Mon Post #1: Real Estate Forecast - updated

Excellent interview with David Lepoidevin of National Bank on BNN about real estate last week (hat tip to Fish from Fishyre).

If you missed it you can watch it here.

Transcript excerpts courtesy of VREAA:

"Where we are concerned is regarding the value of Canadian real estate. The lessons from the world have been that real estate has had greater implications than just the value of your investment properties.”

“In Canada if you look at the actual numbers, the numbers don’t lie. If you look at median real estate prices compared with those in the US, at their peak the median US housing price was $265,000. Today in Canada, the latest figures we have is $375,000 for the median real estate price transaction. So therefore we are 42% higher in Canada today that the US was at the peak. And we’re [about twice] the median price in the US today.”

“Many of the banks are more exposed [to the mortgage market] than they have ever been. CIBC has 50% of their loans in real estate. When we got into trouble in the early 1990’s, the average Canadian bank was about 13% exposed to RE, and we know we got into a heap of trouble then [with overexposed institutions].”

“The Canadian bubble has extended far beyond the US bubble. We’re beginning to see cracks in the system and the cracks are coming from my home town which is Vancouver, which may have been the epicenter of the bubble. A stand-alone house in Vancouver was over $1 million and still is over $1 million.

Reports are coming in that Asian money is slowing to a trickle. [Real estate prices in China are dropping.] The frenzy had spilled over into Vancouver almost as a suburb of China. [The money has stopped because the Chinese real estate market has slowed but also because the investor immigrant program has ‘shutdown’.”

“If we look at the percentage of jobs in actual construction (this isn’t realtors this is actually guys swinging hammers) ... we can see that Canada, the red line, is way above not only where the US is today, but we are significantly higher at 7.5% compared with 5.5% in the US at their peak.”

“So we need to define whether there is a bubble and what I’m trying to point out to people is, yes, there is a bubble.”

“The myth in Canada is that real estate cannot go down unless there is a spike in interest rates. In the United States interest rates of 2% lower than they were when housing prices will almost double what they are today. So it wasn’t a spike in rates that caused house prices to go down it was a reduction in the availability of credit, tightening credit. We now have the first Canadian majority government we’ve had in 8 years and they are beginning to put the brakes on.”

“If we did an Internet search for ‘boom and bust’ you will find hundreds of examples in history, in various economies, of boom bust cycles. If you do an Internet search for ‘boom’ and ‘soft landing’ there are no entries. There are none. ‘Soft landing’ are the scariest words in investment history because they don’t happen. We are trying to engineer a soft landing in real estate just as the Chinese are. The NASDAQ bubble, the US housing bubble,The Canadian housing bubble... You will not find a soft landing.”

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Email: village_whisperer@live.ca
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You know what's coming...

Sigh.

I find it amazing that what seems so obvious escapes the consciousness of so many.

The latest to wake up and smell the coffee are the brilliant economists at the National Bank who have come out with the insightful conclusion that the impact of rising interest rates on the residential housing sector "could be dire" in Canada.


Really? Whodathunkit?

“Though the Bank of Canada has done well to set its rate normalization process in motion, the fact remains that the stakes at play are high, with home prices and household debt at record levels relative to income,” economists Matthieu Arseneau and Yanick Desnoyers said in a report. “The residential real estate sector, which is extremely sensitive to interest rate fluctuations, could have the wind knocked out of its sails if interest rates do nothing more than normalize.”

No kidding.

And what will happen if they do more than 'normalize'?

The impact on our Country, economy and government finances is going to be severe.

Once again, I shake my head.

Arseneau and Desnoyers are right, but where was this insightful analysis when the blogosphere was initially sounding the alarm last year?

Meanwhile the Toronto Star has taken these observations to their logical conclusion and noted that the CMHC is Canada's very own ticking time bomb.

The Star article concludes exactly what has been said here for the last 18 months... that the CMHC is "a potential financial disaster lurking just over the horizon, waiting to put us into the real world of true financial crisis."

Sigh... we are so screwed.

I am reminded of events in mid 2008. The United States was spiraling into recession and our politicians steadfastly maintained we would not be effected.

As world events continue to spin wildly, we continue to believe that we will not be impacted.

We are watching a 5.9% annual decline in the M3 money supply, the deepest decline since the early 1930s banking crisis. This is a post World War II record drop in the inflation-adjusted M3 and it signals an intensifying business contraction. Many observers believe we are heading for a renewed recession and it will set the stage for a U.S. solvency crisis and severe inflation threat.

Meanwhile British Prime Minister Cameron has come out and that the UK deficit is worse than 'previously thought'. That's British for "oh sh*t".

Tempering the UK announcement is word that that the U.S. government’s total debt will risee past $13 trillion for the first time in history later this month. The amount owed will surpass GDP in 2012, based on forecasts by the International Monetary Fund.

“Over the long term, interest rates on government debt will likely have to rise to attract investors,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., a unit of Japan’s third-largest publicly traded bank. “That will be a big burden on the government and the people.”

THAT, my friends, is the understatement of the year.

Just as Canada could not escape the effects of the recession which swept over the US in 2008, nor will we escape the impact of the sovereign debt crisis that is bearing down on the UK and US.

As all this plays out, you don't want to be carrying debt... especially hundreds of thousands of dollars in mortgage debt.

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Email: village_whisperer@live.ca

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Please read disclaimer at bottom of blog.