to promote the idea that "it appears we have established a bottom" to the real estate crash. And this was done in a desperate attempt to restore 'consumer confidence' and halt the downward slide.

A great many Americans dived into the housing market as they blindly followed the advice of Lereah and the National Association of Realtors... and in doing so, those Americans committed a catastrophic financial mistake.

Picking up the Globe and Mail newspaper today, I read headlines trumpeting a "Phoenix-like rise' in the real estate market. The Industry is giddy and proclaiming that "in Canada, buyers are back, sales are surging, and prices are edging up."

"Canada appears to have skirted the clutches of a lengthy, painful downturn. We can quibble about how stong and early the recovery will be, but the worst is over", says Michael Gregory, a senior economist at BMO Nesbitt Burns.

It isn't.

Faithful readers know I have written about this phenonmenon often.

In a desperate attempt to prevent a repeat of the US experience, the Canadian government has thrown massive fiscal stimulus and ultralow interest rates at the Canadian economy in a desperate attempt to supercharge real estate and forestall the collapse of values... a domino that would devestate the Canadian economy.

And lo-and-behold, a year after the start of the collapse in Canada, Canadian economists are making the exact same claims as the famous David Lereah was just over one year into their collapse.

You will recall it started back in February when Canadian R/E Industry shills started putting out stories on how first time buyers were diving into the market to take advantage of historic low interest rates - and how their peers were being 'left behind'.

Phone calls were make and virtually the same, identical stories were appearing in newspapers in Vancouver, Calary, Edmonton, Winnipeg, Toronto and Montreal, but tailored to profile individual couples in each market.

Each newspaper came out with these stories on almost the same day.

It has been a highly organized and coordinated campaign specifically targeted to manipulate 'consumer confidence' and it is being done with a level of skill that would have made Gordon Gekko (from the movie Wall Street) proud.

I can almost hear the phone call now... "Blue Horseshoe loves Vancouver Real Estate."

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Macleans Magazine: Don't believe the housing hype!

Back on June 7th, I made a post that questioned the validity of the 'affordability' argument being used to hype homes. That post (So what happens when it's time to renew?) can be seen here.

This week Macleans Magazine has come out with an article reminding Canadians that "there are plenty of signs that the Canadian housing market is still on some very shaky ground."

And just like my July 7th post, Macleans questions the affordability argument as well. (see the Macleans article here)

Looking at the PR coming from the Real Estate Associations, the magazine notes the Industry is trumpeting how sales are up 16% this year and how, in May, sales hit an all time monthly high.

The article pinpoints exactly what is being insinuated by this statement; "that Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed."

Macleans isn't buying into that malarky, and neither should you.

The magazine notes that there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.

Just like we have profiled in yet another post, the magazine notes household debt is still an astonishing problem in Canada. "There is one particular statistic that suggests trouble could be brewing. Unlike in the U.S., Britain and most European countries, household debt in Canada is, incredibly, still growing."

The magazine notes that the rising debt being accumulated by Canadians is being driven largely by record-low interest rates.

"Canadians have been buying homes not so much because they can afford them, but because many believe there’s never been a better time to buy, with lending rates so low."

Macleans sees what we have been harping about... that real estate is not more affordable, but that cheap money is more plentiful. "Houses are barely more affordable now than they were during the market peak. And as people keep buying, houses may only become less and less affordable."

The article also notes that not everyone agrees with the Canadian Real Estate Association figures that suggest the market has managed such a quick and painless turnaround. According to the Teranet-National Bank housing price index, Canada’s housing market is not recovering yet. Home prices have been falling for the past eight months, according to its latest statistics. Vancouver, Calgary and Toronto have each experienced significant price drops compared to last year. This would seem more in line with what one would expect after an unprecedented six-year housing boom in which home prices shot up 80%.

And what is the doomsday scenario looming on the horizon?

"If mortgage rates go up sharply then affordability will get crunched. Things could get much, much worse. And that’s not an unthinkable scenario. Some banks have already boosted interest rates twice this year. Then there is the possibility that job losses continue and the economy doesn’t recover quickly, putting further strains on household finances. The low interest rates and continued debt problems mean that Canadians could find them themselves badly over-exposed."

BMO economist Sal Guatieri, in a newsletter last week wrote, “it’s worth remembering that the further house prices go up and the longer household finances get stretched, the greater the risk of a painful correction. Anyone who doubts that should talk to an American or British homeowner.”

The article headline says it all. "Don't believe the housing hype!"

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The Greatest Threat to the Canadian Economy? The BOC says Household Debt.

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The Bank of Canada released its bi-annual Financial System Review yesterday.

On the whole, the BOC says Canada's banks and credit markets are as strong as could be expected amid the deepest global recession since the Second World War.

The BOC has come to the conclusion that overall risks to the financial system are unchanged from its last report in December.

“Despite the severe impact of the global crisis, the Canadian financial system has continued to perform well compared with those of other countries.”

Hmm... somehow being front of the pack in a herd of turtles isn't all the comforting. And I wonder, how much of that performance is attributable to the hundreds of billions of dollars of liquidity that the Bank of Canada and other major central banks have injected into the global financial system?

Rock-bottom interest rates have lowered the cost of borrowing and slowed the the crashing housing market from it's perilous decline... at least for now.

But the Bank of Canada warns that a potentially catastrophic threat looms on the horizon: household debt. The risk posed by household balance sheets is significant. And it has grown.

The Bank of Canada reports that the level of debt to income reached a record in the fourth quarter as real net worth dropped 6.7% from the same period a year ago. While stressing that the possibility of a mass bankruptcy is remote, the ability of Canadians to repay their bank loans has replaced frozen credit markets as the main fear factor among policy makers, the report said.

“There has been a further deterioration in the financial position of the Canadian household sector as a result of the continued turmoil in financial markets, the deepening global recession, and worsening labour market conditions,” the report said.

Canadians' household debt is about 140% of disposable income, compared with about 150% in Britain and almost 190% in the United States.

The fact of the matter is that Canadians have been no different than Americans in using their homes as ATM machines and withdrawing equity to spend. That's why the Bank of Canada has been so desperate to halt the slide in real estate values. Should the economy worsen, global financial conditions could trigger a surge in interest rates. If that happens Canadian real estate values will come crashing down.

The end result? Negative equity and household debt combining to drown many Canadian families.

In the face of these conditions, Canadians are frantically trying to save more and spend less. Which is, of course, what politicians fear will devestate the economic recovery.

Unfortunately the only solution our government is working towards is trying to provide more credit for everyone.

Can you say Catch 22?

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But the BC economy is getting better, isn't it?

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Took the dog for a walk at the beach with a friend yesterday.

He (the friend, not the dog) was keen to take issue with some of my recent blog musings.

"How can you say real estate is not going to do well. People are jumping into the market and the BC economy is getting better, isn't it?"

Uhh... no, it isn't.

Many of British Columbia's lumber mills sit idle. Coal exports are down 40%. The price of natural gas, one of our key commodities, has collapsed and the tourism industy this summer is going to suck wind, big time.

More importantly the industry that had helped fuel the province's economic growth the past 10 years - residential home and condominium construction - is suffering the "nastiest" downturn among the provinces according to a recent report.

Canada Mortgage and Housing Corp. released data this week that showed B.C. has had "arguably the nastiest residential construction recession this cycle" in the country.

But what about the 'Olympic bounce'?

We've already had that, at least in the construction industry. Any added construction oomph from the coming Vancouver 2010 Winter Olympics is gone. Most major projects are nearing completion or have been completed.

So what's the near-term outlook for the construction industry?

Peter Simpson, chief executive officer of the Greater Vancouver Home Builders Association says, "housing starts are abysmal. Builders are hesitant to put shovels in the ground when there's inventory that hasn't sold."

And with interest rates on their way back up, that inventory isn't going to be moved out quickly, creating a further drag on the real estate market.

"We're in a full-scale recession in B.C.," said Jock Finlayson, executive vice-president of the Business Council of British Columbia. "Getting out of it is going to depend on when the global economy, and the U.S. economy, bottom out, and how things look after that."

Hmmm... there's that nasty tie-in to the global economy again. So what's happening out there?

Oil is way up, closing over $71 US a barrel yesterday, the price having shot up over 100% over the last three months. This has sent the Canadian dollar up over 90 cents US and on it's way to par - a development that will kill exports and manufacturing jobs.

Meanwhile, in the US, the economy is about to be broadsided by another huge wave of defaults from Alt-A, Option ARM and commercial real estate mortgage resets (see latest article here). Estimates peg coming residential foreclosures at $1.5 trillion.

As for the global economy, it appears Europe is about to be rocked by banking issues (IMF tells Europe to come clean on bank losses). Seems that, contrary to popular belief, the German banking system was just as irresponsible as the American banking system. Turns out the German state-owned banks, who's boards of directors are filled with the politically well connected, had been a dumping ground for US toxic waste - evidently the 'benefactor' of German trade surpluses.

And Germany wasn't alone in the mad dash to lend to foreigners. Austria is up to its eyeballs in loans made to Eastern Europe. Sweden had done the same in the Baltic States. Spain pumped money in to cajas that were used to finance a property boom fueled by foreign investors. Ireland had engaged in an Florida style construction boom as well. This is only a brief summary.

Now the jig is up. Spain, Ireland and the Baltic states have collapsed into depression. Their debts will never be paid. Eastern European currencies have tumbled, massively increasing their debt burden. They either hyperinflate or default. All of these loans, in addition to the tens of billions of US toxic waste remain on the balance sheets of European banks. And for the most part they are still valued at 100 cents on the dollar.

The message here: Europe's financial crisis is just getting started.

Then there is China, the supposed economic darling who will pull the planet out of recession. Today's China Daily News reports that China's exports and imports shrank for the seventh month in a row in May as the economic downturn continued to dampen global trade (see article here). I have a question for you. Who, exactly, is China going to be selling goods to so that their economy can keep growing?

So much for global recovery.

Far from getting better, we have BC entering a "full-scale recession" with recovery dependent on US and global conditions improving. That will be compounded with rising loan costs, big energy price hikes, reduced consumer spending, more pain for the Canadian manufacturing sector, a US economy that is going to remain stagnant (if not get worse), evidence that Europe is in for some serious pain and no one with money to buy China's goods so that China can, in turn, buy Canada's commodities.

No, my friend... the outlook for BC real estate values remains gloomy. I'd be willing to bet that within a year the prime rate will be double what it is today and Vancouver will have re-taken the lead from Miami in that plunging real estate graph I posted on Monday.

The sun is setting fast on the real estate boom times.

Even my dog can see that.

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There must be a pony around here...

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Ahh... the credo of the eternal optomist as adopted to the real estate industry. You could walk into a house and be up to your knees in manure and a real estate agent would cheerfully tell you... "Gee, this place must come with a pony."

Once again the Real Estate pollyanna's shill about the return of good times, the underlying message the same as always... Don't be left out, you better buy now!

The latest is the Real Estate Board of Greater Vancouver telling us that the Greater Vancouver housing market "has entered a more moderate and balanced state," with sales and benchmark prices both up in April compared to March.

And don't kid yourself, the local real estate community is doing everything it can to whore values higher.

The industy is eagerly pointing at 3% mortgages and homes being up to 15% more affordable than they use to be. The carrot is dangled furiously at people who wanted to buy in the past, but could not. "Now," the pollyanna's proclaim, "they can."

As we have documented here in the past month the crucial first-time buyers are being relentlessly prodded into action.

The pollyanna's hook their prey and trumpet that the Federal government will let them raid $25,000 from their RRSPs, tax-free, to buy a home. The Feds will also donate $750 to help them close. Then real estate industry creates media releases about young buyers rushing into the market in this, perhaps the best (and last) time, to buy into the market.

Even the mighty CKNW, the radio station that bills itself as "BC's News Leader and the station you turn to in an emergency", has turned to pimping for the real estate industry. Surely you have heard the sickening PSA's that tell everyone that 'now is the time to buy'.

For shame. It's peer pressure at it's manipulative best.

And what about the real news? The economic winds are not blowing kindly.

The public service abounds with rumours of slumping revenues, pending cuts in spending, and a much bigger-than-budgeted deficit.

Watch for a new provincial budget on the heels of the BC Liberal election majority that cuts services, raises taxes and slashes funding to municipalities.

What is it they say? Shite rolls down hill? Municipalities will, in turn, cut services and raise - wait for it - property taxes. And the hikes will be significant.

All of this comes on the heels of yesterdays news that bankruptcies in B.C. are soaring and that heavy job losses are taking their toll on individual residents. B.C. has the dark distinction of having posted Canada's third-largest increase in consumer bankruptcies, behind Alberta's 99.8-per-cent increase and Newfoundland's 88.9-per-cent rise.

Mark my words, if the economy does not perform the Immaculate Resuscitation investors in the stock market are being hoodwinked into believing, all those being sucked into buying now are going to be very, very bitter.

Maybe they can console themselves as they hunt around their new house looking for the pony.

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