Wednesday, November 24, 2010

Thin Ice

As Arctic outflow winds sweep down across Western Canada, the Village on the Edge of the Rainforest has been plunged into winter's icy grip.

A rare snowfall blanketed the region on the weekend and since then nighttime temperatures have dramatically dropped to -10 Celsius (14 degrees Fahrenheit for our American friends).

Snow and icy cold temperatures? Things keep up like this and we might even consider hosting a winter event like the Olympics.

But I digress. Lots has been going on locally over the last week and as I have touched base with a number of the local blogs there seems to be a whirlwind brewing about the status of 'our bubble'.

After almost half a year of declining real estate sales, our local market is best described as stagnant. The bubble has yet to burst.

The result is a growing sense of fatigue.

Some buyers, tired of waiting for a crash that isn't forthcoming, are jumping into the housing market. Against better judgement they are taking on massive levels of debt as house lust consumes them.

Meanwhile on the west side of Vancouver, sales gallop along at a pace and with prices that have some suggesting Vancouver is - in fact - different.

It makes me smile.

Perhaps it is because I am not sitting on the sidelines - eagerly waiting for a housing collapse - so that I can make a move and purchase a house in the city.

'A watched pot doesn't boil', goes the famous saying and because prices aren't dropping dramatically, many find themselves doubting what logic and common sense tells them is all too obvious.

As I repeat ad nausam, in 2008 the world suffered a financial earthquake the depth and breadth of which we still do not fully understand, appreciate or comprehend.

Canada enacted a number of emergency measures which shielded real estate in our county from the Great Credit Contraction that is sweeping the rest of the globe.

After experiencing a minor contraction in 2009, real estate appears to have recovered. In reality all we have done is forestall the Great Reckoning.

And no one is better positioned to remind us about what is coming than Mark Carney, Governor of the Bank of Canada.

Over on the blog Housing Analysis, Jesse has transcribed parts of a 15 minute interview Carney did with CBC's Sunday Edition (hosted by Michael Enright).

You can listen to the entire interview here (it takes place in hour two, about 10 minutes in).

As transcribed by Jesse, the most significant comments are listed:

  • Michael Enright: You expressed concern publicly for a long time I think from the moment you took the job about household debt in Canada. I think it was running somewhere around $40,000... and you're concerned about that. Interest rates are very low at the moment. Is there a correlation between the lower the interest rate [and] the more likely it is for people to take on more debt?

    Mark Carney: Well this is the concern. Interest rates in Canada are low, abnormally low, exceptionally low...

    Enright: Are they emergency rates do you think?

    Carney: Well we had them at emergency levels from April of last year, in April of 2009 after the crisis...

    Enright: Right.

    Carney: The Lehman crisis. We got them down to 25 basis points and we further increased our balance sheet beyond that. But we moved them up from emergency levels because the Canadian economy is back at the level we were before the crash, we recovered all the jobs we lost during the crash, and things have moved quite positively for Canada. But they're still at exceptionally low levels. And the risk is that Canadians, some Canadians, take on debt on the assumption that interest rates will always be this way.

    Enright: Or they're here now, they look pretty good and they'll probably stay that way for a while.

    Carney: Exactly. And particularly when one thinks about mortgage debt, thirty year mortgage debt, that is not a sensible assumption. And our concern is that people will get themselves into positions which will make it very difficult to service their debt.

    Enright: But you can't say, wait a minute folks, I wouldn't go and buy a summer cottage because something might happen in the next 6 or 8 months. I mean, that would send Bay Street spinning, wouldn't it?

    Carney: No. We're taking a longer term perspective on it and we're providing as much transparency as we can about the future path of monetary policy, as much as appropriate. The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they're going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates, and the banks that lend to them should also be comfortable about that.

As Carney says, interest rates are still at "exceptionally low levels." They are going to go up... way up.

And for those who have taken on debt on the assumption that interest rates will always be this way, Carney makes it expressly clear they are in for a rude awakening.

It does not matter if there are some people with vast amounts of money who can easily afford the multi-million dollar single family houses in our little hamlet on the Edge of the Rainforest.

When the reckoning comes, when interest rates normalize, there are so many who will affected by a crisis of debt in the Lower Mainland that the exact same chain of domino's that has brought down so many American R/E bubbles will repeat itself here.

It is unavoidable.



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