A clear and present danger

It's fascinating to watch the media as the housing bubble enters the public consciousness. 

In addition, one wonders how the recent 'fire sale' of low interest offerings from the mortgage divisions of the big banks will counter counter the growing public concern about the state of real estate. 

On a personal level I have many friends and associates who have bombarded me with queries at the uber low 3.99% 10 year mortgage offerings and ask "why not?" 

You have to believe sales will see a boost in the last half of March as housing lust pulls in the remaining holdouts to buy at the top of the market. But the media warning signs still shout 'DANGER' to all who wish to see them. 

Even today CBC is reporting on a TD bank report which says:

"Overvalued housing markets in several Canadian cities and high household debt poses a clear and present danger... The report flags Vancouver as the market with the greatest risk of a housing price correction."

And yet how many selectively block out these messages? 

More significantly, how bizarre is it to watch one arm of TD bank actively encourage Canadians to plunge themselves into what could become one of the worst financial decision of their lifetimes while another cries out about the danger of doing that very thing? 

Says the TD economist:

"all cities are at risk when interest rates eventually rise from their present 'exceedingly' low levels. Household debt growth over the past decade has been fuelled not as much by credit card borrowing but largely by loans secured by real estate, in particular home equity lines of credit. The ratio of debt-to-personal disposable income, which is now above 150% is likely to reach by late next year the 160% peak experienced in the U.S. and the U.K. before their real estate corrections occurred."

When rates do return to more normal levels, higher by two to three percentage points than they are now, TD estimates more than one million Canadian households, or about 10% of those that currently have debt, will have to devote 40% or more of their income to making their monthly debt payments. 

The Bank of Canada calls that a level that puts households in a financially vulnerable position. 

In Vancouver, the situation will be far, far more dire. 

Thus I content myself with reminding those who will listen... don't be seduced. 

Meanwhile the banks look for a mea non-culpa. TD says an acceptable way to manage the current situation is not for banks to agree to lend less.

“To do so would be collusion, and it is illegal.”

Instead TD is calling for several options to head off further growth in household debt. 

The first is to ask the federal government to shorten the maximum amortization on mortgages from 30 years to 25. TD also believes the feds should also raise the minimum down payment for a mortgage from 5% to 7%. 

Both moves are long overdue but clearly the Conservatives have been waiting until public consensus is on their side before making such a move. 

The fact of the matter, though, is that it is too late.

The damage has been done. Canadians have pigged out on debt and a giant segment of our society is going to get crushed when the tide turns. 

Queen’s University prof Louis Gagnon says we could have a housing panic if the borrowing does not stop.

“It would be a classic case of everybody dropping their asset at the same time just to make ends meet.”

Meanwhile a new research paper from Pacifica Partners concludes.

“Our outlook on Canadian real-estate remains negative and we believe Canadian housing will begin an extended contraction phase.”

The above mentioned changes should be made to Canadian mortgage rules but this is closing the barn door after the horse has already run away.

Curiously TD is suggesting that banks be required to stress test credit applicants who apply for home equity lines of credit to demonstrate their ability to pay it off in 20 years.

They are also suggesting that banks should be required to impose a sort of stress test on borrowers in order to qualify for a mortgage, a test that would require borrowers to demonstrate to handle interest rates in the order of 5.5%.

How much do you want to bet the banks would be doing this already if CMHC weren't guaranteeing Canadian home mortgages?

This is your greatest indication of the 'clear and present danger' the housing bubble is about to force on our country.

Banks aren't properly vetting mortgage applicants. Banks HAVE been lending out money to people who can't pay it back.

TD Bank says that:

"Implementing all these measures gradually would be sensible for the long-term, and not just in the current environment.”

Agreed, but it doesn't defuse the ticking time bomb we currently face. 

We do face a clear and present danger... and that danger looms larger than most people realize.

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Fri Post #1: Do not ask for whom the bell tolls...

Yesterday we ruminated on the impact the plethora of mainstream media articles about the Canadian Housing Bubble was going to have on the real estate market.

How long before all the negative press convinces buyers (local and internationally) that now is NOT the time to buy?

Yesterday morning TD Bank may have just upped the "do not buy" ante.

In a note to clients, economists at TD said that a "housing correction will take hold in 2013." Prices are already down from their highs in May of 2011 and TD sees 2012 being a weak year... but the real 'correction' will start in 2013.

Ummm... okay.

So let me ask you a question.  If you are looking to buy, prices have been dropping lately, everyone and their dog is talking about housing bubble, listings are booming, sales are dropping... and TD Bank comes out and says the real 'correction' won't ramp up until 2013 - would you buy this year?

More importantly, if you are one of those 70% of Boomers who don't have adequate funds set aside for retirement and whose entire plan for your golden years is selling your bubble inflated real estate and downsizing in the next 5 years... do you hit the panic button yet?

Thirty-five years ago you bought that Richmond, Burnaby or even Vancouver house for $65,000.  It currently is valued at anywhere from $700,000 to $2,000,000... if local prices start to slide much more, do you undercut the market and still get out with a succulent profit (thereby creating even more downward pressure on prices) or do you stubbornly hold on because the house was valued at 15% more last May and it's "worth" at least that now?

2012 is shaping up to be a very interesting year.

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Email: village_whisperer@live.ca
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