Thurs Post #1: The assault on Ottawa begins: CAAMP launches winter lobbying

You can imagine how hard it is for real estate agents right now as they deal with clients who have their home on the market.

Sellers have expectations skewed by a housing boom driven by almost 35 years of of unprecedented debt expansion, a boom which has gone parabolic in the last decade.

Declining prices?  Bite your tongue.

You can just imagine the conversations as agents patiently explain to perplexed sellers that November sales figures are 30.3% below the 10 year average. You just know those sellers aren't receptive to suggestions they should 'adjust their expectations' or 'price their home for the current market.'

So what to do?

Pull the listing, of course.

Massive inventory will be blamed (triggered by those repressive mortgage changes) and the industry associations are almost promoting the factors now.

It's leading to headings like yesterday's in the Province newspaper:Vancouver homeowners pulling properties off the market rather than settle for lower prices.

The free-falling Vancouver housing market shows no signs of reversing its slide with the latest figures showing November sales 30.3% below the 10-year average for the month.

The Real Estate Board of Greater Vancouver now says consumers have begun pulling their homes off the market rather than settle for a lower prices in what is still the country’s most expensive market to buy a home... Home sellers appear more inclined to remove their properties from the market today rather than lower prices to sell their properties.

Toss in supporting articles by industry 'experts' about how prices simply 'won't be coming down' and you can see the framework for yet another cunning media campaign to mould the mindset of homebuyers and particularly sellers.

"Everyone else is pulling their listing and not accepting less... why wouldn't you if you believe it's 'worth this much?"

But the clock is ticking on that strategy.  Come Spring those removed listings will come flooding back with a vengence with sellers anxiously expecting the market to have recovered.

But as we outlined yesterday, there is no government rescue plan being implemented which will facilitate a Spring recovery.

Yet.

Which is why CAAMP (the Canadian Association of Accredited Mortgage Professionals) is wheeling into action :

CAAMP leadership will be talking to bureaucrats and politicians in Ottawa early next week in yet another effort to raise the red flag on tighter mortgage and lending regimes.

“Our Chair, I and our chief economist will have a series of meetings in Ottawa on Wednesday with both public servants and politicians to discuss the findings of our most recent research,” Jim Murphy, president and CEO of CAAMP said. “We will obviously discuss the government’s recent changes along with the need to maintain a healthy housing and mortgage industry in Canada.” 

And what is that 'recent research'?

Last month, CAAMP released its Annual State of the Residential Mortgage Market in Canada report.

They produced surveys which indicated that most Canadians are dealing with the largest level of debt in history very well, thank you.

They have been handling their debts and paying down their mortgages “comfortably.”

More significantly the report raised concerns that the mortgage rule revamp implemented by the government has shut out many first time homebuyers from the market and caused a drop in housing market activity.

[Which is exactly what they were supposed to do]

(There) is a sentiment shared by many brokers who argue that the mortgage rule changes were ill-timed since the hot housing market was already moving towards a price correction.

Mortgage professionals also warned of a possible snowball effect wherein a reduction in activity at the entry level will create difficulty for those who wish to sell their homes and move up in the market, creating a slowdown in upper segments of the housing market as well.

“Our concern today is the number of growing first-time buyers who are now unable to get a mortgage. We worry that this is having a dampening effect on what was already a cooling market, we hope policymakers will give some thought to addressing the needs of this key sector.”

CAAMP is desperate to lobby government to make changes before the Spring market rolls around.  And the organization no doubt feels their chances may have improved with the looming departure of Bank of Canada Governor Mark Carney.

I suspect next week's efforts will be the first of a Winter long offensive.

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Sat Post #2: The battle for public support: the real estate industry vs the Federal Government

Two days ago we talked about the latest offensive by CAAMP against the changes made this year by the Federal Government to the rules around mortgages.

One of the first impacts can be seen here in the Vancouver Sun as reporter Shelley Fralic regurgitates the CAAMP news release and asks: "What, exactly, is wrong with a 35-year mortgage?: Government as babysitter is pricing many, especially first-time buyers, out of the market"

Besides the excellent response from the Huffington Post we profiled in the post two days ago, we simply refer back to the excellent article the Post came out with back in the first week of November: "Canada Housing Slump: Flaherty's New Mortgage Rules A Scapegoat For A Much Bigger Problem"

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.

"To the surprise of no one, following the introduction of the most recent rule changes, sales activity ratcheted down," said Gregory Klump, chief economist at the Canadian Real Estate Association, in announcing a 15.1-per-cent year-on-year decline in home sales for September.

The Toronto Real Estate Board chimed in: “Some households have put their home purchase plans on hold in response to the higher cost of home ownership brought about by the recent changes to mortgage lending guidelines.”

The industry has good reason to maintain this narrative. For one, it makes it seem like falling sales volumes and prices are all "part of the plan," nothing to worry about. (Not true.) And it also deflects uncomfortable questions about the role of real estate developers, agents, banks and industry groups in creating the inflated house prices Canada has seen in recent years.

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.

Hmmm... someone get these guys a blog, they'd fit right in with us.

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 industry would argue that the last changes were the straw that broke the camel's back and the cumulative effect is at fault, but do go on:

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.

And of course this is what the battle is all about: the real estate industry wants the government to endlessly feed the ponzi with cheap, easy credit backstopped by the taxpayer's of Canada. As we have noted numerous times, the amount CMHC insures has gone from under $100 Billion in 2006 to almost $600 Billion today.  Right there is the source of the housing bubble in Canada.

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.

Some economists argue this is an excessively expansionary policy that has overheated Canada’s housing market. (Plenty of others would say that, given the damage taking place in other parts of the economy, those low rates were necessary.)

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.

Add to that the phenomenon of foreign investors bailing on condos, at least in Toronto, and you have a pretty perfect storm for a housing slowdown.

And, if anything, the adjustments to the mortgage rules were too little, too late.

What should happen in a market like this 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.

Our finance minister agrees with this.

“It’s better to have some softening in the market rather than have sudden movement,” Flaherty said this summer, talking about the new mortgage rules.

But can “softening” be achieved at this point? Or has the housing market become so out of balance that there’s simply no way to avoid a hard landing? That, of course, is the big question these days.

Interestingly, as CAAMP argues how the mortgage changes are harming the economy - and by extension jobs - there is an article out in the United States that is taking the data and showing us: "How Too Much Household Debt Buried The Job Market."

One of the most interesting side shows is in watching the frustration that is now clearly being felt by the real estate industry when it comes to their growing inability to manage their message in the media.

For the past 10 years they have had free reign to massage public perception.

They still have some pull, as the Fralic column in the Vancouver Sun demonstrates.  But they are being overwhelmed on the whole.

More on this tomorrow.

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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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Mortgage rules to change tomorrow

So the big news today is that Ottawa is going to finally tighten up on mortgage rules. According to the Globe and Mail newspaper the government will announce tomorrow that CMHC will not longer support mortgages with amortization periods longer than 30 years.

The newspaper also reports that Finance Minister Jim Flaherty will announce that the government is going to take action to reduce the rapid rise in home equity lines of credit by clamping down on the insurance that CMHC offers to the lines of credit. Basically it will be withdrawn.

Finally Ottawa will also reduce how much Canadians can draw on their home equity. Last February the Finance Department announced that it would lower the maximum amount Canadians could withdraw in refinancing their mortgages to 90% from 95% of the value of their homes. It is now expected to reduce that maximum to 85% from 90%.

Says the Globe:

• "Ottawa's recent actions have been moving policy in the opposite direction that it was headed prior to the U.S. subprime crisis. As the subprime crisis morphed into an economic recession, the federal government took steps to make it easier and cheaper for banks to lend mortgages in Canada in order to keep credit flowing and the economy strong. In 2006, the maximum amortization period in Canada was extended to 40 years from 25. Now the government is trying to cool a market that it helped to fuel."

It will be interesting to watch the impact the changes have.

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Battle of the Form Letters

Yesterday we made reference to the CREA's campaign to keep Finance Minister Jim Flaherty from changing the mortgage rules.

As part of that campaign, Realtors are being urged to fill out this form letter and send it off to their local Member of Parliament (click on image to enlarge).

In a blogosphere response, one of the contributors to the Vancouver Condo Info website (Jessie) has put together a form letter to urge your Member of Parliament to encourage the Finance Minister to follow through with mortgage changes. Here is the content of the form letter:

• To: Hon. Jim Flaherty
  Your MP's name here
  
  Sirs,
  
  I am writing you supporting potential changes to mortgage financing rules in the upcoming year. As you are undoubtedly aware, the average Canadian household debt to household income ratio has increased significantly in the past number of years and has now exceeded that of the United States. This was made possible by historically, and unsustainably, low interest rates on mortgages. As has been shown in other OECD countries, there is some evidence to suggest that households are primarily concerned with their short-term financial health -- the ability to service today's debt with low interest rates -- and less concerned with their long-term financial health -- the inability to service service tomorrow's debt with high interest rates. I have not seen any data or arguments to suggest that household debt will start decreasing in the coming year as long as interest rates remain low. My concern is that without further tightening of mortgage financing rules, Canadians will continue to take on debts that are unsustainable in the long-term.
  
  While I am a believer in free markets, the growth in household debt is not sustainable when interest rates rise and I am not confident households will start saving while debt is so "cheap". If measures are not taken sooner rather than later, the resulting overhang of debt will put Canada at a distinct disadvantage relative to its trading partners, whose households have started to rebuild their balance sheets and will be in a much better position to weather the inevitable interest rate rises in the coming years.
  
  Sincerely
  Your Name
  Your Address

Choose your weapon.

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Rules can be bent

.
Is this the start?: Federal Reserve Raises discount rate from .50% to .75% (posted 18:27 PST)

How effective will the new mortgage rule changes instituted by Finance Minister Jim Flaherty this week be?

Well... when you consider that, under the old rules, the mandatory 5% downpayment was openly flaunted by banks who advertised on their websites that they would give you 5% back for taking out the mortgage with them (thus eliminating the 5% down requirement); what do you think?

Me too.

And the media is openly telling buyers, "Don't worry, home loan rules can still be bent."

"It's not a huge deal," said Benjamin Tal, a senior economist with CIBC World Markets. "It was a balancing act for the government, which wants to be seen as responding to the mortgage market but not derailing it."

Ah yes... the government wants to be 'seen as responding'. Image is everything.

The real-estate industry was clearly worried about the possibility of down payments rising to 10% and amortization shrinking to 25 years. That would have had an impact. But these changes? Pfffft.

As the Vancouver Sun notes, "one financial institution was still advertising last week its offer to pay the 5% minimum down payment on your behalf... the banks will also let you tack on your mortgage insurance costs on top of your loan, meaning you can get a mortgage for almost 98% of the value of your property."

Nothing has changed. And if you need a little more income than you did last week to qualify for that loan, have no fear - I can almost guarantee there will be strategies coming out to let you deal with that.

A little deja-vu circa USA in 2006?

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For those who enjoy the pics I have posted on the Olympics, you can see more updates on this sub-site I have created. All future photo updates will be uploaded on this sub-site.

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New Mortgage Rules

As I mentioned last week, the start of the Olympic Games would make it difficult for me to post on a daily basis and that's exactly what has happened. I have lots more Olympic pics for you, but I may stick them on a subsite and reference the link here.

The main news today is the new mortgage rules that the Canadian Finance Minister came out with.

In a nutshell (1) all borrowers must meet 5 year fixed rate standards instead of the previous standard of 3 years, (2) limit refinancing to 90% vs 95% of a home's value, and (3) require 20% down for speculative/investment mortgages that require CMHC insurance.

Comically Finance Minister Jim Flaherty said he is responding to growing concerns that Canada's housing market is overheating, but stresses there is no bubble in Canada's real-estate market.

"There's no compelling evidence of a housing bubble, but we're taking proactive, prudent, measured and cautious steps today to help prevent a housing bubble."

Riiighhttt!

We have a housing bubble and the government is scrambling to find ways to tamper the fire without putting it out.

As for discouraging speculation by demanding that prospective homebuyers who want to purchase a property for rental purposes will have to come up with a 20% downpayment, instead of the current 5%, Economists are already noting that it will be difficult for lenders to determine on which side of the line buyers fall.

And the creation of a test threshould of meeting a 5 year fixed mortgage rate? All this change does is limit the size of the mortgage you are going to be able to get; it doesn't prevent people from buying homes, it doesn't drive a lot of new homebuyers out of the market and it doesn't lead to higher payments.

Currently you can get a 5 year fixed mortgage for 3.75%. What kind of test threshold is that?

The infamous stress tests conducted by the Bank of Canada released at the end of the year tested current Canadian mortgages at a 4.5% rate threshold and found that 10% of all Canadians would be severely stressed at this level.

It all comes down to interest rates.

And on that front events are moving very quickly with the PIIGS, Dubai and the global demand for money. More on that tomorrow.

I steadfastly maintain that events will push intrerest rates levels to the historic norm of 8.25% AT THE VERY LEAST!.

That rate is almost double the BOC stress test rate that places 10% of Canadians in 'severe distress'. Recall that one morgage broker considers 8% to be a 'doomsday scenario'.

These are the same brokers, btw, who rationalized that anyone who receives a 5% down/35 year amortization mortgage "are getting them because they’re well qualified. It’s that simple."

Well... no it's not. And the fact that the Finance Minister's hand was forced into taking some sort of action proves that they are not well qualified.

But let's not kid ourselves. The new mortgage rules do nothing to address the dangerous and precarious position that a vast majority of current Canadian mortgage holders are already in.

When the global demand for capital pushes yields ever higher, the 'Canadian-housing-bubble-that-isn't' will trap all these Canadians and implode in spectacular fashion.

It's all about interest rates, and not the 5 year rates at a piddling 3.75% or 4.5%.

Interestingly, Minister Flaherty took a small jab at lenders in his release today, saying these rule changes are designed to “help prevent some lenders” from “facilitating” irresponsible lending.

Nice of you to finally admit that this exact problem already exits, Jimbo. The problem is... irresponsible lending has already created a collossal mess. And there is only one way that mess will be unwound.

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