It's the Government's fault

Everywhere you turn right now, the federal government is getting the blame for the decline in housing sales.

The latest is an article in the Vancouver Observer:

“Things have actually been getting tough for almost a year, now. The folks who have been affected are primarily first time buyers and the self employed—even those with a good credit (FICO) score and a decent-sized down payment.” 

This could create a bit of a problem in Vancouver, where a significant percentage of young professionals are unincorporated sole proprietors who are financially responsible but who may still need someone like a parent with home equity to co-sign a loan. 

Even if you do own a home, the amount of money that a bank might lend to you on your home equity lines-of-credit (HELOC) has also dropped from 100 percent to 65 percent of the appraised value of your property. 

There are alternatives out there. There are what’s known as “B-lenders” or private lenders, who will charge a one to two percent fee along with a mortgage rate that can be as high as 10 percent. “So, right away you’re paying $1000 - $2000 on every $100,000 you borrow, and higher monthly mortgage payments.” 

So, perhaps there is a grain of truth to the recent comments from BC Real Estate Association Cameron Muir that new mortgage rules choked home sales in the Lower Mainland over the summer.

It's all the government's fault.

This will be the PR battleground over the course of the Winter and Spring months ahead because it's only going to get worse.

As many of you know, beginning this month (November 1) new regulations from the OSFI (Canada's banking regulator) have come into effect requiring most federally-regulated lenders to comply with its B-20 mortgage guidelines.

Banks have now brought in stricter rules on conventional mortgage qualification, self-employed income verification, borrowed down payments and cash-back mortgages.

All of which has some sectors of the real estate industry freaking out, guaranteeing more media stories attempting to blame the government for what's going on.

That's why it's great to see articles like this one in the Huffington Post. Titled, Canada Housing Slump: Flaherty's New Mortgage Rules A Scapegoat For A Much Bigger Problem, the Post right from the get-go identify what the issue really is:

This summer, Prime Minister Stephen Harper and Finance Minister Jim Flaherty took a regulatory hammer to Canada’s housing markets, causing condo sales to plummet in Toronto, and sinking Vancouver house prices by jaw-dropping margins. 

Or so the finance and real estate industries would have you believe. 

To hear Canada’s banks, industry groups and even the Conference Board tell it, the slowdown that descended on many Canadian housing markets over the summer is the fault of the strict new mortgage rules Flaherty put into place this past June. 

The media are happy to go along with it, because it offers a neat and simple explanation for why Canada's decade-long housing boom is coming to a halt. The only problem is, this isn’t what’s happening.

This isn't what's happening?

Oh really... do tell.

First the background: Flaherty tightened the rules for mortgages for the fourth time in as many years this past June, reducing the maximum length of a mortgage insured by the CMHC to 25 years from 30, effectively making that the maximum amortization period for most Canadians who take out mortgages. He also reduced the maximum amount you can borrow against the value of your house to 80 per cent from 85 per cent. These changes, like the previous ones, were aimed at ensuring that Canada's rising home prices weren't due to irresponsible lending and borrowing. 

The be sure, this will have a cooling effect on the housing market. There are prospective home buyers who just can’t afford the extra $140 per month, on average, that the shorter mortgage periods represent. Some homebuyers have just been priced out of the market. But can that alone explain the 70-per-cent drop in condo sales in Toronto, or the nine-per-cent drop in house prices in Vancouver? 

Highly unlikely. TD Bank forecast the impact of the mortgage rule changes on the housing market and found it would amount to a three per cent decrease in house prices -- far less than what Vancouver, for one, has already seen. Not to mention, we’ve had three previous rounds of mortgage rule tightening since 2008, and none of them tipped the market downward. Clearly, something else is happening here. 

The housing market’s fundamentals aren’t looking good. Standing in the way is that pesky basic law of economics — supply and demand. In some Canadian markets, those two things have become entirely detached from one another. 

As the CEOs of both BMO and RBC have attested, Canada’s real estate market is simply overbuilt -- particularly in Toronto, where condo construction has grown so thoroughly out of hand that there are now twice as many high-rises going up there as there are in New York City. 

And more, much more, construction is being planned. 

In Vancouver, where residential construction has been somewhat more restrained than in Toronto in recent years, the supply-demand disconnect is reflected in prices, which have flown so high that Vancouver has nearly as many houses listed for sale over $1 million as sell in the entire United States in a month. The city's housing costs ranked as the second least affordable in the world, after Hong Kong, in a recent survey. 

Across the country, house prices are now 35 per cent higher relative to income than has been the long-term trend through history, Bank of Canada Governor Mark Carney noted earlier this year. 

Simply put, prices are too high. Canadians aren't earning enough to justify these price levels. 

And closely linked to this is the elephant in the room: debt. It has never been cheaper to take on debt in Canada. With a global financial crisis busting out all around, the Bank of Canada dropped its base interest rate to one per cent in January, 2009, and it has stayed at or below that level for nearly four years now. 

All this has had an alarming effect on household balance sheets. StatsCan recently revised its measurement of household debt to make it more in line with international norms, and found the debt-to-income ratio hovering at a record 163.4 per cent, higher than the level the U.S. had when its housing market began a years-long decline half a decade ago. 

That offers more of a clue to why Canada’s housing market has peaked and appears to be on a downward trajectory. It’s basic mathematics writ small in the finances of households across the country — there’s just no more breathing room to borrow more money.

The Huffington Post concludes what all non-biased observers have concluded.  That adjustments to the mortgage rules were too little, too late.

The Post notes that what needs to happen is a re-balancing — or a correction, if you prefer.

Whatever the terminology, house prices have to come down relative to incomes. Then and only then can they return to healthy, stable levels of growth.

Federal Finance Minister Jim Flaherty sees it.

Bank of Canada Governor Mark Carney sees it.

And bloggers like this one see it.

The changes that were made had to be done.  And the result will be a continuing decline in housing prices.

As the Post says, "don't blame it on Harper and Flaherty. All they did was close the barn doors after the horses had fled, and help the chickens come home to roost."

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Did the Greater Vancouver Home Builders’ Association just have the rug pulled out from under their media offensive?

On Wednesday we told you how Peter Simpson, president and CEO of the Greater Vancouver Home Builders’ Association, had launched a bit of a media campaign to try and apply some public pressure on Federal Finance Minister Jim Flaherty.

Simpson was hoping to play the 'economic' card and frame the recent mortgage issue as an economic threat for the government:

"The real threat to the economy is if a real-estate slowdown leads to a sharp reduction in housing starts. That’s because new-home construction stimulates the sale of appliances, carpets, and other products. For every housing start, there are 2.8 person years of employment that are create.That’s direct and indirect jobs. If it continues to fall, they’re going to have to take a good hard look at what their actions have caused — and be prepared to make some adjustments. I don’t know what those adjustments are.”

Even the headline tried to create the impression Flaherty's resolve on the issue was not that strong:

"Finance Minister Jim Flaherty may intervene in amortization period for home mortgages"

Somehow it only seems fitting that, only a day later, Bank of Canada Governor Mark Carney comes out with a strong statement on the topic of real estate and advises Canadians to "invest in 'productive capital,' not houses or condos."

How's that for a kick in the gonad's, Peter? Apparently your entire industry has been written off as the centre of massive Canadian mal-investment.

You could see the footprints of the spin machine in high gear in the Globe and Mail article:

Canada Mortgage and Housing Corp. reported that construction starts slipped in July to an annual pace of 208,500 from June's 222,100. That was largely due to a decline in multiple units, such as condominiums and apartments, in British Columbia.

"Canadian housing starts, particularly the multi-unit sector, have ebbed from extremely robust spring levels," said Robert Kavcic of BMO Nesbitt Burns.

"With stricter mortgage rules likely to cool demand in the remainder of the year, construction activity should moderate further to a more sustainable pace."

Seems Simpson's challenge to government that "if housing starts continue to fall in a declining real estate market, then government is going to have to take a good hard look at what their actions have caused", has been met and rebuffed.

The message: construction activity should reduce to a more 'sustainable' pace.

If Simpson thought he had Flaherty's ear on this topic, then Carney just played the role of Lucy to Simpson's Charlie Brown.

And just like in the Peanuts classic, you just knew what the outcome was going to be... and it still made you smile.

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Historical Perspective

The Globe and Mail newspaper came out with an article today the encapsulates what many bear bloggers have complained about.

Primarily how Governor of Canada Mark Carney's debt warnings are at complete odds with the monetary policy he is following.

The Globe notes how Carney, for years now, has used ultra-low interest rates to flood the financial system with easy money.

That policy kept Canadians buying homes while markets elsewhere in the world faltered.

The conventional wisdom has been that keeping those emergency low interest rates in place has been a risk worth taking, given the weakness in the non-housing side of the economy.

But as it becomes clear that it's entirely possible that Canada’s housing crash wasn’t avoided, but merely postponed, the Globe wonders whether history will be kind to the Bank of Canada Governor?

Carney is being heralded around the world. He chairs the Financial Stability Board, tasked with reforming global financial institutions.

He’s whispered as a candidate to head the Bank of England.

Wherever he goes, people laud him for saving Canada from the worst of the global financial crisis. On Tuesday, the Canadian Club honours him as “Canadian of the Year.”

But this adulation, as the Globe notes, can quickly shift as it did for the former Chairman of the US Federal Reserve, Alan Greenspan.

When Greenspan retired from the U.S. Federal Reserve in 2006, he looked like a genius. He had steered the world’s largest economy through the dot-com bust, 9/11 and a recession. All was good as the economy roared.

But two years later, with the U.S. housing bubble bursting and the financial crisis raging, Greenspan’s reputation was substantially diminished. His failure to see the mortgage lending bubble – and do anything about it – is now etched in his legacy.

A rattled Mr. Greenspan later admitted his faith in the financial system was shaken.

If Canada’s housing market crashes, will Canadians look back on all his verbal warnings over the past few years about debt?

Or will he be judged on the monetary policy he kept in place as his warnings fell on deaf ears?

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Wed Post #2: Even more Carney warnings on interest rates

Bank of Canada (BoC) Governor Mark Carney used an appearance at the House of Commons finance committee to re-stress the central bank’s recent message that rates could have to go up despite global economic uncertainty.

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.

But can you really engineer a soft landing?

I guess we're going to find out.

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Macleans puts household debt and the Bank of Canada’s anxiety levels in a graph

In the graph above, Macleans Magazine charts Canadian's debt-to-income ratios, alongside some increasingly alarmed quotes from BOC governor Mark Carney or other Bank officials.

Macleans notes that it has been years since Bank of Canada governor Mark Carney first started warning about Canadians piling on too much personal debt.

Rising household debt, after all, has been the most dangerous byproduct of his low interest rate policy, which was initially designed to help Canada sprint out of the Great Recession.

Later this low interest rate policy was partly dictated by the need to help sputtering Canuck exports.

Right from the get-go, though, Canadians haven’t been listening.

As the situation has become more dire, so have the Bank’s warnings.

Today Canada’s ratio of household debt compared to disposable income is inching toward 160%, the peak seen in the U.S. and the U.K. just before their respective housing busts.

Macleans also notes that Carney is still sounding those warnings. Last week, he finally raised the prospect of raising interest rates, cutting people off from all that cheap money, even as the Fed down south sticks to near-zero rates.

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Debt Shock? Whatchyou talkin bout Mark?

The end of another week and the focus continues to zero in on negative news for Real Estate.

And, once again, the warnings are coming from Bank of Canada Governor Mark Carney.

Yesterday's Vancouver Sun announced the news:

"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???

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Tues Post #1: Part of the Plan

Yesterday we posted that when the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

Cheap credit, artificially suppressed interest rates and government policy were used to fuel and protect the real estate boom in the hopes that the Great Global Recession would pass before the impact him home in the Land of the Maple Leaf.

How important has Real Estate been to the Canadian economy?

In 2010 the Canada Mortgage and Housing Corporation widely discussed the importance of the housing market for the Canadian economy in the CHMC publication 'Canadian Housing Observer'.

The CMHC’s numbers show that real-estate-related economic activity in 2009 contributed more than $300 billion to the Canadian economy.

That accounts for more than 20% per cent of Canada’s total gross domestic product.

Not only did new residential constructions and sales of current houses positively stimulate the economy by creating jobs, creating higher wages, creating investment, and creating government revenues but far more important to the government was the wealth effect motivated by increasing housing prices.

The housing bubble strengthened consumer confidence and, as a result, consumers spent more.

This was crucial for the Canadian economy. While the world was going through the Great Global Recession, this 'wealth effect' allowed Canada to get by without experiencing any real pain.

In an average recession, the economy starts to rebound after 3-5 years.

So the hope has been to get us through the worst of the recession and then allow growth in our resource based economy to mitigate the debt overhand.

The problem is that this was no ordinary recession.

As many in the blogosphere have noted, this economic crisis began with its financial system and as Bank of Canada Governor Mark Carney noted last week, “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

And that's the problem... the recovery is not going to come in time.

Our nation's plan of "channelling cheap and easy capital into unsustainable increases in consumption" is just that... unsustainable.

It's forced Carney to publically address what, until now, has been a topic confined to the realm of the blogosphere. To wit that the “debt super cycle” in which debt fuels consumer spending as a driver of the economy is an era which“is now decisively over.”

This public admission is stunning for those who have spent any amout of time watching the statements of public officials.

It's your best evidence that the time of reckoning is rapidly approaching.

Which begs the question... how will it all play out? 

As we posted back in 2009 in 'The Anatomy of a Bubble', no model can predict the timing, highs or lows of any bubble.

But all bubbles - be they real estate, stock market or whatever - tend to follow a pattern traced in human psychology.

And when any given bubble 'unwinds', it usually takes as long to wind down as it took to wind up.

Vancouver's real estate market has taken over 15 years to blow up into it's current state.  As a result one could logically expect that the decline will take years, not months, to play out.

Ideally officials like Carney want to see a gradual unwind. That's the plan.

But can you engineer an orderly unwind?

Things don't always go 'according to plan.' The variable is the unknown... events that upset the plan.

I mean let's face it. If things went according to plan, the Recession would be over by now, wouldn't it?

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Do you hear what I hear?

It's Christmas time in the city and the scarcity of posts from your dutiful scribe is a direct consequence of imbibing in the holiday spirit prevalent at this time of the year.

There's a lot going on and time simply doesn't permit delving into all the topics I would like to cover.

But I would be remiss if I didn't take a moment to reference an incredible speech given recently by Mark Carney, Governor of the Bank of Canada.

As the Globe and Mail noted, "Mr. Carney delivered a discourse so intelligent in its analysis and perceptive in its recommendations that it stands as the best speech delivered by any public figure in Ottawa in a very, very long time."

Carney says that he believes that the Western world stands at a point of “rupture.” For decades, countries borrowed beyond their means – leveraged themselves with accumulations of debt. “That era,” Mr. Carney proclaims, “is now decisively over.”

For many faithful readers, this is not news. However hearing such candor from the likes of Carney is... and it gives you a glimpse of the seriousness and gravity of the situation we are in.

As this blog says ad nauseum, the 2008 Financial Crisis was a severe financial earthquake whose depth and breadth we still do not fully appreciate.

Now... three years later, it is only becoming apparent.

Debt, particularly Sovereign Debt, is the issue of the coming decade.

Carney talks about the “debt super cycle” which occurred all around the world. It's that debt which fuelled consumer spending, not productive investments.

Excessive private debt wound up on the public ledger. The more households and governments borrowed for consumption, the less productive the economy became, which, in turn, means the overall debt burden was less sustainable.

Everywhere in the Western world, a long period of deleveraging – that is, reducing debts – has begun, or must begin.

The global economy, Mr. Carney predicts, risks entering a “prolonged period of deficient demand.” In Europe, there’ll be fiscal austerity, high unemployment and tight credit; in the U.S., personal and government debt will hang over the economy for years. The U.S. economic crisis began with its financial system, and Mr. Carney (agreeing with many others) notes that “recessions involving financial crises tend to be deeper and have recoveries that take twice as long.”

When countries do what Western ones have done and borrow abroad to fund internal consumption, their situations become unsustainable.

Canada, Mr. Carney warns, is falling into that very trap, because “channelling cheap and easy capital into unsustainable increases in consumption is at best unwise.”

Canadians have been running a net financial deficit for more that a decade, borrowing more than they’ve earned. Canadians’ household debt ratio is now worse than the Americans or the British, Mr. Carney says.

“Our demographics have turned, our productivity has slowed, and the world is undergoing a competitive deleveraging. We might appear to prosper for a while by consuming beyond our means. Markets may let us do so for longer than we should. But if we yield to this temptation, eventually we, too, will face painful adjustments.”

I would suggest that Carney has identified exactly what has been happening for the past five years.

When the housing bubble began to burst in the United States in 2005/2006, the ruling federal Conservative government in Canada moved heaven and earth to shield our economy by protecting the real estate industry.

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 suppressed 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.

This isn't to excuse Carney's role in all of this, as the blogosphere constantly points out.

But the fact the at the Governor of the Bank of Canada is now completely dispensing with the malarkey about how splendidly Canada has done during the recession - on a regular basis - is a significant development.

Regrettably the average Canadian isn't hearing him.

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The looming Canadian Debt Crisis?

I was going to post my thoughts on the new R/E theme that 'HAM is not prevalent in Vancouver' yesterday but didn't get a chance.  Look for it later this week.

Other themes from the past couple of weeks have been the European/Greek debt crisis, the US debt situation and Carney/Flaherty's comments on the Canadian debt situation.

Ultimately all these topics are inter-connected, which is why we focus on them.

And the Canadian debt situation will hinge on how all these external factors play out.

Our blogging colleague Ben Rabidoux, who now blogs on his great new site The Economic Analyst, has come out with some great graphs that reflect the status of Canadians. 

The first clearly show how debt is exploding in Canada as the growth in lines of credit is compared to the growth of disposable income, GDP and inflation (click on images to enlarge):

Next the growth in Mortgage debt is similarly compared:

Mortgage debt as a percentage of GDP:

And finally how mortgage rates have fallen over the past 30 years:

For the past 2 years there has been a steady stream of warnings from analysts that the artificial accomodative money policies of the past 30 years will be coming to an end.

Our own central banker and federal finance minister have spent the past year issuing warnings that Canadians should get ready for interest rates that will return to the historic norm.

These charts clearly show why they are concerned.

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Yet another warning from Carney

Ahhh.... our own central banker is issuing warnings again. 

Dropping by the Village on the Edge of the Rainforest on Wednesday, Mark Carney chose Vancouver for a speech on housing.

How appropriate.

And what did he have to say?

The latest blatherings were a sharp warning that the housing market may be overheating. Seems his ultra-low interest rates, combined with too much optimism on the part of buyers, has been jacking up prices in places like Vancouver. 

With investment in residential properties nationwide now near peak levels, Carney left little doubt that he is concerned.

• “The risk is that expectations become extrapolative, prompting the classic market emotions of fear and greed – greed among speculators and investors, and fear among households that getting a foot on the property ladder is a now-or-never proposition.”

Carney even singled out Vancouver saying that Asian wealth is fuelling valuations that in some cases are “extreme.”

Carney’s speech comes a day after a report from the Certified General Accountants Association of Canada showed household debt has hit $1.5-trillion.

If household debt were distributed evenly across all Canadians, the report said, a two-child household would owe an estimated $176,461, including mortgage costs.

Topping it all off was a report, that also came out on Wednesday, from Statistics Canada that showed Canadian families’ income from earnings, investments and private pensions fell 3.2% in 2009 to $63,000 – the first “significant” drop in market income since the early 1990s.

In the end it came down to Carney repeating the warnings he has been uttering for more than 18 months now as Canadian borrowers continue to binge on cheap credit,

Carney said the share of households “highly vulnerable to an adverse economic shock” has risen to its highest level in nine years.

He says borrowers and banks should "be careful."

Carney knows what the blogosphere has been saying for almost two years now: we are sitting on a powderkeg ready to implode.

In his speech Carney noted that real estate loans now make up more than 40% of Canadian banks’ assets, compared with 30%.

Our Nero-ish central banker called this “unprecedented exposure.”

• “The central position of housing assets and liabilities on the balance sheets of both households and financial institutions means that any housing excesses could generate important vulnerabilities in the financial system. Historically low policy rates, even if appropriate to achieve the inflation target, create their own risks.”

Vancouver, of course,  is Ground Zero for this looming disaster with prices up an astounding 25.7% to $831,555 – more than 11 times the city’s average family income – from $661,745.

But there is no economic recovery and Carney can't raise interest rates yet.

He knows what's coming.  But after so many warnings, all the children in the Land of the Maple Leaf hear is the muffled "whaa, whaa, whaa" sound of the adults talking on the Peanuts cartoons and it becomes background noise to the oblivious.

The Financial Post had an interesting take on it, though.

• "With the Bank of Canada’s hands tied in so many ways when it comes to cooling off a housing bubble, the message for Canadians is simple: Homeowners you’re on your own on this one. Get sucked into the housing hype if you must, but be prepared for interest rates to rise — and with all that mortgage debt you’re carrying on your fancy new houses, be prepared for those rates hikes to bite."

Indeed. The Post even had this little tidbit:

• "Cut through the bankspeak and Mr. Carney also said some parts of the housing market may be acting like a classic financial bubble, with expectations of rising prices and ever higher returns driving dynamics rather than supply and demand."

No one knows when our bubble will burst, but Robert Kavcic, an economist at BMO Capital Markets, came out with an apt comparison given the events of this week in the NHL.

• “By pure coincidence of course, the last time the Canucks suffered a heartbreak game 7 of the Stanley Cup final (1994) was just before red-hot Vancouver house prices tumbled more than 26%.”

And just as the heartbreak of a Canucks loss this time around was more intense than in 1994 because the expectations were higher (we were the league's best team)... so the bursting of this bubble will be more intense than it was in 1994 because that bubble is so much bigger.

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What does Carney know?

For more than a year now, Bank of Canada Governor Mark Carney has been warning Canadians about interest rates.

Critics have jumped all over his warnings as hypocrisy... Carney was the one who cut them, why would he be so surprised that Canadians are taking advantage of them?

Wasn't that the whole point of lowering them to begin with?

Some suggest that Carney is a very bright mind who knows exactly what's going on. The tight rope that he has had to walk between currency, manufacturing, employment, trade balance and international economic relations is a difficult one. And the consequences of Canadians gorging on house and consumer debt are a necessary by-product of resuscitating the economy.

Some even suggest that Carney, by bringing in emergency level interest rates and staving off a housing collapse in 2009, has created an opportunity for astute Canadians to divest themselves of debt laden real estate and prepare for what is coming.

There is no doubt that Carney is fully aware many Canadians aren't making astute decisions. He has noted that while Canada’s recovery has been the envy of the Group of 7, the recovery has relied on levels of consumer spending and investment in housing that are proving unsustainable.

Last November Carney appeared on CBC's Sunday Edition and said:

• We're providing as much transparency as we can about the future path of monetary policy, as much as appropriate. The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they're going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates, and the banks that lend to them should also be comfortable about that.

This passage caught my eye and intrigues me.

"We're providing as much transparency as we can about the future path of monetary policy, as much as appropriate."

The inner circle of Central Bankers is a tight one and some have suggested that Canada's Central Banker Carney, a former Goldman Sachs employee, is tighter with the US Federal Reserve than most Central Bankers.

And this week Carney warned that "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening" is particularly chilling.

Does Carney know things that other Central Bankers do not?

This thought line intensified yesterday as the Federal Reserve finally complied with a court order to forced to disclose unredacted data on it's lending from it's discount window.

As initial scrutiny of the 25,000 or so pages of declassified information began, one glaring anomaly surfaced repeatedly.

Copious data exists about FX swap lines between the US Federal Reserve and other banks. Many critics have charged that these swaps were the means by which the Fed bailed out much of the world.

And as the information is studied, parties like Zero Hedge are looking at just what the terms were on these various borrowings.

To everyone's surprise, there was a whole lot of "NR" exemptions, aka redacted data.

What's redackted is data on par lent out, par received, net change, limit and undrawn available, which is critical to determine whether the Fed actually lost money on its FX swap transactions.

But what is even more stunning is that it appears that one Bank in particular (which everyone believes can only be the Bank Of Canada) has been purposefully and diligently redacted out of the 977 pages in the document highlighting the currency swap data.

Why?

Suddenly Carney's comments that the Bank of Canada is "providing as much transparency as we can about the future path of monetary policy, as much as appropriate," and his comment that "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening" becomes even more ominious.

What is going on between the US Federal Reserve and the Bank of Canada? What does Carney know that others do not? More importantly... how wise is it to ignore his year long warnings that Canadians need to prepare for significantly higher interest rates when he appears to be privy to such inside information?

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Bank of Canada says many are underestimating what's happening

On Saturday Bank of Canada Governor Mark Carney was giving a speech to the annual meeting of the Inter-American Development Bank in Calgary.

He noted that commodity prices could continue to increase for decades (hello Gold and Silver) and encouraged central banks in emerging markets not to delay raising interest rates because inflation pressures will only worsen.

And you know what that means for interest rates, right?

"Everything else being equal, higher commodity prices usually necessitate higher policy rates. Even though history teaches us that all booms are finite, this one could go on for a long time," Carney said.

More warnings, but many want to know WHEN!

"Bringing that message back to Canada — even if the US Federal Reserve stays on hold through 2011, look for the Bank to start responding to rising commodity price pressures before long." BMO economist Douglas Porter said in a commentary.

Many figure it will come after the Federal electiion on May 2nd.

But by far the most significant comment came when Carney said, "some economies are postponing monetary tightening in the hope that old relationships will reassert. Others are resisting capital inflows. And all appear to be underestimating the scale of what's happening."

There are those who will pooh-pooh Carney's comments as more empty warnings.

They ignore at their own peril.

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On the topic of Interest Rates

In last Friday's post, Enthusiasm and Euphoria, I talked about our real estate market conforming to the classic bubble pattern and that it will be rising interest rates that finally prick the bubble.

Dennison's of the Village on the Edge of the Rainforest simply cannot comprehend the looming implosion that will devastate our hamlet on the wet coast.

Many will concede the devastating impact that double digit interest rates will have... but almost to a mortgage holder, they are adamant that interest rates will never climb that high.

For three decades now capital has become progressively cheaper and more easily available. Many people have come to believe that low interest rates now are the norm as they have gone their entire adult lives knowing nothing else.

For those innocent souls the current shifting sands will be nothing short of a paradigm shift. Even those old enough to have watched how the Internet transformed society (a paradigm shift on a scale not seen since the printing press transformed civilization), oblivion reigns supreme.

As noted in a report by the McKinsey Global Institute since 1980, differences in the cost of capital in most countries have converged as financial markets globalized and risk premiums in developing countries fell.

• Capital became plentiful, and long-term interest rates declined too — primarily as a result of falling investment in assets such as infrastructure and machinery. Global investment fell dramatically, creating a decline in the demand for capital substantially larger than the growth in supply created by Asian current-account surpluses.
  
  In other words, the “saving glut” so often cited as a cause for low interest rates really resulted from a decline in global investment.
  
  Today, however, this trend is reversing. Across Africa, Asia, and Latin America, rapid urbanization is increasing the demand for roads, water, power, housing, and factories. Global investment demand will now rise considerably up to 2030, reaching levels not seen since the postwar reconstruction of Europe and Japan.
  
  The global appetite to save, however, is unlikely to rise in step, for several reasons. China plans to encourage more domestic consumption. Spending will rise as populations age. Even increased expenditure to address or adapt to climate change will play a part. As a result, the world will soon enter a new era of scarce capital and rising real long-term interest rates. Such rates will in turn constrain investment and could ultimately slow global economic growth by as much as 1 percent a year.

Interest rates will be going up.

And while government has gone out of it's way, particularly since the early 1990s, to supress those rates artificially as a means to stimulate the economy, those days are coming to an end.

Our problem is coming to grips with that fact.

It is expected, nay... considered a right of entitlement, that government will be able to continue forever with that rate suppression.

Does the prophet see the future or does he see a line of weakness, a fault or cleavage that will be shattered as easily predicted events unfold?

As posted here we have read how Mark Carney, the Governor of the Bank of Canada, has warned us about what is coming.

Likewise has Alan Greenspan, former Chairman of the US Federal Reserve.

Even most well known Canadian blogs are detailing rising interest rate warnings this week.

The harmonics inherent in this particular act of prophecy are not all that hard to discern.

Ignoring them is nothing less than an act of defiance in the face of overwhelming logic and evidence to the contrary.

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Canadian Borrowing Gone Mad

I was working on a post compiling many of this week's debt warnings and rationalizations when I came upon this post by Mish Shedlock.

Mish says it better than what I had prepared, so check out his full post.

Also... adding to this week's round of debt warnings is this Carney piece in the Toronto Star where Carney warns that "the hard part of the recovery is just starting."

Intestingly, came across info that today on BBC Radio 4 (which is designed to serve as offshore radio and is part of the Royal Navy's system of Last Resort Letters - a system that in the event of a suspected catastrophic attack on the United Kingdom, submarine commanders check for a broadcast signal from Radio 4 to verify annihilation of the homeland) the Money Program panel had the consensus view that interest rates would go up substantially in the new year.

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Lux Æterna: Cassandra's Nightmare

I recently read an analogy about the stock markets by Jawad Mian of Q Invest which could equally apply to our Canadian Real Estate markets.

In Greek mythology, Cassandra was a princess of the legendary city of Troy, and the most beautiful of King Priam’s daughters.

Cassandra was seduced by Apollo, who gave her the ability to predict the future. But when she refused herself to him, he cursed her by making people disbelieve her predictions.

So Cassandra went around knowing and predicting the future, telling people what was going to happen, but no one ever believed her. She foresaw the fall of Troy, but couldn’t prevent it.

Cassandra is a figure both of sagacity and of tragedy, where her combination of deep understanding and powerlessness exemplify the tragic condition of humankind.

I find the mythic origins of the Greek prophetess and the metaphorical application intriguing in so far as it relates to the Canadian Real Estate markets.

What Cassandra sees is something dark and painful that may not be apparent on the surface of things or that objective facts do not corroborate.

She may envision a negative or unexpected outcome; or a truth which others, especially authority figures, would not accept.

In her frightened, ego-less state, she may blurt out what she sees, perhaps with the unconscious hope that others might be able to make some sense of it. But to them, her words sound meaningless, disconnected and blown out of all proportion.

At the turn of the century, there were some who fretted that higher interest rates might soon return.

Dismissed as scaremongering Chicken Little's who thought the sky was falling, they were further vilified as Central Bankers in the Western World cut interest rates to stimulate the economy out of the dot com collapse.

"The Central Bankers are telling us interest rates will stay low," the housing bulls cried. "Now is the time to buy!"

And they were right.

As the American housing market imploded, and the 2008 Financial Crisis took hold, Central Bankers swore to cut interest rates drastically to resuscitate the economy.

"The Central Bankers are telling us interest rates will stay low," the housing bulls cried. "Housing in Canada will continue to rise!"

And they were right.

But over the last 12 months that has changed.

First it was Alan Greenspan, former chairman of the US Federal Reserve, who started sounding the warning bells.

Then Canada's Central Banker, Mark Carney, started with his warnings.

For most of this year Carney has intoned his cautionary tale: Interest rates will be going up - sharply. Make sure you are ready.

For years the housing bears have been dismissed because the signs coming from the Central Bankers undercut the primary reason the bulls said housing would collapse: interest rates.

Changing viewpoints is a gradual process. Flipping from bullish to bearish, and vice versa is difficult. We remember what most recently rewarded us, and internalize that.

Cassandra has become the archetype for many prophetic characters who are either ignored or cannot be comprehended until after an event has occurred.

Our catastrophic failure to heed caution has much to do with our preference to look at the surface rather than what underlies appearances.

Both Greenspan and Carney are issuing warnings about higher interest rates, mainstream media are regularly publishing stories about the existence of a housing bubble, about our extreme debt situation and the American Experience reflects back at us.

And still the warnings sound meaningless, disconnected and blown out of all proportion.

Sometimes illusions are far more comfortable than reality. That may explain the unchecked optimism many continue to have in regards to the Vancouver Real Estate market.

The housing market will soon start a steady erosion that will scar the life of anyone invested on the wrong side. That erosion will be caused by significantly higher interest rates.

The Greek philosopher Solon said: ‘Observing the numerous misfortunes that attend all conditions forbids us to grow insolent upon our present enjoyments. For the uncertain future has yet to come.’

Greenspan and Carney have made it clear now that the uncertain future is almost upon us.

• “The crisis is not over, but has merely entered a new phase... when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many [Canadians] with debt loads they can no longer afford."

Soon the Central Banker safety net will be withdrawn, or the bond market will negate their interference.

Will it be a Requiem for the Canadian Housing Dream? More importantly... will you be forced to mourn your own personal circumstance out of insolence?

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Bonus Tuesday Post: More Carney Warnings on Debt

Bank of Canada Governor Mark Carney is speaking out again today on debt.

In an interview today with BNN, Carney issued yet another stern warning.

Clearly our central bank is highly concerned about the fact that Canadians' debt-to-income ratio is now higher than Americans'. This is the first time in 12 years we have put ourselves in this position.

Carney commented that Canadians’ borrowing has entered "uncharted territory" and the risks associated with the level of debt households are carrying is something that "we all have to take seriously."

(please... keep the gagging down out there, blogoshpere)

Said Carney:

• "We are in uncharted territory, household debt-to-income is higher than it’s ever been. The level of vulnerable households in Canada is high, and will be substantially higher if interest rates adjust, and that’s something that we all have to take seriously."

Once again the main concern is while interest rates aren't likely to rise until about mid-2011, Carney is worried that too many Canadians won't be able to handle higher payments when they do rise.

Of particular interest is Carney's assertion that the longer that rates stay low, the more abruptly they may need to rise to curb inflation when the economy improves.

More Carney:

• "The issue is the sustainability of the situation. "No country can grow debt faster than income persistently. Ultimately it’s a shifting in time of consumption."

Perhaps the most intriguing element of Carney's warnings the last couple of days has been his caution that the Bulls should not take comfort in statistics that show, on average, growth in Canadians’ assets are vastly outpacing their debts.

Carney pointed to other countries whose banks made the "classic mistake" of lending based more on borrowers’ assets than their liabilities.

• "The debt endures, the asset prices go up and down. People in Ireland, people in Iceland, people in the United States that took out big mortgages on assets that were worth a lot more for a long period of time, found out that the asset’s not worth very much but the debt’s worth exactly what it was when I took it out."

Ahh, yes... there can be a lot more 'HELL' in the acronym HELOC than people appreciate.

Carney is telling us Real Estate doesn't always go up. He sees a downturn coming. As in the United States, a slight downturn is what started toppling the dominoes.

Ultimately this will be our undoing as well.

"Sell now or lose out on that equity forever."

To watch the BNN interview:

Click here for Part One

Click here for Part Two

Click here for Part Three

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Another significant warning about interest rates...

Time after time I have said that when it comes to the Real Estate Bubble in our little hamlet on the Edge of the Rainforest, the issue is all about interest rates.

When they go up dramatically, the bubble will burst in spectacular fashion.

Until they do, the bubble bears will have to withstand the taunts and barbs of the bulls.

And while bears have uttered the warning for several years now, rates have been artificially suppressed by stimulus initiatives and the bulls have chortled about it every chance they get.

Bears have also had to endure the criticisms from friends and family who chide them because the collapse has not come.

For those of us who can see what is coming, the taunts are insignificant.

Unless property has been bought to be flipped, the time frame is irrelevant. Buying five years ago or buying yesterday is immaterial... interest rates will destroy you because the amount of your mortgage is so massive that the amount still owing cannot withstand the level of interest rates we are about to be saddled with.

And the fact of the matter is most have not bought their real estate to flip.

What we see coming is the day the manipulation of interest rates end - either because governments have decided to withdraw stimulus or because governments can no longer effectively manipulate them (ie. the bond market forces interest rates higher).

And judging by the warnings from those who matter, that will be sooner rather than later.

Bank of Canada Governor Mark Carney has come out with his sternest warning yet of what lies ahead.

In a speech to the Economic Club of Canada today in Toronto, Carney said efforts by various governments to stimulate the economic recovery are keeping borrowing rates low. But...

• "the crisis is not over, but has merely entered a new phase... when interest rates begin to rise again, the repercussions may be swift, fierce and have the potential to catch many with debt loads they can no longer afford... The Bank of Canada will set interest rates based on inflation, not on whether a large swath of Canadians have taken on too much debt. The bank may also raise interest rates even in a low-inflation environment to discourage risky borrowing."

Honestly... short of pounding you over the head with a shovel, how plainer can the looming future be made for you?

Canadians, of course, will respond with the same fairy tale denial that is almost a mantra now... "the government would never allow interest rates to go very high because it would hurt Canadians too much".

Okey-Dokey... Joe six-pack, allow me to introduce you to Stephen Harper, Prime Minister of Canada:

• "The [current] situation is the result of individuals' choices, and the government can't control how they spend."

If you didn't catch it, that was your Prime Minister officially hanging you out to dry.

For years the refrain has been "buy now or be priced out forever."

For those who can read the writing on the wall, the refrain has become, "sell now or lose out on those capital gains forever!"

Problem is, too many Canadians are illiterate.

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Carney a hero?

Courtesy of our friends over at VREAA, our attention was drawn to BMO’s 10 fun economic, financial facts for 2010 to impress friends at parties.

According to one of the 'fun' facts, the deputy chief economist at BMO Nesbitt Burns tells us that:

• "Vancouver posted the fastest increase in house prices among major Canadian cities this year, averaging 15%. Tougher mortgage insurance rules, a 13% slide in sales in the city, a 13% rise in new listings this year, the new HST, a feature story in Business Week about how Vancouver was the last housing bubble in the world, a website comparing million-dollar homes in the city to crack houses... none of it mattered when stacked up against shrewd investors from China."

Shrewd?

We'll see in five years.

I can't help but recall the comments of a friend's Dad made about 12 years ago in Richmond.

He is a realtor, and Canadian born of Asian descent. Commenting on a new Chinese restaurant that was lined up out the door he said, "Of course there's a line-up. It's new. And Asians flock in packs to the latest fad. We are such lemmings."

Such self-depreciating humour was not out of the ordinary, but it was the first time I had heard him (or his son) make the 'herd mentality' comment. When I asked about it he stressed - with seriousness and sincerely - that it was a common trait of the community.

I wonder how much of that is a factor now.

More importantly, I wonder why more on the west side of Vancouver don't seize on the opportunity.

Carney has move heaven and earth to stave off a collapse of our real estate market in 2009 and successfully re-inflated it. He also spent the last year warning Canadians about taking on so much debt.

Many have been saying, WTF... you facilitated the massive debt orgy. Raise interest rates to stop it!

Carney, for his part, has stressed over and over that the emergency level interest rates are to aid businesses... that homeowners must show prudence in their decisions.

But has Carney actually been doing current homeowners a favour?

The real estate bubble is going to collapse. He knows it, you know it.

What Carney did was give you the precious gift of time.

With the real estate bubble collapsing world-wide, Carney resuscitated your fundamental asset and bought you time.

In Vancouver all that the mainstream media (and R/E media) have been able to gush about for the past 12 months is how wealthy Asians have been coming in to buy up our overpriced real estate.

(Remember, China has pumped more stimulus on a per captia basis into their economy than has America. This money has found it's way into their stock markets and is credited with fueling both domestic and foreign real estate purchases)

For 12 months Carney has warned, cajoled and scolded us about debt.

Short of hitting you over the head with a stick, he has told you to get out of massive debt NOW before it is too late.

What an opportunity!

With the real estate market resuscitated, Vancouver homeowners can realize once-in-a-lifetime capital gains from the real estate bubble at a time the rest of the world have had theirs disappear, never to be seen again.

Should we vilify Carney or praise him?

Ultimately we are all responsible for our own actions, our own decisions.

Carney has given current homeowners a chance to save their equity, pull it out, and put it in places it will grow exponentially in the next phase of the crisis.

And served up for us is this supposed steady stream of stimulus imbued Asians who will buy with cash.

I am less inclined to blame Carney for facilitating those Canadians who have tanked up even further of massive amounts of debt since the crisis began, than I am inclined to be highly critical of those who should be properly counseling us to make prudent decisions.

From where I sit, the real villain's are the R/E shills who exploit the situation and the media who have abdicated their responsibility to inform in favour of catering to their main advertising base.

The latest shining example of this condition comes from the blog Alberta Real Estate Watch who brings us this December 4th, 2010 missive from the Edmonton Sun (click image to enlarge):

Basically the article tells you that"investing in real estate is the proven way to become a millionaire," and it will give you "an asset pool that appreciates every year"

Submitted by Erica LePan of The Mortgage Group Alberta, it is nothing more than manipulative advertising sans the typical investment warnings that 'past performance is not indicative of future returns'.

Worse, courtesy of the Edmonton Sun, it carries the aura and appearance of legitimate news.

Critics say Carney is an enabler with his low interest rate policy.

Perhaps. But at least Carney is warning Canadians about the consequences of their actions and he has given Canadian homeowners an opportunity that virtually every foreclosed-upon and distressed American homeowner would give their eye teeth to have right now.

The likes of LePan and the Edmonton Sun bear far more responsibility, IMHO.

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