Wed Post #2: More Mortgage Changes from CMHC on Friday? - Updated

Are there more, significant changes coming our way from CMHC this friday?

The website Mortgage Trends posted today that CMHC has advised reporters that will be making an announcement Friday at 11:00 A.M. EST.

What's interesting is that they’ve notified reporters well in advance, which apparently is somewhat unusual. So unusual, in fact, that it has many speculating that it will be a major announcement. Some suggest CMHC will be increasing the down payment required for CMHC for insured mortgages from the current 5% to back to 10%.

Reuters, however, ran a story on Feb 24th, 2014 which noted Federal Finance Minister Jim Flaherty said there were no imminent plans to intervene in the mortgage market:

In the interview, Flaherty indicated he is not overly concerned about the state of the housing market and said, as expected, there are no imminent plans to intervene in the mortgage market to curb lending after having done so four times already since 2008. But he said it would be "unwise" to rule it out as a tool in the future… For now, the minister is focused on increasing scrutiny of the mortgage insurance business of the federal housing agency, the Canada Mortgage and Housing Corporation (CMHC), and encouraging the growth of private mortgage insurers.

This real estate blog offers their opinion on what the changes might entail:

Option 1 – Some Form of Privatization? This would be big news and create great political fodder, if this was part of the announcement would likely be under taken by a partial break up of sectors with some remaining core functions of the crown corporation. Australia took a similar approach with success.

The recent budget included the statement “The Government continues to adjust the housing finance framework to restrain the growth of taxpayer-backed mortgage insurance and securitization,” which have also been a running theme to statements made by the Finance Minister. Reducing future taxpayer burden is clearly part of the agenda,.So the question that begs here, is what step could they take to reduce taxpayer risk, which leads to our Speculation Options 2 and 3:

Speculation Option 2 – A change to the down-payment requirements: A return to 10% down-payment structure, eliminating the 5% down option.

Speculation Option 3 – A reduction in the amount of insurance protection offered: Will it be less geared to impact the end consumers of mortgages and more to the banks in as much that the reduction will be in the security provided to the bank through CMHC reducing the risk from 100% of loan value to a similar percentage that the likes of Genworth and AIG now see at 90% of loan value. This would also even up the competitive playing field putting CMHC Insurance on par with Genworth and AIG.

My money is on Speculation Option 3 and here is why. It doesn’t impact the end consumers which would for lack of better words tick off a lot of potential home buyers (voters), have a big impact on the market (from construction to industry professionals). It would also be a step towards privatization, just like the Receiver General Fee structure implemented within the budget…is that not the trend here?

At the end of the day we only speculate and will await with anticipation what this major player in the real estate insurance market has to say this Friday!

We shall see on Friday.

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Fri Post #2: Time to rethink government backing of Mortgages in Canada? New guidelines coming?

On November 27th the International Monetary Fund suggested it was time for Canada to rethink its long-time policy of providing blanket backing to insured mortgages.

And today the Wall Street Journal is reporting that federal Finance Minister Jim Flaherty is on board with the International Monetary Fund’s view. Said Flaherty:

"Government-owned Canada Mortgage and Housing Corp. has become “something more grand, I think, than it was intended to be."

The IMF said last week that the system has its advantages, notably in giving the government some ability to guard against market excesses. But it ultimately exposes taxpayers to big risks, should home prices succumb to a sharp correction. The IMF suggested offloading some risk to private-sector lenders.

Flaherty, as we all know, has been tinkering with CMHC for a while.

In his 2012 budget, he gave his finance department authority over CMHC –which for decades had been overseen by the ministry responsible for human resources and social development — and named the top bureaucrat at Finance to the company’s board.

Canada's banking regulator, the Office of Superintendent of Financial Institutions, was also given the authority to regulate CMHC.

Mr. Flaherty said Friday he has sought to limit the risk CMHC poses to the broader government, and to taxpayers, citing government moves to tighten mortgage-insurance regulations four times in the past five years. Those restrictions have put a cap on the amount of liability the CMHC can assume.

OSFI is expected to introduce new guidelines governing mortgage insurers in 2015, CMHC said last week. CMHC also said that, at the behest of Mr. Flaherty, it is now charging a so-called risk fee on mortgages it insures, a move seen as helping compensate the Canadian government for the risk it is exposed to.

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Are 30 and 35 year mortgages about to be banned in Canada?

Garth Turner is out this evening with intriguing speculation that Canada's federal finance minister is getting ready to end 30 and 35 year amortization mortgages in Canada.

As you already know, CMHC insured mortgages are now limited to 25 year amortization. But 30 and 35 year mortgages still exist, provided borrower's put 20% down and bypass CMHC insurance.

Turner asserts borrower's ability to do this is about to end:

Last week the CEOs of the monster banks were given a clear message that 30-year mortgages need to be wiped away. Completely. In fact, they’ll be banned. That letter will go out next week, the result of a decision made jointly by the Department of Finance, OSFI (the bank regulator) and the Bank of Canada. Regulated financial institutions will also be prevented from buying any securities which are made up on mortgage with 30-year ams.

Stunning news to be sure, and it's estimated such a move will shave 5-10% off already dismal real estate sales.

It continues the theme we talked about on Tuesday when the Financial Post that told us "the federal government and policy makers are scrambling to engineer a soft landing for the country’s overheated housing market."

It also adds credence to Marc Faber's recent comments that there could be significant depreciation in real estate values ahead.

Faber says... he’s observed a significant disconnect between selling prices of homes relative to what they really should be worth.

The precarious state of the housing market has made Canadian banks more risky investments. Dr. Faber doesn’t follow the Canadian banks that closely, but observed that Canada, like Australia, has higher household debt than in the U.S. “With the higher leverage in Australia and Canada, I think I’d be very careful about any lending institution,” he said.

The Federal Government is determined to unwind the housing bubble without raising interest rates, a move that would be harmful to the overall economy.

Is a return to a minimum 10% downpayment the next move for the Feds?

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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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Wed Post #1: Federal Government indicates it plans to stay the course on mortgage changes

Back on October 3rd we told you how the real estate industry was gearing up with it's campaign against the Federal Government to undo it's mortgage changes.

The Globe and Mail reported:

The federal government eliminated the approval of 30-year amortization periods on government-backed mortgages in June – and the decision’s impact can now be seen most vividly in the cooling off of Greater Vancouver’s market, with sales falling for everything from entry-level homes to luxury houses... Real estate sales across Greater Vancouver are sinking. There were 1,516 residential properties that changed hands in September in the region, down nearly 33 per cent from the same month last year. In West Vancouver, where the posh British Properties are located, the number of detached homes sold fell to 43 last month from 71 a year earlier.

The Industry's thrust is that the mortgage changes are hurting everyone, not just the entry level buyer. It's hurting you.  Ergo... you should pressure the government to turn the taps back on.

Eugene Klein, President of the Real Estate Board of Greater Vancouver said:

“There’s been a clear reduction in buyer demand in the three months since the federal government eliminated the availability of a 30-year amortization on government-insured mortgages. This makes homes less affordable for the people of the region.”

It's a theme we have covered numerous times this month as the Industry has kept up the pressure.

Yesterday the Federal Government once again served notice they intend to stay the course.

Canada’s deputy minister of finance says he isn’t convinced tighter mortgage rules his department announced in June are behind the recent cooling in the housing market. 

In a rare public speech, Michael Horgan argued that recent comments linking the two are premature.

“There’s some evidence that the housing market, particularly in some markets, is cooling and slowing at the moment,” he said Monday during a presentation to business students at Carleton University. “We read a lot of press commentary that’s saying it’s because of the government’s changes to mortgage insurance rules. I think it’s actually too early to make the direct link.”

 The Globe makes note of the increasing pressure from the Industry:

In recent weeks, several economists have issued reports or made comments in the media linking the latest housing market data to the policy change. 

Earlier this month, the Canadian Real Estate Association reported that Canadian home sales were down 15.1 per cent in September from a year earlier. More than half of the country’s markets were down by at least 10 per cent. 

The association’s chief economist, Gregory Klump, told The Globe and Mail at the time of the report’s release that the data were linked to Ottawa’s June moves. “The recent mortgage insurance changes are working, it is cooling the market and sales have ratcheted down compared to a year ago,” said Mr. Klump.

But Hogan isn't buying the argument. Hogan says there is likely some cause and effect at this point, but he suspects it is more likely that Canadians are starting to realize their household debt levels need to be addressed and are pulling back on their own:

Mr. Horgan pointed to data released this month that the ratio of market household debt to disposable income hit 163 per cent in the second quarter, which the deputy minister noted is at similar levels as those in the United States before the recession. “We do have a home-grown risk,” he said, as he listed Canada’s housing market among a group of factors that could throw Canada’s projections off track. “This is something we pay a lot of attention to.”

And what does Minister Flaherty think of his underlings comments?

During an appearance on CTV’s Power Play, Mr. Flaherty was asked about his deputy minister’s comments. “I’d certainly agree that the full impact [of the changes to mortgage rules] has not been felt yet,” said the Minister.

The full impact hasn't yet been felt?

Can't make it much clearer than that, can he?

Meanwhile the plunge in home sales has made headlines in the Wall Street Journal. At the end of the article Flaherty is quoted commenting on the impact on house sales:

"We think that's a good thing. I would much rather have a soft landing than a hard landing."

Of course that is what the government is shooting for.  But there has never been a 'soft landing' from an asset bubble born of excess credit.

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Will the Real Estate market recover like it did in 2009?

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Last night I was having a discussion with a co-worker about the current real estate market downturn.

He wanted my opinion on whether or not we might see a market rebound like we saw in 2009? Naturally I told him I don't believe the market will rebound this time.  

I took him through the logic.

Between August 2008 and March 2009, the average home price fell by 8.5% according to the Teranet-National Bank House Price Index. The decline was sparked by the 2008 financial crisis. But by November 2009, the market had already recovered.

What allowed things to recover?

A large part of the reason for the quick rebound was massive government intervention.

The Bank of Canada moved fast to slash interest rates to unprecedented lows, allowing banks to continue lending to businesses and consumers.

The federal government established a $125-billion program to buy mortgages it had already insured from banks and financial institutions, providing even more liquidity. Ultimately the Fed's bought mortgages worth a stunning $69.4 billion.

The Bank of Canada and the Federal Government did this because they were gambling that what was happening was your garden variety severe recession.

Normally these recessions last 3-5 years.

But this isn't a normal recession.  We still do not fully appreciate the breadth and depth of what is going on. What we are experiencing is a one-in a multigenerational crisis, one that will probably last up to 15 years.

The Federal Government and the Bank of Canada have started to recognize this.  Mark Carney has sounded warnings and alarms so often over the past year that some have begun to tune him out as you would the infamous little boy who alway cried wolf.

But the time has come for more than just warnings. And the government is scrambling to de-engineer what they started.

Demographia, an urban planning research firm and consultancy in the U.S., argues that prices become unaffordable when they exceed three times income. Canadians seized on the government intervention from 2008 and have managed to increase the country’s household debt to personal disposable income ratio to a record high of 163%.

Carney and Flaherty know this cannot continue.  The economy is not about to recover adequately anytime soon which means incomes cannot rise to deal with the record high debt.

And that debt is of massive concern.  Because of that concern, there will be no intervention by the federal government this time around.

So what will happen?

First off, you have to understand house prices are at the level they are because of government policy - not because they are 'worth' these values.

The housing market in a precarious position: we have a massive gap between prices and incomes, worsening affordability, and an indebted nation of homeowners unable to withstand economic shocks.

The federal government has no choice but to continue undoing  the mortgage changes that facilitated the boom. To avoid it would be extremely irresponsible... and they won't change course.

Most Canadians simply do not appreciate just how artificial our housing boom is and what this change in thinking by the government means for house values.

This is a boom that has been created by the artificial stimulus of excess credit. And the altering of the access to that artificial stimulus is going to have profound effects.

Consider how we got here:

• Prior to 1999 you needed 10% for a mortgage and that mortgage had a maximum amortization of 25 years.  CMHC also had limits on how much you could buy with their insurance.
• CMHC then lowered the down payment to 5% down with price limits depending on the area. Amortizations were 25 years. There would be no price limit on what they would insure if 10% or more was put down.
• By Sept. 2003 CMHC allowed 5% down on 25 yr amortizations but they removed all price ceiling limitations. Now any mortgage would be insured regardless of the value of home purchased. 
• March 2004 CMHC began allowing Flex-Down products which permitted the 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured.
• March 2006 you had  0% down, 30 yr amortizations. This became 0% down, 35 yr amortizations later in the year.  Interest only payments were allowed for 10 years.
• November 2006 CMHC began allowing 0% down, 40 yr amortizations along with interest only payments for 10 years. 
• Canadian banks ramped this up by allowing up to 7% cash back offers is you would take on a mortgage with them.  You could basically get paid if you bought a house.

All of these were exacerbated by the emergency actions taken during the financial crisis.

As we mentioned earlier, the Bank of Canada moved fast to slash interest rates to unprecedented lows, allowing banks to continue lending to businesses and consumers. The federal government established a $125-billion program to buy mortgages it had already insured from banks and financial institutions, providing even more liquidity. Ultimately the Fed's bought mortgages worth a stunning $69.4 billion.

CMHC had their lending cap increased.  CMHC went from $100 Billion in insured mortgages in 2006 to $600 Billion in 2012.

We have reached the upper limits on how current incomes can be levered into higher and higher debt loads. Worse... the limits are being reversed denying many access to the ability to take on those upper level debt loads.

More significantly... there is less room to manoeuvre on other policy tools.

The overnight rate is now 1% compared to 3% in August 2008. Cutting rates to stimulate the market is hardly an option. Banks have less flexibility, too. A five-year fixed rate mortgage is roughly 3.8% today, down from 5.7% in late 2008.

Finally the argument that that foreign investors, predominantly wealthy Chinese citizens, are buying property here because Canada is a safe haven in a turbulent global economy and that this will defend the strength of the housing market is being shown not to be the salvation many once thought it was.

The credit spigot that has allowed so many Canadians to buy homes at boom levels is being turned off. 

Sales activity has slowed down and prices responded by initially plateauing and now they are beginning to fall.

There will be no intervention this time around.  This isn't 2008/2009 all over again.

The fact of the matter is that all booms created by excess credit go bust. Ours is a classic excess credit boom.

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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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Huh?

Meet Randal Denley. Currently he writes for the Ottawa Citizen.

Last week he penned the most bizarre column that took issue with the recent actions of Federal Finance Minister Jim Flaherty.

As you know by now, the federal Conservatives have taken action to shorten the amortization period for mortgages and reduced the percentage of your income it will allow you to spend on housing.

Denley disagreed with the moves and articulated his concerns in a column titled "Buying a house is our risk".

But right from the headline, you're left scratching your head.

If "buying a house is our risk", why are you arguing against the government withdrawing from what they will cover with CMHC insurance?

Denley says,

"Low interest rates play a big part in making more expensive houses affordable. The Bank of Canada, which supports low interest rates by keeping its prime rate low, doesn’t want us to take advantage of them. It could solve the problem by raising rates, but that would be bad for the economy. Instead, the government is using regulation to depress people’s ability to buy a house.

The government believes it needs to save us from ourselves. Left to our own devices, we will bury ourselves in debt that will take generations to pay off. If only we could be as financially responsible and debt-free as government itself."

Umm... if Canadians want to plunge themselves into insane mortgage debt, we should let them.  Freedom to make your own decisions and all. 

Okay.

But Denley goes on to argue...

"Why do we need government to intervene in the housing market?"

Err... we don't. That's the problem.

Any Canadian can walk into any bank and request a longer amortization under the new regulations.

You can apply for a 30, 35 or 40 year amortization. It might require a higher down payment, a higher interest rate on the loan, a more rigorous financial check, and a hell of a lot more capital backing your request... but if you qualify the bank will provide you with the the loan at the longer amortization.

Of course the average Canadian won't qualify for this. They NEED government interference to provide government guarantees to get that loan at all.

As we noted the other day, the cap on CMHC mortgage insurance funding in 2006 was $100 Billion.

In 2012 it sits at $600 Billion and CMHC is about to breach that ceiling.

In that one statistic lies the foundation which provided the crack cocaine of cheap money that fuelled our massive housing bubble.

It was massive government intervention that brought us to this point and facilitated Canadians to be able to assume all this debt.

By themselves, a huge number of Canadians never would have qualified for all those mortgages to begin with.

Denley argues that we don't need the government playing nanny for us and protecting us from our spending choices.

Agreed, how Canadians choose to spend their money is indeed up to them.

So how is it that Denley comes to the conclusion that other Canadians, through government intervention in the housing market via CMHC insurance, should be asked to assume the risk of those foolish expenditures by our fellow citizens?

"Looser mortgage rules do increase the risk that some people will get overextended and lose their homes. That’s unfortunate, but people make bad financial decisions all the time. Does that mean everyone else should face government controls on their investments?

Buying less house than you can afford and keeping your debt under control are prudent choices, but they should be our choices. It’s our money and our risk.

Bingo! It's your money and YOUR RISK.

Which is exactly why CMHC shouldn't be insuring those mortgages and passing that risk onto the backs of other Canadians through government guarantees in the first place.

It's comical to watch Denley criticize Flaherty for the changes he made.

We've become so addicted to government interference in our housing market that when the government does start to pull back... newspaper critics scream THAT'S government interference.

Huh?

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Flaherty's Folly - updated

Took the day off and wandered down to Greek Days in Kits yesterday.

As you can see, tons of people in attendance.

If you've never been to Greek Days, the festivities all revolve around one basic theme - food.

Wandering the internet this weekend, the Canadian real estate blogosphere was also focused on one basic theme too: examinations and criticisms of 'the week that was.'

In describing last weeks events, a number of different sites invoked the phrase: "Flaherty's Folly" to describe events.

I agree with the moniker... but I would broaden the perspective in applying the term.

History won't remember 'Flaherty's Folly' as the sole actions he took last week. Instead it will refer to the past six years.

Let's wind the clock back 10 years and review.

In 2002 total outstanding mortgage debt in Canada was a cool $467 billion.

These mortgages were on the whole issued to households with good credit, and to people with proper downpayments. CMHC insured a small portion of this debt.

In 2003 CMHC decided to remove the price ceilings limitations. That is, it would insure any mortgage regardless of the cost of the home.

In 2007, after years of lobbying, the now defunct AIG found new hope with a newly elected Conservative government.

AIG was now permitted to insure high risk Canadian mortgages.

CMHC was also permitted to issue mortgage backed securities and exchange these on the open market.

At the same time, the Conservative government launched a radical policy that allowed CMHC, AIG & GE to insure 35 year amortizations that were coupled with 0% down payments. A few months, but before 2008 - this was expanded to 40 year amortizations.

Thanks to Canada economic stimulus package of 2007 the mortgage market radically changed.

Historically high home prices continued to gain steam. High risk borrowers flooded the real estate market.

Throughout 2007, the average Canadian home buyer who took out a mortgage had only 6% equity in their home. The 6% equity is or equals the national average downpayment for all mortgages including home buyers who traded up to more expensive homes.

In 2008, Canadian home prices started to dip as affordability became the worst on record in many cities.

CMHC publicly admitted that it was ordered to approve as many high risk borrowers as possible to prop up the housing market and keep credit flowing.

In 2008 some 42% of all high risk applications were approved, a 33% increase over 2007.

Between the beginning of 2007 and 2009 Canadian Banks increased their total mortgage credit outstanding listed on their books by only 0.01% -- possibly the smallest amount of change in post WWII history.

Mortgage Securitization has accounted for 90.5% of all growth in total Canadian mortgage credit outstanding since 2007.

The cap on the Canadian mortgage securitizaton market has grown from

• 100 billion in 2006
• 130 billion in 2007
• to 295 billion by mid-June 2009

In 2009 CMHC indicated in its plan that it will insure $813 billion via a combination of mortgage insurance and mortgage-backed securities (MBS) by the end of that year.

In 2009, at the height of a global recession, we started to see many individuals  being granted $500,000 - $800,000 mortgages for their first home purchase if their household income ranges from $110,000 - $170,000.

It forced the Canadian Government to raise the cap on CMHC insurance to $600 Billion. But at these rates of progression, it only took until 2012 for the cap limit to fill up.

In a February 3rd, 2012 article in the Vancouver Sun, the daily paper asked "Is the mortgage industry running out of money?" as CMHC closed in on their $600-billion cap for mortgage insurance.

Think about it. In 2006 that cap was $100 Billion. Six years later it is hitting $600 Billion.

In that one statistic alone lies the real foundation of what caused Real Estate values to skyrocket in Vancouver and the rest of Canada.

The explosion in real estate values was fuelled by the crack cocaine of cheap, easy money... it's that simple.

And now the supply of drugs is being drained away.

This is the fourth time in just four years that the government has made changes to mortgage rules. The first change occurred in 2008, when they shortened the maximum amortization period from 40 years to 35. In January of last year, the government announced that it would be reducing the maximum amortization period of government-backed insured high-ratio mortgages from 35 years to 30 years. Now it has reduced them from 30 to 25 years.

Dropping the amortization period back to 25 years and tightening HELOC rules isn't the problem. Increasing amortization periods and insuring HELOC's to begin with is what triggered this mess.

Flaherty is the man who brought us the 40 year, zero down mortgage.

Flaherty's folly was not, as some are suggesting this week, bringing us back to the 25 year mortgage.'

The folly lay in moving us from 25/10 to 40/0 in the first place.

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Thurs Post #1: Interesting Times

The third week of June, 2012 is rapidly turning into 'the week that was'.

Will we look back at this as a major turning point in our housing bubble?

It started off with the Vancouver Sun outlining upcoming changes for CMHC mortgages by the OSFI. A barrage of negativity hits the mainstream media telling people to prepare for changes like:

• Home Equity Line of Credit mortgages reduced from 80% financing to 65% financing.

• Lines of credit to be either amortized, or amortized after a specified period of time.

• More stringent income requirements for self-employed borrowers.

• All mortgages to be reviewed upon renewal (currently as long as payments are made, it is unlikely for a bank not to offer a renewal to a client).

• Funds from cashback mortgages are not allowed as a source of down payment

• Use of the five-year posted “benchmark” to qualify uninsured terms of one to four years and all variable terms (currently most lenders use a three-year posted or a lower rate to qualify uninsured mortgage).

• More limits on underwriting exceptions.

• Home insurance to be included in debt-servicing ratios (it is currently not included.)

• More public disclosure of statistics pertaining to institutions’ mortgage practices.

• More accountability from management to ensure lenders are adhering to their underwriting guidelines.

Egads.

These measures being discussed in the media are, by themselves, enough to create a stir. But that was just primer for the next round.

Canadian Mortgage Trends fired off a tweet earlier today which proclaimed: "What the industry didn't want to happen, happened"

And what are they referring to? What is the dire news they didn't want to happen?

CMT announced that the former No. 1 lender in the mortgage broker market announced that they are closing their doors to new business as of July 31, 2012.

FirstLine, a broker lending subsidiary division of CIBC, was put up for sale earlier this year but a deal could not be closed.

A source familiar with the discussions told CMT: “The buyer struggled to come to a deal that made sense so CIBC chose to let FirstLine die a natural death on its own."

This was a development CMT says marks "a moment of truth for the broker market."

But if that weren't enough, press reports last night confirmed what we alluded to yesterday. Specifically Ottawa is tightening up on mortgage rules.

"The country’s biggest banks were caught off guard on Wednesday night as the Department of Finance prepared to clamp down on mortgages by reducing the maximum amortization for a government-insured mortgage to 25 years from 30.

Ottawa will also limit the amount of equity that can be borrowed against a home to 80 per cent of the property’s value, down from 85 per cent.

Ottawa will announce two other changes, according to a source. It will no longer allow high-ratio mortgages over $1-million, and it will cap the gross debt service (which looks at a consumer’s total debt payments as a percentage of their income) at 39 per cent.”

The third week of June 2012.

I suspect we will be looking back on this as a significant signpost on the road that was the Canadian Housing Bubble.

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Wed Post #2: Is the 30 Year Mortgage about to get axed?

Speculation is racing around the real estate community that Federal Finance Minister Jim Flaherty is about the axe the 30 year mortgage in Canada.

About an hour ago (at 5:19 PDT), Reuters made the following announcement:

Flaherty news conference at 8:15 a.m. (1215 GMT)

* Canada economy strong but faces big risks

(Reuters) - Canadian Finance Minister Jim Flaherty will make an announcement on Thursday at 8:15 a.m. (1215 GMT), the Department of Finance said on Wednesday evening without providing any details.

Flaherty will hold a news conference in Ottawa at that time, according to the brief statement.

Officials at the Finance Ministry did not immediately reply to requests for additional information and officials at Prime Minister Stephen Harper's office declined to comment.

Flaherty, who has been finance minister since 2006, faces a raft of domestic and international challenges to an economy that remained relatively healthy through the global financial crisis, including a strong housing market that some economists now fear is overheating.

He has just returned from Mexico where he accompanied Harper at a summit of the Group of 20 industrialized and developing nations, which focused on the European debt crisis.

A number of blogging sites are now speculating that Flaherty will end the 30 year amortization, bringing conditions full circle.

It was the increasing of the amortization from 25 years up to 30, then 35, then 40 years which many argue ignited the housing bubble.

We will see tomorrow.

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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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Our housing bubble "bound to burst"

One of the greatest complaints in the local blogosphere is that our mainstream media seems so beholden to the Real Estate industry because of the tremendous revenue stream they deliver via advertising.

That's why an article on Friday in the Vancouver daily newspaper, The Province, is such a pleasant surprise.

Saying what the blogosphere has known now for several years, The Province headlined "Housing Bubble Bound to Burst: When it does, the result isn't going to be pretty, economist says"

• With fresh signs from the Bank of Canada that interest rates will stay lower for longer, Canada's still-hot housing market has many of the hallmarks of the U.S. situation just a few years ago.
  
  House prices dipped during the recession, but bounced straight back and have kept climbing since. And homebuyers are taking on record debt to buy houses at historically high prices.
  
  When interest rates eventually rise, some forecasters warn the result isn't going to be pretty. "Our view is that we are in a housing bubble, that housing prices have risen very sharply over the last 10 years, and that there is a big disconnect between housing prices and fundamentals, including interest rates," said David Madani, an economist at Capital Economics in Toronto.
  
  "It really does look like a housing bubble that will have a very unhappy ending."

Now the economist making this prediction is David Madani of Capital Economics.  We have profiled Madani before and these statements are consistent with comments made earlier this year.

What is so surprising is to see one of Vancouver's two main daily newspapers headlining the news is such dramatic fashion.

The article notes what I believe will become a crucial point in the coming years when the collapse is well underway:

• "The government, fretting about high debt levels, is working to engineer [a]  soft landing with tighter rules for government-backed insured mortgages that took effect in March. The changes cap mortgage terms at 30 years rather than 35 and cut the amount homeowners could borrow against their homes to 85%  from 90%."

The Government is aware.  We have seen that in the comments of both Bank of Canada Governor Mark Carney and Finance Minister Jim Flaherty.

Benjamin Tal, senior economist at CIBC World Markets says what is becoming the accepted wisdom on our current housing bubble:

• "In order to crash you need two preconditions: a huge increase in rates as in 1991, which is unlikely, and a subprime type situation, namely very low-quality mortgages."

The faith in low interest rates is tied to the worsening economic climate and level of sovereign debt. For 20 years now we have enjoyed artificially low interest rates to support the economy.

Faith in this going forward is folly but not as much folly as what Tal the Province article closed with:

• "Canada's national banks are more conservative lenders than America's fractured regional banks were, and there is virtually no sub-prime market, where riskier borrowers end up paying higher rates. Mortgage interest is not tax-deductible, so the incentive to buy a home is less. And a large slice of the mortgage market is insured by the government."

We have covered the folly of this extensively.  CMHC has enabled the lending through our banks and there most certainly sub prime borrowers out there... and in numbers that we believe will be proven to be far greater than in America.

So while it is pleasing to see the media cover the fact that this bubble will burst, it is disappointing to see the primary cause of the collapse continue to be justified.

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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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Flaherty joins Carney with more interest rate/debt warnings

Yesterday we posted yet another warning from Bank of Canada Governor Mark Carney about debt and interest rates.

Well it wasn't only Carney issuing warnings in the Land of the Maple Leaf. Finance Minister Jim Flaherty also chimed in his concerns.

• "We have very low interest rates in Canada. We need to remind Canadians that historically low interest rates will not be there forever, that interest rates really only have one way to go and that’s up. So Canadians in terms of their most important – their largest debts, residential mortgages, need to be aware that their monthly payments are going to go up when interest rates go up."

These guys are starting to sound like regular bloggers with all their doom and gloom, aren't they?

What is most interesting is that a survey by the Certified General Accountants Association suggests 58% of indebted respondents are taking on more debt just to pay for daily living expenses like food, housing and transportation.

And if consumers are taking on more debt just to pay for daily living expenses, it deprives them of resources for other purchases, like cars, TVs, appliances, clothes slowing economic activity.

Which means the economy doesn't grow.  Which means income doesn't grow. Throw in rising interest rates and the problems compound.

Can you see it? There is a growing perfect storm here.  And when it breaks, the fallout is going to be wicked.

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