Friday, March 16, 2012

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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  1. W... can you confirm this? I read through the CMHC rules and regulations... and no where does it say you must be a Canadian or landed immigrant. So, this is the theory.... foreigners are taking out 5% and take out a loan on the rest backed by CMHC. If it goes up... GREAT!! And, if the value falls ... they walk away with a very small loss... and leave the Canadian Tax Payer on the hook... after a shift and brutal plummet.

    1. I believe this is going on and will add to the problem.

  2. I guess you might be interested by this think tank...

    In this context all the more dangerous, as all the players are lulled by a dangerous illusion of a “return to normal”, in particular of the “restarting of the US economic engine” (16), LEAP/E2020 considers it necessary to alert its readers to the fact that summer 2012 will see the shattering of this illusion. In fact, we anticipate that summer 2012 will see the crystallization of five devastating shocks which are at the heart of the current process of world geopolitical swing. The black clouds which have been accumulating since the beginning of the crisis around economic and financial issues have now been joined by the dark clouds of geopolitical confrontation.

    Therefore, in LEAP/E2020’s view, five devastating storms will mark the summer of 2012 and thus accelerate the process of world geopolitical swing:

    . US relapse into recession against the background of European stagnation and BRICS slowdown
    . dead end for the central banks and interest rate increases
    . storm on the foreign exchange and Western sovereign debt markets
    . Iran, the war « too far »
    . new crash in the markets and financial institutions.