Baby, we got a bubble!?

[paperchopper]

CMHC's liabilities are quite large, I recall seeing $800B before or so, perhaps it is $600-700B, that is a very scary number considering that there is only $1T of mortgage debt in Canada.

So 60-70% of "homeowners" couldn't pony up the 20% downpayment. Furthermore, the banks themselves would have NEVER, EVER given mortgage to 60-70% of current mortgagees had it not been by the subsidization by the federal government and the CMHC.

Furthermore, that # is misleading because it states that 71.1% of mortgagees have more than 20% equity. That is irrelevant in the grand scheme of things, as first off, the current prices are a bubble. If I buy a house on a 0/40 mortgage for $400k and a $400k mortgage, and ta da, it goes up 10% then 15%, I magically have close to 30% equity in my house. Every single person insured by the CMHC put less than 20% down. Furthermore, people who bought more recently, hence have less equity, also much more likely paid a higher price than someone who bought 2 years ago-- perhaps double or more. Anyways, my point is that 71.1% of the $600B is not in mortgage with >20% equity, it would much more likely be $200-300B are in mortgages with less than 10% equity. Harper and Co already bought $80B of these off the banks so they could fudge the numbers. Anyways, a 20% swing and $200B+ of mortgage debt would be underwater, perhaps more.

A ticking time bomb waiting to explode.

 

[CN Tower]

Every single person insured by the CMHC put less than 20% down.

PC, my friend, please calm down. I'm not sure what I find more frustrating- your histrionics or your ignorance. You worked in the financial sector, many of us own property and live in this world on a daily basis. I personally borrowed money against a property that I own that was for <50% of the bank's appraised value of the property and had the mortgage insured by CMHC to effectively buy down the rate. My mortgage is currently insured by CMHC and yet I have >50% equity in the property according to their appriasal and probably more like 66% equity if the property was ever brought to market (very unlikely).

The point I am attempting to make is that while I agree with you that CMHC and the government have encouraged people to over-extent themselves in mortgage debt through the combination of easier and cheaper credit, there is no need to exaggerate or embellish the facts. They speak for themselves. The more you blather on with your hyperbolic diatribes the more you detract from the core argument that housing prices are essentially peaked for this cycle. We are aware of the credit implosion that took place in America and we are aware of the risks presented to us here. There are district differences between the housing markets in the two countries but you are very correct to point out the dangers that debt present.

Balance out your comments they will sound stronger and we can all learn more. Isn't that the goal?

 

[daveto]

So basically the taxpayer and not those who buy CMHC bonds (essentially Gov't of Canada bonds) carries the risk, and the investors would receive full payment unless the government defaulted which will not happen certainly at 50 billion dollars but it will mean government cutbacks, austerity programs, and increased taxes; much what we see in Ireland, Greece and England at present causing all the social unrest it brings with it..

Interested, that is correct. Although I think that even the worst case scenario $50b would not be such a big pill for us to swallow. If spread over 5 or 10 years, it's much more palatable.

But the problem is that before that $50b could get hit (again, what I think is a worst case cost), first we would see upwards of $200b of housing equity "asset" melt away.

My assessment of what has happened is that the Gov't has used the CMHC as a brilliant way to juice the economy to protect us during the recession since 2008. People think they have more assets,so they spend more, or they can justify buying a more expensive house because the credit is easy to get and easy to service.

I don't think it is necessarily a bad economic tool, providing that by the time it is necessary to pay this back and wean people off it, the economy has recovered and can stand on its own two feet and assist the consumer in digesting the bitter pill as housing corrects. Maybe that will happen, in which case bravo to Flaherty and co.

I think it is unlikely to work as planned, because I don't think the economy will recover in time. History has shown that financial, debt based, crises take 5-10 years to resolve.

And thus I think that if the $200b of perceived equity does indeed begin to melt away then that will be the biggest driver of economic distress for Canada, which will be further exacerbated by those amounts that CMHC has to cover. In effect, exactly what has happened in the US.

One final note about the economic effect of dropping housing prices...

A lot of people talk about how the US printing money will create inflation. But what they don't understand is that the US is also experiencing a huge destruction of money. When housing prices go down in the US that reduces various types of money supply. It also reduces the velocity of circulation of money as people spend lower amounts, and less frequently, because their perceived wealth has decreased.

So really, the Fed printing of money is simply an offset to the destruction of money taking place. Were it not for the Fed printing money, the US would have dropped into deflation. Deflation causes problems for our modern world because our financial system is systemically unable to handle it. Think about it....if deflation is at minus 3%, would you accept a bank account paying you minus 1%?

On a related note, just because inflation is low does not mean that bond prices cannot increase nor that mortgage rates can't go up. If there are fewer lenders choosing from too many borrowers, then the lenders can get paid more and interest/mortgage rates go up. This is unusual in our recent economic experience, but there is nothing which prevents high interest rates and low inflation. In the 70s it was inflation that was the problem, with interest rates moving higher in response. My pet economic theory is that the next decade will be defined by minimal inflation, but that economic growth will be choked by high interest rates as gov'ts compete for financing. If the 70s was stagflation, I'm not sure what we would call the theory I've described. Anyway, just a theory, and somewhat off topic.

 

[paperchopper]

I've never heard of a bank that would require mortgage insurance on a mortgagee putting 50% down, in fact, you could have shopped the banks for the lowest interest rate. There is virtually no risk for the bank as it has a very wealthy cushion should you default, and you have very strong motivation for paying off that mortgage. So, not to be rude, but I find it hard to believe that a bank would require CMHC insurance for their lowest rate with a 50% downpayment. Perhaps you put down less than 20%, but due to recent price increases have 50% equity? If so, you have made out fairly well.

Why is my rhetoric so inflammatory? I only point out the facts, and the last one is pretty disturbing. The biggest distinction between prime and subprime is that a less-than-stellar credit risk would have been required to purchase mortgage insurance. The fact that nearly 70% of Canada's mortgages are insured, well, this truly is scary, but such a figure would imply that 70% of Canada's mortgages are subprime by American standards.

Perhaps Canada is different.

My advice to you, if you were able to sell your property on the market and have 66% equity, would be to sell, and to rent instead. Your rent would most likely be less than your mortgage payment, and you would save a few hundred dollars there, along with property taxes, condo fees (if you have a condo), property insurance and maintenance. You would be easily banking $1000+ a month that you could invest, and at the same time divest yourself of risk of the coming RE collapse.

 

[CN Tower]

I've never heard of a bank that would require mortgage insurance on a mortgagee putting 50% down, in fact, you could have shopped the banks for the lowest interest rate. There is virtually no risk for the bank as it has a very wealthy cushion should you default, and you have very strong motivation for paying off that mortgage. So, not to be rude, but I find it hard to believe that a bank would require CMHC insurance for their lowest rate with a 50% downpayment. Perhaps you put down less than 20%, but due to recent price increases have 50% equity? If so, you have made out fairly well.

Why is my rhetoric so inflammatory? I only point out the facts, and the last one is pretty disturbing. The biggest distinction between prime and subprime is that a less-than-stellar credit risk would have been required to purchase mortgage insurance. The fact that nearly 70% of Canada's mortgages are insured, well, this truly is scary, but such a figure would imply that 70% of Canada's mortgages are subprime by American standards.

Perhaps Canada is different.

My advice to you, if you were able to sell your property on the market and have 66% equity, would be to sell, and to rent instead. Your rent would most likely be less than your mortgage payment, and you would save a few hundred dollars there, along with property taxes, condo fees (if you have a condo), property insurance and maintenance. You would be easily banking $1000+ a month that you could invest, and at the same time divest yourself of risk of the coming RE collapse.

Who said I just bought the property? Who said it was my personal residence? Who said the bank required CMHC insurance?

Man, are you ignorant!

 

[interested]

Paperchopper,
I am sure you are aware of articles like this brief one I am attaching here. I post it for interest sakes.
What is your view and do you think Wall Street, government, people in "high finance" (and I am not saying you personally so don't bite my head off) played or continue to play a significant role in a war against main street.

http://www.businessinsider.com/top-...vernment-is-fighting-back-but-against-whom-11


I ask because you said you would have absolutely no sympathy for those who may get burned going forward on R/E. But do you acknowledge that there may be at least some degree of truth to some of this? I ask since if you would agree to even a degree, is it not unduly harsh to judge most main street people on this forum when the game would fixed as it were in favour of those on Wall Street. I have heard people say that Wall Street is likened to "legalized theft" of the collective wealth of main street for the betterment of those on Wall Street. Is this in fact the wealthy/insiders taking unfair advantage of the rest of Main street?

I would ask that you answer if you choose to with a balanced reasoned counter arguement which I know you are very capable of doing from previous posts (I fully expect the "buyer beware" response) but I would ask that you please not go into a diabribe insulting me for asking as this is not the spirit it is asked but rather a followup to your absolute lack of sympathy for those who may be harmed if things play out as you suggest they will (which may well occur if you are correct).

 

[daveto]

Paperchopper, not to pile on here, but I agree you should calm down a little bit with the hyperbole. ))

On a seperate note, here is a link to one of those financial advice columns in the Financial Post. This 39yr old lady has $1.15m in RE in three properties Calgary, $1m in mortgages, no other assets, and nowhere in the article do they consider her position if prices drop. Its shocking that they wouldn't even suggest that she plan for the possibility.
http://www.financialpost.com/person...ge+real+estate+investments/3988718/story.html

 

[interested]

Whether I agree with the 39 year old or not, this is a classic example of being way overlevered and greed. This I have very little sympathy for.
Get rich scheme is what I would call this. A 10% drop and she is in trouble. Rental rates down, same conclusion.
I agree Dave. Talk about putting all your eggs in one basket and then way overlevering it.
If R/E goes straight up, she will look like a winner. In my view, this is akin to gambling and not investing. Reasonable investors plan for dark days or at least setbacks.
I am not saying you can plan for every eventuality, but going way out on a limb like this just supports Paperchoppers contention that the reckoning will be brutal since clearly if this investor is indicative of a significant amount of the market, even a minor adjustment downward will be disastrous.

 

[interested]

Interested, that is correct. Although I think that even the worst case scenario $50b would not be such a big pill for us to swallow. If spread over 5 or 10 years, it's much more palatable.

But the problem is that before that $50b could get hit (again, what I think is a worst case cost), first we would see upwards of $200b of housing equity "asset" melt away.

My assessment of what has happened is that the Gov't has used the CMHC as a brilliant way to juice the economy to protect us during the recession since 2008. People think they have more assets,so they spend more, or they can justify buying a more expensive house because the credit is easy to get and easy to service.

I don't think it is necessarily a bad economic tool, providing that by the time it is necessary to pay this back and wean people off it, the economy has recovered and can stand on its own two feet and assist the consumer in digesting the bitter pill as housing corrects. Maybe that will happen, in which case bravo to Flaherty and co.

I think it is unlikely to work as planned, because I don't think the economy will recover in time. History has shown that financial, debt based, crises take 5-10 years to resolve.

And thus I think that if the $200b of perceived equity does indeed begin to melt away then that will be the biggest driver of economic distress for Canada, which will be further exacerbated by those amounts that CMHC has to cover. In effect, exactly what has happened in the US.

One final note about the economic effect of dropping housing prices...

A lot of people talk about how the US printing money will create inflation. But what they don't understand is that the US is also experiencing a huge destruction of money. When housing prices go down in the US that reduces various types of money supply. It also reduces the velocity of circulation of money as people spend lower amounts, and less frequently, because their perceived wealth has decreased.
So really, the Fed printing of money is simply an offset to the destruction of money taking place. Were it not for the Fed printing money, the US would have dropped into deflation. Deflation causes problems for our modern world because our financial system is systemically unable to handle it. Think about it....if deflation is at minus 3%, would you accept a bank account paying you minus 1%?

On a related note, just because inflation is low does not mean that bond prices cannot increase nor that mortgage rates can't go up. If there are fewer lenders choosing from too many borrowers, then the lenders can get paid more and interest/mortgage rates go up. This is unusual in our recent economic experience, but there is nothing which prevents high interest rates and low inflation. In the 70s it was inflation that was the problem, with interest rates moving higher in response. My pet economic theory is that the next decade will be defined by minimal inflation, but that economic growth will be choked by high interest rates as gov'ts compete for financing. If the 70s was stagflation, I'm not sure what we would call the theory I've described. Anyway, just a theory, and somewhat off topic.

Dave, I agree with what you are saying but would suggest that perhaps it is not the destruction of money but rather the destruction of wealth that is occuring with the printing. Now the destruction of money may be the ultimate result if everyone loses confidence in it.

Your suggestion about deflation and the economies ability to deal with it are absolutely correct. At least so far, Japan can't figure out how to get out of it. The great Depression only resolved with the printing of money(in the 1940's) and the War. So inflation is the "lesser" of the 2 evils if I can call it that.

On an historical note; I know that in certain countries that where save havens, for example Switzerland, there were years in the 1970's that banks actually charged you to keep money in their institution. We briefly had a situation where MM funds went negative and the banks in the US and I believe Canada last year lowered their fees so as there would be no loss of capital as MM(Money Market funds) were supposedly guaranteed. So it can occur and people may actually even accept low negative rates of returns if everything around them seems to be devaluing.

Finally, I don't think what you are describing is far off the stagflation of the 1970's and as you know, it was a particularly difficult problem for Volker and other Central Banks to resolve.

 

[cdr108]

On a seperate note, here is a link to one of those financial advice columns in the Financial Post. This 39yr old lady has $1.15m in RE in three properties Calgary, $1m in mortgages, no other assets, and nowhere in the article do they consider her position if prices drop. Its shocking that they wouldn't even suggest that she plan for the possibility.
http://www.financialpost.com/person...ge+real+estate+investments/3988718/story.html

that's very sad ... she has all her eggs in one basket and has only 15% equity.
it doesn't say when these properties were bought, however, the earliest mortgage of 4 that will be paid will be in another 21 years.
she's barely covering her expenses and as the FA indicated, rising rates, vacancies, unexpected repair expense will wipe her out.
with a MINOR correction and/or a combo of the above will put her underwater !

 

[paperchopper]

Interesting how posts magically disappear on this forum, I'm quite surprised that the entire thread and any mention of a bubble hasn't been neatly sanitized yet.

Anyways, I'll stick to my hypothesis that CN Tower is mentally unstable, by stating facts then, oh man, I can't even address it, it's quite too hilarious.

Interested, I feel no sympathy what so ever for the someone who overextends themselves. It's called greed. We make very good money, and we work very long hours, 80+ a week. We are highly specialized and have extremely high IQ's, and we deserve our compensation. People will always look for people to blame for their own failures, but main street expects the financiers to make an economy grow, to provide efficient capital markets to provide them with the loans so they can live (essentially) beyond their means. We don't put a gun to their head and force them to do anything, they have free will and are perfectly capable of making sound decisions. We run a business, and that businesses goal is to make a profit-- nothing else. If you want to take out a loan and indebt yourself for the next 50 years and live like a bum to have some house, sure, go for it! Haha, it's highly amusing to see the daily bullshit we see at work, but in the end, the average IQ of the population is rather low, and a sizable percentage of the population would be considered mentally retarded.

I really don't concern myself with such insights. People are unintelligent and a waste of time in general, ala CN Tower and company. That article you mentioned is quite hilarious, and it sounds like it was written by a failure. Fannie was evil? Please. Payday loans? That has nothing to do with the finance industry, and with that comment alone, the author loses any credibility. We're to blame because idiots can't live within their means? QE-- the QE that Bernanke and other central bankers had to resort to because billions of greedy ordinary people wanted to portray an illusion of wealth? Wealth is generated by sweat and hard work, not by debt. Ponzi scheme? Rigging the stock market?! I think that author mentioned everything except the classic "Wall St is run by Jews and Israel", haha. I wouldn't be surprised if he were a tin-foil hat wearing, Hitler-idolizing Anti-Semite who cries over his mortgage statement every night.

Anyways I'm getting really tired with the bullshit on here, people really do have a low IQ. The writing is on the wall. Sleep tight.

 

[daveto]

PC, the same arguments are used by drug dealers. But if it's not illegal then I admit that there is nothing preventing you from living a pure, law of the jungle lifestyle.

Your posts seem like the typical trash talk that only happens on anonymous internet forums, and I'm guessing you woudn't be quite so sharp tongued face to face. But I admit that maybe I'm wrong, and maybe you really are as big a dick as you seem.

 

[X2 Buyer]

PC - I have to admit I was bothered by the disappeared comment you had previously..so if you are tired, no one makes you speak here.

 

[Polkaroo]

Who said I just bought the property? Who said it was my personal residence? Who said the bank required CMHC insurance?

Man, are you ignorant!

Let's not resort to personal attacks.

 

[Polkaroo]

Your posts seem like the typical trash talk that only happens on anonymous internet forums, and I'm guessing you woudn't be quite so sharp tongued face to face. But I admit that maybe I'm wrong, and maybe you really are as big a dick as you seem.

There is no need for this type of tone.