KA1
Senior Member
http://www.ottawacitizen.com/business/Rising+home+prices+double+edged+sword/4151793/story.html
Another perspective on CMHC mortgage insurance.
Another perspective on CMHC mortgage insurance.
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Baby, we got a bubble!?
- Thread starter simuls
- Start date
interested
Senior Member
I disagree totally with this perspective.
The problem with using 2008 is that most people's 5 year mortgages that were taken out with 40 years, zero down or 35 years and 5% down were done in 2006 onwards. So they did not come under pressure in 2008. If there was the same slide as in 2008-2009 from which everything ultimately recovered but a significant drop of about 15% occured, this would be a very different set of circumstances and one in which CMHC I am quite sure would have lost money.
What Flaherty belatedly figured out is that come 2011 onwards, those who have to refinance in a higher interest rate environment are going to have problems, especially if they put 5% or less down, prolonged mortgage period of 35 to 40 years, and happen to have bought nearer the peak and hence do not qualify unless they have amassed more down payment or had job promotions or significant pay increases.
Now I do agree that perhaps he has made it more difficult for someone who was marginal to get a mortgage. In fact, and I am talking about
Toronto now, if the person was marginal and renting is cheaper than ownership at these prices, he is in fact saving those individuals from possibly making one of the biggest mistakes of their life.
Now, will it be shown to be wrong. Yes if prices just keep going up indefinately, but when you are a marginal borrower with the biggest asset purchase you are making in your life, that is an awfully big assumption to be making.
I personally have very little respect for Mr. Flaherty's stewardship of the economy but here I think he is on the right track.
As well, the suggestion that the tax payer is not on the line I think is just naive and misleading. If CMHC were to experience a serious increase in inability to pay mortgages, they would be very quickly under water. I would hazard that if those mortgages that were CMHC insured were to have come due even over the 6-8 months of the downturn of 2008-2009, my suspicion is that CMHC would have been underwater and of course it is the taxpayer who would end up making that money. So to suggest otherwise I believe is ill advised at best or misleading at worst.
The problem with using 2008 is that most people's 5 year mortgages that were taken out with 40 years, zero down or 35 years and 5% down were done in 2006 onwards. So they did not come under pressure in 2008. If there was the same slide as in 2008-2009 from which everything ultimately recovered but a significant drop of about 15% occured, this would be a very different set of circumstances and one in which CMHC I am quite sure would have lost money.
What Flaherty belatedly figured out is that come 2011 onwards, those who have to refinance in a higher interest rate environment are going to have problems, especially if they put 5% or less down, prolonged mortgage period of 35 to 40 years, and happen to have bought nearer the peak and hence do not qualify unless they have amassed more down payment or had job promotions or significant pay increases.
Now I do agree that perhaps he has made it more difficult for someone who was marginal to get a mortgage. In fact, and I am talking about
Toronto now, if the person was marginal and renting is cheaper than ownership at these prices, he is in fact saving those individuals from possibly making one of the biggest mistakes of their life.
Now, will it be shown to be wrong. Yes if prices just keep going up indefinately, but when you are a marginal borrower with the biggest asset purchase you are making in your life, that is an awfully big assumption to be making.
I personally have very little respect for Mr. Flaherty's stewardship of the economy but here I think he is on the right track.
As well, the suggestion that the tax payer is not on the line I think is just naive and misleading. If CMHC were to experience a serious increase in inability to pay mortgages, they would be very quickly under water. I would hazard that if those mortgages that were CMHC insured were to have come due even over the 6-8 months of the downturn of 2008-2009, my suspicion is that CMHC would have been underwater and of course it is the taxpayer who would end up making that money. So to suggest otherwise I believe is ill advised at best or misleading at worst.
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lead82
Senior Member
Interesting article. The author is right about the CMHC insurance fee. It is essentially a tax to protect banks. In any case, it does its job well as our banks are making record profits and our population hasn't seen a large amount of defaulting that has been occurring in the US.
However, the author wonders why Flaherty is putting in more strict rules. The answer is simple. He wants to reduce demand in the real estate sector to stop or reduce the insane rise in housing prices that has occurred in the last 5 years. It's not sustainable and eventually in a few short years real estate in major cities in Canada will only be affordable by international investors or the wealthy.
If the average GTA family takes home about $80K in pre-tax income, an affordable home should cost no more than 5x that number or lower. That would put an affordable house at $400K for most families. Good luck finding something in that range in most of the GTA. A condo sure, but certainly not a house for that price.
The Canadian real estate market will continue to inflate and inflate until it becomes over-priced for investors and then we will see a big crash down to earthly levels. Unfortunately for those waiting for the big crash - it wont happen any time soon.
The market is a creation of the federal government and the banks. The federal government doesn't invest in much transportation infrastructure to enable easy movement. This confines people to jobs and thus raising the land value of big cities like Toronto, Calgary, Vancouver where most of the jobs growth is occurring. If jobs and investment could be spread between multiple cities (I'm not suggesting sprawl) with good regional rail links to each other then people could move out and live in places that are more affordable. For example, why not invest in Kitchener/Waterloo or Hamilton and create more industry/jobs there through incentives. So instead of luring companies to the 905 belt, we should be luring companies to other towns/cities to spread the jobs and wealth so that we dont have everyone in Canada live in the top 5 big cities. This is exactly what's happening and why real estate is so expensive.
In addition, the government controls the rules to make housing affordable by setting the amortization limits and borrowing rules to enable a boost to the market (e.g. 40yr amortizations, 0% downpayment, $25K RRSP loan) or to limit growth (e.g. 30 yr max amortization and 5% downpayment). The banks comply and help to apply the rules to control the market.
Just watch. If real estate starts going down because people can't afford the crazy prices, you will see the government step in and alleviate rates again in the name of affordability of the first time buyer.
However, the author wonders why Flaherty is putting in more strict rules. The answer is simple. He wants to reduce demand in the real estate sector to stop or reduce the insane rise in housing prices that has occurred in the last 5 years. It's not sustainable and eventually in a few short years real estate in major cities in Canada will only be affordable by international investors or the wealthy.
If the average GTA family takes home about $80K in pre-tax income, an affordable home should cost no more than 5x that number or lower. That would put an affordable house at $400K for most families. Good luck finding something in that range in most of the GTA. A condo sure, but certainly not a house for that price.
The Canadian real estate market will continue to inflate and inflate until it becomes over-priced for investors and then we will see a big crash down to earthly levels. Unfortunately for those waiting for the big crash - it wont happen any time soon.
The market is a creation of the federal government and the banks. The federal government doesn't invest in much transportation infrastructure to enable easy movement. This confines people to jobs and thus raising the land value of big cities like Toronto, Calgary, Vancouver where most of the jobs growth is occurring. If jobs and investment could be spread between multiple cities (I'm not suggesting sprawl) with good regional rail links to each other then people could move out and live in places that are more affordable. For example, why not invest in Kitchener/Waterloo or Hamilton and create more industry/jobs there through incentives. So instead of luring companies to the 905 belt, we should be luring companies to other towns/cities to spread the jobs and wealth so that we dont have everyone in Canada live in the top 5 big cities. This is exactly what's happening and why real estate is so expensive.
In addition, the government controls the rules to make housing affordable by setting the amortization limits and borrowing rules to enable a boost to the market (e.g. 40yr amortizations, 0% downpayment, $25K RRSP loan) or to limit growth (e.g. 30 yr max amortization and 5% downpayment). The banks comply and help to apply the rules to control the market.
Just watch. If real estate starts going down because people can't afford the crazy prices, you will see the government step in and alleviate rates again in the name of affordability of the first time buyer.
Eug
Senior Member
The Bank of Canada's rates are in response to inflation, not real estate pricing.
interested
Senior Member
True Eug.
BofC is responding to inflation, but clearly real estate is on Mark Carney's mind as he constantly refers to it. Flaherty made the move and that should allow the B of C to continue its designated focus. I am sure Mr. Carney looks at alot of factors as evidenced by the fact that were it not for a par dollar, he probably would good up with the interest rate due to inflationary pressure but he won't due to the US weaker economy and their monetary policy. So, while the B of C does respond to inflation and not real estate pricing, the Bank will indirectly converse with Finance to ensure that the 2 are dealt with.
Carney is worried about the R/E pricing and market but did not want to raise interest rates due to unemployment and sluggish growth, both in Canada but especially the US.
BofC is responding to inflation, but clearly real estate is on Mark Carney's mind as he constantly refers to it. Flaherty made the move and that should allow the B of C to continue its designated focus. I am sure Mr. Carney looks at alot of factors as evidenced by the fact that were it not for a par dollar, he probably would good up with the interest rate due to inflationary pressure but he won't due to the US weaker economy and their monetary policy. So, while the B of C does respond to inflation and not real estate pricing, the Bank will indirectly converse with Finance to ensure that the 2 are dealt with.
Carney is worried about the R/E pricing and market but did not want to raise interest rates due to unemployment and sluggish growth, both in Canada but especially the US.
Eug
Senior Member
interested
Senior Member
I haven't read the whole report. However, remember that CAAMP despite analysis has a vested interest to portray things better. Afterall, they do not want the mortgage business to dry up any more than realtors want the real estate market to stop in its tracks.
That said, his numbers are reassuring. However, the example quotes mortgage rates going to 5% from the current 4% (which is actually aroudn 3.69% on 5 year fixed with even 3.44% available.). That would seem to provide a cusion.
The problem with this analysis is Gov of Canada can tell me that inflation is 2%. The reality is it is much higher. Food prices are markedly up. Gas is markedly more expensive, both far more than 2%. The thing of it is; most people I know have to eat and most drive. In my particular case, I would say that makes up a very significant part of my monthly budget. I can put off the purchase of a new TV or electronics if I have no money (which incidently is declining in price) but I can't not eat or use my car to get to work.
My point is that other necessary expenses are going up more tying up more income I believe than previously and while it may not show up as debt, using an historic basket when 2 of the most important items are not accounted for, is going to distort the results.
I think Canadians are much more pressed than is immediately obvious by looking at total debt service ratios.
that said, it is somewhat reassuring to see numbers like this. However, let's recall these are just arbitrary numbers that have worked in the past and bankers use them to figure out whether one can carry the debt. It is debatable if one gets closer to 32% house debt or 40% total debt that one can manage the rest of ones expenses with 60% residual.
That said, his numbers are reassuring. However, the example quotes mortgage rates going to 5% from the current 4% (which is actually aroudn 3.69% on 5 year fixed with even 3.44% available.). That would seem to provide a cusion.
The problem with this analysis is Gov of Canada can tell me that inflation is 2%. The reality is it is much higher. Food prices are markedly up. Gas is markedly more expensive, both far more than 2%. The thing of it is; most people I know have to eat and most drive. In my particular case, I would say that makes up a very significant part of my monthly budget. I can put off the purchase of a new TV or electronics if I have no money (which incidently is declining in price) but I can't not eat or use my car to get to work.
My point is that other necessary expenses are going up more tying up more income I believe than previously and while it may not show up as debt, using an historic basket when 2 of the most important items are not accounted for, is going to distort the results.
I think Canadians are much more pressed than is immediately obvious by looking at total debt service ratios.
that said, it is somewhat reassuring to see numbers like this. However, let's recall these are just arbitrary numbers that have worked in the past and bankers use them to figure out whether one can carry the debt. It is debatable if one gets closer to 32% house debt or 40% total debt that one can manage the rest of ones expenses with 60% residual.
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daveto
Active Member
What is the source of the data?
A rise of 0.4% from when?
A trend requires more than one data point.
Based on what? and no, I don't think that will happen.
KA1
Senior Member
http://www.theglobeandmail.com/glob...-market-trends-for-2011/article1882519/page2/
Link to The Globe and Mail -- general discussion about housing market in 2011.
Link to The Globe and Mail -- general discussion about housing market in 2011.
daveto
Active Member
I read those questions/answers, and I'm just shaking my head.
My three favourites:
The cries of Bubble have been occuring for literally decades.
But he conveniently ignores that sometimes a bubble does exist, such as Toronto in the late 1980s.
#1 A bubble doesn't exist if you actually analyze the underlying economic fundamentals (rather than screeching about housing market numbers).......
But then he only very selectively analyzes those economic fundamentals. In particular, he ignores price-to-income, price-to-rent, and even the effect of mortgage rates or the CMHC rule changes.
"...the financing frauds that were perpetrated inflated the (US) market beyond belief..."
My favourite...as he doesn't acknowledge that US RE prices at the peak were actually 10% cheaper than our current prices, nor does he explain why we are so different.
I don't doubt that he believes what he is saying. But so what. Intelligent people have believed all kinds of crazy things over the years. But objective factual analysis usually disproves most of those false believes. An analysis which is regrettable not present in the Q&As.
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ponyboy
Active Member
I do. Who knows for sure, but I doubt he believes as strongly has he argues in this discussion. The repeated selective use of data (as you point out) suggests intent to deceive rather than portray a balanced analysis. He is selling the story because his livelihood is tied in respects to supporting the housing market.
TCW
New Member
Food inflation is under 2%, thanks to Wal-Mart.
http://www.theglobeandmail.com/repo...food-inflation-tame-in-canada/article1882175/
And they are opening up 40 Supercenters this year
http://money.canoe.ca/money/business/canada/archives/2011/01/20110126-114520.html
cdr108
Senior Member
TCW
New Member
Consumers get message on debt, rein it in
http://www.theglobeandmail.com/repo...et-message-on-debt-rein-it-in/article1883104/
http://www.theglobeandmail.com/repo...et-message-on-debt-rein-it-in/article1883104/
daveto
Active Member
Is Canada the only country with a CMHC (or equivalent)?
http://img341.imageshack.us/i/governmentmortgagemarke.jpg/
Is that good or bad? I think its pretty bad, but I guess the bulls will say that is why our housing is safe (unlike spain, ireland, etc)
http://img341.imageshack.us/i/governmentmortgagemarke.jpg/
Is that good or bad? I think its pretty bad, but I guess the bulls will say that is why our housing is safe (unlike spain, ireland, etc)