Tuesday, October 8, 2013

FP: Mortgage debt putting our national economy at risk.

Interesting article in the Financial Post yesterday. Titled Stephen Harper told mounting mortgage debt is putting ‘our national economy at risk’, the news article details how the Federation of Canadian Municipalities, made up of member cities representing 90% of the nation’s population, have told the Prime Minister that the high cost of housing was the most “urgent” financial issue facing Canadians today.
We have been warned before, and often. The federal government and the Bank of Canada, in particular, have lectured us about the evils of sky-high consumer debt and still-creeping house prices — and the mounting threat to the economy — as rock-bottom interest rates inevitably begin to rise...

Canada Housing and Mortgage Corp., the Crown agency responsible for insuring mortgages to approved buyers, uses a 30% threshold of total household income going to housing. Anything above that, and consumers could end up over their heads.

Dallas Alderson, director of policy and program at the Canadian Housing and Renewal Association, said one-quarter of Canadian are over that limit.
What do they want the Prime Minister to do?
“We believe that as the government sets its priorities for the next two years, it should address the high-cost of housing in Canada, the most urgent bread-and-butter issue facing Canadians today."
Of course when these groups ask the Federal Government to intervene, it usually means more subsidies, which is the type of meddling in the past which has created the mess in the first place.  Remember, greatly increasing CMHC's balance sheet was all about making housing 'affordable'. Notes the FP article...
Finn Poschmann, vice-president of research at the think-tank C.D. Howe Institute, said Ottawa has “little jurisdiction and almost no practical capacity to deliver housing.”

“Past attempts to do so, through CMHC for example, have produced financial disasters for the people who participated and put CMHC in grave financial situation.” he said.

“We wouldn’t want to see that again, nor the federal mortgage agency deeply underwater and as similar U.S. agencies have been, through the course of much more recent financial disasters.”
Curiously no one suggests removing the punch bowl which created the sky-high housing values to begin with.

Yanking that punch bowl away will trigger a very painful process.  But it's the long term solution that is required.

Speaking about the punch bowl of ultra low interest rates, the Globe and Mail notes that GM Canada chief frets over credit-driven car sales.
The president of General Motors of Canada Ltd. is worried that ultra-cheap auto loans could be causing Canadian vehicle sales to spike just as home sales did during the U.S. housing bubble.

Canadians are on pace to drive more than 1.73 million new vehicles off dealers’ lots this year, breaking the record of 1.703 million, but that’s a higher level than economic indicators suggest sales should be, Kevin Williams told The Globe and Mail’s editorial board Monday.

Part of the reason, he noted, includes eight-year, interest-free loans being offered by some auto companies. His comments highlight again the hot-button issue of consumer debt, singled out by Finance Minister Jim Flaherty and the Bank of Canada as a critical concern before the inevitable rise in interest rates.

Mr. Flaherty has focused on mortgage debt, but auto loan debt has been rising in the fierce fight among auto makers for market share and their battles with each other and Canada’s Big Six banks in the auto lending market.

Auto loan debt rose 8.6 per cent in the second quarter from year-earlier levels, outpacing the increase of 6.1 per cent in total debt, according to numbers compiled by Equifax Canada.

Consulting firm J.D. Power and Associates said last month that 64 per cent of Canadians who finance vehicle purchases are taking on terms of six years or longer.

The longer terms are designed to make monthly payments as low as possible, Mr. Williams said, but they mean in some cases buyers will return to dealers for a new vehicle still owing money on the vehicle they’re trading in.
The unwinding of all of this is going to be very, very painful.


Email: village_whisperer@live.ca
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  1. So? The government dare not to do anything.

    1. The government is more concern about next election rather than what may happen a few years down the road. Chances are they will not be in power.

    2. Are you kidding? Look at the competition. You think they have a more responsible plan. This government has done a tremendous job of bringing down the deficit and getting the house in order.It is up to Canadians to reign in spending a little too.

    3. Are you kidding? The Cons created the bubble - increased mortgage amortization to 40 years, and lowered interest rate to zero. They only decreased amort to 25 years when they noticed there was virtually nothing left of the $600B CMHC ceiling.

  2. I think I mentioned this before on your blog but a friend who volunteers at a food bank in Vancouver said that he is seeing middle class families coming in for food. I will point out that he is a RE agent. He says he imagines that they are living in million plus houses but just cannot afford food. I heard the same thing in Victoria. People just can't make ends meet with mortgage payments. When interest rates go up which is will at some point it will be a disaster.

  3. I used to look at USA and think : what a bunch of morons when it comes to personal finances and borrowing money. Now I look at debt rates in Canada and feel that we didn't learn anything form 2008 meltdown in the US. Canadian government structured recession bailout on cheap mortgages and loans.Even now they refuse to rise rates. Most Canadians took the cash ( loans and mortgages) as it was easy to get. Now it's time to start re-pay or bail. Most folks will find that renting is OK and having extra cash for kids RESP is cool. There is going to be a lot pissed off home owners who lost 3-5 years of equity in the home they have and some are already underwater not sure what they will do at mortgage renewal. At least that is what it looks like for an average person in Vancouver.

  4. If things go as badly as I think they will in the GVRD. I hope people remember who was PM during this RE run up. Hopefully if they lost alot of money on their homes, they will be pissed and vote in someone who cares about Canadians not just big oil companies. I'm still shock at how blind some of my friends are, they think that these prices are normal and will stay the same or keep going up, they are in for a rude awakening, the day of reckoning is definitely approaching the people of Vancouver.

  5. Yes. The CMHC was bad at intervening to boost housing supply.
    But, they've been quite good at intervening to boost housing demand.

  6. Some of people in food bank have money for food alright. But since it's free, it is hard for them to resist. It is not such an epiphany. If you follow them to their cars, BMW X5 is their current favorite ride.

    1. I highly doubt it. *shake my head.