Thursday, December 17, 2009

O tidings of comfort and joy...

You may have seen them if you occasionally read the comments section of this blog.

Some like to chide me for being so negative and repeating, ad nausem, my warnings about debt and rising interest rates. The number of comments pale in comparison to the dozens of the emails I get on that theme, but I love to read them.

So it makes me wonder if similar letters and emails are now being sent to Bank of Canada Governor Mark Carney.

'Cause let's face it... his public statements lately are inter-changeable with the posts of those in the blogosphere.

And yesterday the Governor had more tidings.

Speaking to a business audience in Toronto, Carney delivered this clear and unequivocal warning to Canadians:

  • "Responsibility starts with the individual. Our advice to Canadians has been consistent: We have weathered a severe crisis—one that required extraordinary fiscal and monetary measures. Extraordinary measures are the means to an end: the return to the ordinary. Although we expect the recovery to be gradual and protracted, these measures are working. Ordinary times will eventually return and, with them, more normal interest rates and costs of borrowing. It is the responsibility of households now to ensure that in the future, when the recovery takes hold and extraordinary measures are unwound, they can still service their debts."

As we are found of reminding faithful readers, 'normal' interest rates over the last 20 years mean a rate of 8.25%.


The implications for many recent homebuyers in the Village on the Edge of the Rainforest who have taken out variable mortgages at rock-bottom rates and maximized the amount they could borrow are clear: any rise in interest rates risks putting a financial squeeze on a large number of debt-laden Vancouverites.

Even the Mortgage Brokers Association of B.C. is starting to take notice as they said yesterday that, "Canadians are potentially leaving themselves wide open for significant financial obligations once interest rates begin to rise."

Really, who could have known?

But it didn't end there. Carney once again focused on a fact we quoted yesterday from The Globe and Mail:

  • "The ratio of mortgage debt to household incomes in Canada recently hit a record 70%, up from 65% a year ago. And 40% of home buyers are opting for short-term, variable-rate mortgages, which will eventually ratchet up, leaving some owners in deep financial trouble."

To this Carney told Canadians that the nation “must be vigilant” in containing the threat rising rates would have on increasing the debt-servicing costs for Canadians who have taken on increasing levels of debt.

Sorta rings hollow because what is coming is serious business and I think it's too late to be 'contained'.

Consider the bold prediction earlier this week from economist and author Jeff Rubin. He predicted the jump in interest rates could be as steep as 3% to 4% over the next two years as the Bank of Canada struggles to contain inflation caused by increasing energy costs.

3% - 4%! Yikes again.

That type of increase could add up to $1,000 to the monthly payment on a $400,000 Vancouver mortgage.

And everyone I know that has bought a house in the last three years is carrying much more than a $400,000 mortgage.

None of them can afford even a $500 increase in their monthly payments, let alone $1,000 or more.

While the Globe and Mail can publish joyous, helpful little articles like this one that urges Canadians to "Wrestle Down That Debt While You Can", the reality is that its too late, the damage has been done.

Maybe that's why Carney had this Christmas message for banks:

  • "Similarly, lenders have responsibilities. Financial institutions should actively monitor risk stemming from households and not take false comfort derived from mortgage insurance and past performance of household credit. As our simulations suggest, the overall credit profile of Canadian households could well shift if debt continues to grow at current rates."

Oh... it will shift alright. And it's going to create a dire situation for banks. Under one of Carney's 'stress test profiles', the BOC hypothesises that:

  • "the consequences for financial stability from the potential impact of a more severe economic downturn on households could result in a hypothetical increase in unemployment that could produce loan losses for financial institutions representing about 10% of their Tier 1 capital."

And as faithful readers will recall, Sprott Asset Management predicted that if the Canadian banks’ tangible assets were to drop by 3%, their tangible common equity would effectively be wiped out.

Double Yikes!

But bloggers have seen this scenario coming all year. And did anyone catch American Karl Denninger on BNN yesterday?

He was asked to be on the Canada's Business News Network to talk about housing. After his appearance he wrote about it on his blog:

  • "[I did] a bit of research after the show [and] I came up with the following....

    Canadian family income as a whole ("families of 2 persons or more") is allegedly $70,000 (approximately.) The average house price? $325,000.

    That's a multiple of 4.64, or dramatically into bubble territory (the maximum for affordable housing is roughly 3x, so this is 154% of the maximum!)

    It's worse in places like Vancouver - there the ratio is over 10 (!) for single-family homes and about 8x for all residences.

    Let me be clear, strictly on the numbers: Canada is in for a housing bust WORSE THAN OURS.

    Beware Canadians..... you can argue over the timing of the outcome here, but if you think the 'bad event' won't happen and act on that belief, don't cry when a year or three down the road I start piping up with 'I told you so!'

And some think I'm too negative when I call for a collapse of over 40% in the value of Vancouver houses and over 50% in the value of Vancouver condos.

God rest ye merry gentlemen... Let nothing you dismay.


Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. Don't worry, there are a ton of us that think you are right on the money.

  2. Carney has been setting himself up for a 'Don't say I didn't warn you' moment when the poop is to hit the fan.
    The horse is already outside the barn. Prices have gone up to a point beyond a level supportable by average household incomes without resorting to unnaturally low interest rates and exotic mortgage schemes. First time buyers only have two choices: buy or not buy. Houses available on the market that are 'affordable' by historic wage metrics are usually such dumps that few buyers would want them. Unlike older generations, the Gen-X and younger cohorts tend to have fancier tastes and thus are more likely to fall into the 'affordable monthly payment' trap and end up overstretching their true budget limits to get the condo/house they desire. We may or may not see a US style crash, but the wealth destruction will definitely drag the economy to uncomfortable lows.

  3. We will see a US style crash. It's gratifying to finally see mainstream media acknowledge the coming problem. It also gives the 'wiser' ones a chance to repair the position they have put themselves in.

    Who knows, maybe it will help blunt the collapse.

  4. Somehow I have an ominous feeling that the 'unwise' or 'irresponsible' ones will have the last laugh ... They will whine loud enough when the crash comes and turn a financial issue into a moral one, and the government will punish us 'wise and responsible' folks by robbing us to bail out the whiners.

  5. For what our government is on the hook for when it comes to CMHC... they won't have the money to bail anyone out.

  6. '... they won't have the money to bail anyone out.'

    Don't underestimate the ability of our government to squeeze money out of those of us who still have jobs. We complain about our high taxes and most people think the government can't tax us more. Yes, it can. Our tax burden is higer compared with that of the US, but not as high as that in much of Europe. Are we seeing Europeans burning down their cities in protest? I don't think so, at lease not yet.