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Canada’s Mortgage Monster?
Chris Sorensen And Jason Kirby of Maclean's report, The CMHC: Canada’s mortgage monster:
David LePoidevin isn’t the first person to suggest Canada’s roaring housing market is headed for a U.S.-style crash. But he is a rare breed of money manager for daring to point a finger at the Canada Mortgage and Housing Corporation, the country’s biggest mortgage insurer. In a fall 2009 note to his clients, LePoidevin questioned what was underpinning the country’s skyrocketing home prices, aside from rock-bottom interest rates. “The stock market was sure not providing huge capital gains to the masses,” he wrote. “Did the banks all of a sudden open up the lending spigots? In fact banks have actually reduced the number of their mortgages held from the peak of third quarter of 2008. The smoking gun is the CMHC and its securitization policies.”
As mainstream economic commentary in Canada goes, it was damning stuff. And it provided ammunition to critics who argue the Crown corporation’s policies have inflated a housing bubble. The CMHC is arguably the most influential player in Canada’s $1-trillion housing market. Its main function is to provide mortgage insurance for prospective homeowners who put less than 20 per cent down on their houses, protecting the banks in the event of defaults. The CMHC also helps to spread risk by finding investors to buy CMHC-insured mortgages that have been pooled together into so-called mortgage-backed securities. All of this is guaranteed by the government.
Almost immediately, LePoidevin’s bosses at National Bank leapt to the CMHC’s defence. In a letter to an Ottawa newspaper that had referred to the commentary, co-chief executive Ricardo Pascoe said the Vancouver portfolio manager’s views were “personal” and “do not reflect the views of National Bank Financial Group.” When reached by Maclean’s, LePoidevin declined to talk about the public rebuke or the CMHC in general. A National Bank spokesperson justi?ed its actions, saying the company “felt that the commentary was treading on social and political issues.”
The apparent unwillingness of the country’s sixth-largest bank to challenge the CMHC is curious given the role similar U.S. institutions Fannie Mae and Freddie Mac—quasi-government agencies that securitized mortgages—played in the U.S. housing crash. But it’s far from unusual. Several other critics, including economists, realtors, lawyers and analysts contacted by Maclean’s, say they have also been the target of attack. One bank economist who once publicly raised fears about a housing bubble says he didn’t dare openly criticize the CMHC because of the agency’s reputation for snuffing out dissent—an allegation the CMHC denies. The economist spoke on the condition his name not be used.
Even worse, the public knows next to nothing about what lurks inside the CMHC’s books, aside from the smattering of details it releases in its annual report. And, unlike every other major insurance provider in the country, the CMHC doesn’t answer to Canada’s top financial services regulator. It falls under an amalgam of government acts and departments, including Finance and Human Resources, while also working with the Bank of Canada. Yet on specific decisions that dramatically loosened mortgage lending rules last decade, CMHC officials have testified they did so on their own with the approval and oversight of the CMHC’s board of directors—a board that includes a political consultant, real estate developers, a small-town lawyer and even the owner of a plumbing company—though not one single economist or recognizable financial services professional.
It all raises troubling questions about the agency, its oversight and, ultimately, the health of the country’s frothy housing market, a key driver of the Canadian economy. And, as LePoidevin found out the hard way, asking hard questions seldom yields satisfactory answers.
Since taxpayers, through the CMHC, and not the banks are ultimately on the hook in the event of a housing crash, a growing chorus of critics has been calling for more transparency and oversight, if not outright reform. Stephen Jarislowsky, a billionaire Montreal investor, says home prices are likely overvalued by as much as 20 per cent in some Canadian markets thanks to CMHC policies that encouraged banks to lend far too much money to people to whom they shouldn’t have. The core problem, he argues, is that promoting home ownership makes for good politics in Canada, if not always sound economic policy.
“The CMHC is influenced by the political process, just like [Fannie Mae and Freddie Mac] were in the United States,” says Jarislowsky. He notes the average debt-to-income ratio of Canadian households recently surpassed that of the U.S. for the first time in 12 years. “The political folks are guaranteeing mortgages that the banks might never have made if they had to keep them on their own books,” he says.
At the end of 2009, the CMHC insured roughly $473 billion worth of mortgages (it expected that figure to rise to $519 billion last year, though updated figures haven’t been released), which is nearly the entire mortgage insurance market in the country. The CMHC also assists the financial sector by buying pooled mortgages and reselling them to investors as bonds, giving banks and other institutions an immediate source of cash that they can re-lend. As of 2009, the CMHC had securitized $300 billion worth of mortgages. So critical is this function that Ottawa relied on the agency to prop up the country’s big banks during the financial crisis, giving the CMHC permission to buy $66 billion worth of mortgages.
It’s a familiar-sounding story to American ears. “The Canadian government mortgage apparatus echoes uncannily our experiences down here with Fannie and Freddie” says Jim Grant, author of the widely read Grant’s Interest Rate Observer newsletter. “CMHC has distorted the housing market by making homes, especially ones that are on the pricier end of the spectrum, more affordable and encouraged a lot of people to get in over their heads.”
Grant and other critics argue the CMHC’s balance sheet looks strikingly similar to both Fannie and Freddie if you compare the mortgages the agency insures against its equity. Using the CMHC’s 2010 forecasts, it insures $519.1 billion in mortgages against $9.9 billion in equity, which works out to around 1.9 per cent (although the CMHC says it has another $6.7 billion in “unearned” premiums that could be used toward future claims). By comparison, in 2007, at the peak of the bubble, Fannie Mae backed up US$2.7 trillion of mortgage-backed securities with US$40 billion of capital, or 1.5 per cent equity against its overall exposure. But the CMHC says its capital levels are double what the Office of the Superintendent of Financial Institutions requires of mortgage insurers (though the CMHC is not regulated by the OFSI). But such assurances in the absence of transparent disclosure offer limited comfort. As C.D. Howe researcher Finn Poschmann wrote in a recent report: “Parliament and the voters to whom it answers have no formal documentation of the way these exposures are calculated or managed.”
What bothers Grant is that the CMHC’s government-backed guarantees encourage banks to feel they have less to lose if loans go bad. “The risk has been shifted, rather than reduced, from the stockholders and depositors of the big Canadian banks to the Canadian taxpayer,” he says. And if house prices fall and borrowers get into trouble, the ripples would run far and wide. “A sharp break in Canadian house prices would inflict terri?c damage to consumer con?dence, would hurt the Canadian labour market, and ultimately produce a lot of the unpleasant results that have been America’s burden to bear since 2007.”
The CMHC argues such concerns are overblown. It points out that the Canadian mortgage system is fundamentally different than in the U.S. That’s because mortgage interest is not tax-deductible, a relatively small number of mortgages are securitized, and lenders can generally go after homeowners who don’t make their payments. The CMHC also points to Canada’s low rate of mortgage arrears, currently less than one per cent. Finally, the industry never got swept up in the subprime lending trend, the CMHC says. “We don’t have those products in Canada,” says Pierre Serré, the CMHC’s vice-president of insurance product and business development. “And if we did, CMHC certainly did not insure them.” Lending weight to the CMHC’s claims, a 2009 IMF report called Canada’s residential mortgage markets “boring but effective.”
Canadian lenders didn’t go overboard with the sorts of gimmicky mortgage products—loans with low initial “teaser” rates or so-called NINJA loans (no income, no job or assets)—that got Americans into so much trouble. But it’s not like they shied away from taking risks. For two years beginning in 2006, the CMHC offered insurance on mortgages with amortization periods of up to 40 years, nearly double the traditional 25-year period, and loans with zero down payments. The products were later reined in by Ottawa after the U.S. housing market tanked.
The CMHC dove into such high-risk products largely without supervision. While the government had previously relaxed conditions for guaranteeing mortgage insurance as part of a plan to introduce more private sector competition, it was the CMHC’s management and board that ultimately made the decision to go to 40-year amortization periods. In the same way, in 2007, the CMHC introduced a program for self-employed Canadians who have difficulty documenting their earnings to nonetheless obtain mortgage insurance by “stating” their income. While the program was restricted to borrowers with good credit ratings, one mortgage broker told Maclean’s self-employed Canadians were able to get much larger mortgages than those in the same field who had documented incomes. Then, a year ago, the CMHC backtracked and significantly tightened its rules on stated-income mortgages.
“We’re allowed to operate and make decisions with regards to mortgage insurance products and policies within the [government's] guarantee, and when we do so we advise the government of any changes,” says Peter De Barros, a spokesperson for the CMHC. Still, the move to riskier mortgage products drew the ire of then-Bank of Canada governor David Dodge, who sent a letter to CMHC chief executive Karen Kinsley in 2006 warning about the dangers of throwing fuel on a hot housing market. “A home purchaser is able to borrow at very low interest rates because you and I as taxpayers essentially guarantee that mortgage,” Dodge said during an interview earlier this year on Business News Network. “So it’s not at all unreasonable for us as taxpayers to say, ‘Look, Mr. Borrower, you’ve got to have an equity stake in this as well, so if things go really bad it’s not all on the Canadian taxpayer—part of it is on you.” (Dodge declined to be interviewed for this story.)
Critics say that, given what happened in the U.S., it’s irresponsible to not have someone watching over the CMHC. “They are the only major ?nancial institution in Canada not regulated by OSFI,” says Ian Lee, an assistant professor at Carleton University’s Sprott School of Business and a former bank manager. “Housing is so huge and the consequences are just so large. It’s not like they’re deciding what to do about the price of ballpoint pens.”
So how much risk have taxpayers been exposed to? The CMHC doesn’t reveal specific data about the credit exposure that it has taken on, other than to say it is manageable and in line with internal guidelines. As for the question of whether the CMHC’s policies could contribute to a housing crash, the agency says there’s no reason for Canadians to lose sleep. It says more than half of CMHC-insured mortgages have a loan-to-value ratio of less than 80 per cent based on the value of the original loan, and that the average equity in a CMHC-insured property is 45 per cent. “The mortgages are getting paid down—as a matter of fact, we see that about half of our folks made extra payments, more than just the minimum required principal payments,” says Serré, adding that rising home prices have also helped improve the debt picture.
But such aggregate figures don’t necessarily provide an accurate snapshot of how homeowners are faring, according to Poschmann at C.D. Howe. Important questions remain unanswered—like what is the geographic breakdown of its mortgages? Of those people with lower equity in their homes, what is the size of their mortgages? What classes of loans are they? What are their terms? “You can’t come up with an independent assessment of exposures based on the information they publish,” says Poschmann. “You can manage risks better with oversight and daylight, but right now we have pretty opaque books.”
While the CMHC says it has a sophisticated automated system to check creditworthiness of borrowers and property values, its biggest private sector competitor (which also has its mortgage insurance guaranteed by taxpayers, albeit only up to 90 per cent) nevertheless suggested during a 2007 hearing of the Senate banking committee that more than a third of all mortgages insured by the CMHC could be considered risky. Winsor Macdonell, the vice-president and general counsel of Genworth Financial, told the committee he assumed the CMHC’s portfolio looks similar to Genworth’s given that both provide mortgage insurance for the entire Canadian market. “When I talked about our portfolio, 36 per cent are people with low or poor credit,” he said. “Those are the people who are at risk.” Genworth declined to talk to Maclean’s for this story.
Serré declined to comment directly on Macdonell’s remarks. “I’m not exactly sure what low or poor credit is,” he says. “But I want to make clear that our mandate is not to get people into home ownership, our mandate is to provide the housing of choice. The last thing we want, as a government insurer, is to get people in a position where they can’t manage their debt.” For the sake of Canada and its fragile economic recovery, let’s hope he’s right.
Wow! Where do I begin? It was only a week ago when I delved into the topic of the Canada bubble and now another bombshell article from Maclean's questioning the practices of the Canada Housing Mortgage Corporation (CMHC). (Track daily news on the Canadian housing bubble on canadabubble.com and greaterfool.ca).
First, I used to work at the National Bank of Canada. I never met Ricardo Pascoe but I heard he's not exactly the type of guy you want to piss off. I can only imagine the phone call Mr. LePoidevin got after he wrote that stinging memo, probably telling him to "zip it". The CMHC is extremely important to Canadian banks.
In October 2009, Murray Dobbin wrote a commentary, Why Canada's Housing Bubble Will Burst. It was way too political for my taste, blaming "Harper Conservatives," (Liberals are as much to blame) but Mr. Dobbin did make a good point on banks passing off risk:
The banks themselves have taken on virtually no new risk. According to CMHC numbers in the two years from the beginning of 2007 to January 2009, Canadian banks increased their total mortgage credit outstanding by only 0.01 per cent. Fully 90.5 per cent of all growth in total Canadian mortgage credit outstanding since 2007 has been accounted for by Mortgage Backed Securities. Of course, the banks have no interest in saying no if you have qualified for a securitized CMHC loan -- because they bear no risk if you default.
If that sounds like sub-prime mortgages, it should. Sub-prime is any loan below prime. If a bank refuses you a loan, and CMHC gives you one, the loan is sub-prime. As Lepoidevin says in his warning letter, "Every single U.S. lender specializing in sub-prime has gone bankrupt. The largest sub-prime lender in the world is now the Canadian government."
But is it right to compare the CMHC to US agencies and subprime lenders? No, but let's go back to that Maclean's article above. The CMHC says "more than half of CMHC-insured mortgages have a loan-to-value ratio of less than 80 per cent based on the value of the original loan, and that the average equity in a CMHC-insured property is 45 per cent." In other words, a sizable portion of CMHC-insured mortgages have a loan-to-value ratio greater than 80 per cent based on the value of the original loan. Moreover, the CMHC does not publish the weighted loan-to-value ratio of their mortgage book pre and post 2007. As for the "average equity in a CMHC-insured property being 45 per cent," that too doesn't tell us much. You have to take the median and separate out CMHC-insured properties pre and post 2007.
Keep in mind, there are a lot of young two-income couples who bought homes in the last five years that they were able to purchase because they took out huge mortgages (insured by the CMHC). If one of them loses their job, they're going to be in big trouble. I'm not worried about two doctors who have a guaranteed high income taking out a huge mortgage (even though I think it's stupid). I'm more worried about some salesperson making a lot of money, taking out a huge mortgage thinking they're going to be able to make the payments in the future because they'll continue making a lot of money. If they lose their job, they're cooked. There is no way they're going to find another job that pays them as much. Just look at what happened in the US.
The Maclean's article made some mistakes too, citing some Carleton professor who said the CMHC is the "only major financial institution in Canada not regulated by OSFI." This is false. The two largest Crown corporations in Canada, the Canada Pension Plan Investment Board (CPPIB) and the Public Sector Pension Plan Investment Board (PSPIB), manage hundreds of billions in assets among each other and are not regulated by OSFI even though OSFI regulates private pension plans. Why is this the case? It's all about governance. These public pension investment boards want to operate at "arms-length" from the government. While I agree with this "arms-length" approach, best governance standards around the world have the same entity in charge of oversight for private pension plans also in charge of oversight at public pension plans. OSFI isn't perfect but they have qualified people who can ask some tough questions to these financial institutions and assess the risks they're taking. Whether or not OSFI wants this responsibility is another matter.
Other large financial Canadian Crown corporations like the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) are also not regulated by OSFI, however, they fall under the Financial Administration Act and are subject to a lot more public scrutiny than most Crown corporations. The truth is there is no perfect governance anywhere, and all Crown corporations have secrets they don't want to share publicly. The problem is that someone somewhere has to aggregate and assess all the risks these Crown corporations take. Is it going to be OSFI or another entity? Who knows? All I know is that if I was advising the Prime Minister of Canada, I'd tell him to create a new financial supervisory agency and ask David Dodge to head it (I'm biased, I like David Dodge a lot because he understands what's at stake).
After my last post on the Canada bubble, I received emails from a few money managers asking me the best way to short Canada. Let me be clear on something, this bubble isn't going to burst anytime soon. When it does, it's going to be painful and last for years, but I continue to believe Canadian equities will make new highs. Don't bother shorting Canadian banks either, and if you do, be aware that some banks are a lot more prudent than others in their lending standards. I wouldn't short Canadian bonds either. The best way to "short Canada" is through the Canadian dollar, but it will continue to track oil prices higher. It might decouple if housing tumbles, but it's a tough call to make right now. All this to say that this bubble will last longer than skeptics think. And don't just blame banks. Large Canadian credit unions are aggressively lending to pretty much anyone looking for a mortgage. This is another disaster waiting to happen (can't short credit unions either).
Finally, I want to publicly apologize for some silly comments I made about suburbia USA when I wrote about my recent experience with the CCSVI procedure. Those comments were rude, arrogant and stupid. There are a lot of hard working, decent folks living in these towns and I shouldn't have written anything negative about their way of life. I'm sorry if I offended anyone. Below, some serious humor on the CMHC.
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Nice article Leo.
"This is their (small) window of opportunity to gain a majority government."
Getting a majority in Canada will be like waiting for Mark Carney to raise interest rates. You will be waiting for a long time
wait... you want a Harper majority? The man is a raving psychopath and an ideologue. He will gut the country. It's lucky that he's been held in check to some degree thus far.
Did I tell you who I'm voting for or if I will vote? All I said is that this was a wise decision from the Conservatives because they have a small window of opportunity to capitalize on Canada's economic growth and try to gain a majority government.
All hail Chairman (Mao Tse Harper)! A better copy of GW Bush, I've never seen. The election will be, yet again, another non-event. $300 million down the crapper to host and election that will not change the political landscape here one iota.
Lets hope for another electoral/governmental stand off. As far as I'm concerned none of these clowns (Libs, Cons or NDPer's) have the credibility to run an effective govt.
While I like Conservative fiscal policy, their autocratic bent prevents me from casting my vote for the dicatorship of Mr. Harper.
You're right there, though you forgot to add corrupt to the list. He might have over-stepped with Libya though it's too soon to tell.
If I were a Federal leader campaign strategist for any opposition party I'd have my candidate including their wife in every single election photo. A bit dirty so I won't go further as to why though anyone who lives in Ottawa will probably know...
What stuns me the most is Canadians saw what happenede to our brethren down south when the housing crash happened. I talk to my neighbours and all I ever hear is how it won't happen here. That 500K mortgages on 100K salaries is totally manageable.
I am truly stunned by the spawn of stupid parents. They get more stupid every generation. It must be from IPADs or something cause man these people are gonna get kiled
Totally agree with your sentiment on the present Canadian Psyche here. What truly concerns me is that up here, everyone seems to be whistling happy tunes, pointing southward and exclaiming, look att he mess our poor US cousins have gotten themselves into. good thing that we are in much better shape.
Fed, of course, by our government continually touting "international praise" for our governance strucutre and sound financial system".
Just becuase you may be one of the least "ugly" girls at the dance, doesn't mean you are pretty.
As we have all seen too clearly....everythings good..........until one day, you wake up, and it isn't any longer. Runnin' for cover as we speak.
Agreed +++
I live in Québec where the housing bubble is probably one of the softest in Canada and it's still totally crazy! Banks lend monney to insolvent people agressivly. Many poeple i know who have a family income around 75 to 100k are offered 500 to 600k mortgage (fortnunetely, they don't have to go that high, but some do). And even thought the Gouvernement of Canada restricted the "no down payment offer" or "40 years mortgage", since most of the loan are garanteed by taxpayers, banks have many tricks to bypass the rules and give you a mortgage even if you don't have a penny for down payment...
It's ridiculous and feed the bubble to the point that many people who bought a house 5 years ago will tell you that they couldn't buy the same house today. Since these people are from the average income family, who- who knows how to count - could buy their house now??? And who will be able tomorrow when inflation start to kick in or interest rates start to rise?
Remember that Québec's taxpayer are probably the most taxed in North America... So the discretional income is way lower than the average North American (and the cost of living was lower also... But with houses prices that double in less than 10 years while income almost stagne, it's changing quite fast!)
Insane! But hey, for now, i'm the stupid guy "who missed the train"...
And maybe i really am...
Where are there $500K mortgages on $100K salaries?
Even including the cities where Asians are bidding up the prices, and the cities that have to expand up (due to mountains) instead of sprawling, this is an outlier example.
The average home traded in Canada, in February 2011, traded at $365K.
I completely agree, there are a TON of stupid parents, creating oblivous economic zombies as spawn. Shocks me daily.
Canada is creating the ingredients for a housing shit storm, but it's way off in the horizon.
Look up the Minsky Framework. A "post-keynesian" school of thought. Canada doesn't have the "Ponzi Unit", yet.
"Canada is creating the ingredients for a housing shit storm, but it's way off in the horizon."
Seems that was one of the last things that they were saying here in the US, just before the bottom RAPIDLY collapsed.
Being from the PNW I've got a bit of exposure to BC (not to mention that I married someone from there). In the PNW people have been brainwashed into the "can't happen here" mentality, that the economy here can escape hits occurring elsewhere. I tell people that that's the "island" mentality, that we're all hooked together now. Always ask: who are you going to sell to? (local economies only boost when there's a positive inflow of money; when economic hits happen to trading partners there's a reduction in that positive inflow). In the end it's about PRODUCING something, something that gets exported: watch Canada's exports; they could be another indicator of the needle hitting the bubble (if the bubble already hasn't started to take a hit). When Vancouver's housing market collapses that will take out the rest of Canada's economy. Quote me on that!
And Vancouver's real estate market (which in slow-down mode as it reaches the peak before it trajects to the downside) will be undercut as the US economy continues to decline; and then along this slow bleed China will implode, which will create a HUGE shock in BC's real estate market (many of the young Chinese whose parents are footing their livihoods in BC will be forced to return home), effectively turning off the lights (growth collapses).
It was a rocket launch, and once the initial fuel was spent the trajectory was pretty much a lock. The 40-year mortgage booster rocket- gone! Rock-bottom interest rates- gone! (rates have crept up- not good when all the mortgages are ARMs). Public sectors are being squeezed (monetary pressures).
I nailed the top in the real estate market in the US. I got my wife out of her home up in BC at, what I believe probably was, the top: she bought near the top before we'd met, otherwise I'd have discouraged her from the purchase; luckily she escaped being capsized.
Anyone who doesn't think Canada's housing sector isn't in a huge bubble (averaged across the sector) is likely: a) in the real estate business; b) blind; c) ignorant; d) fooling themselves.
The average house price in Australia is over $450,000.
Sadly you cannot short the CMHC.
But you can short their private cousin, Genworth Financial Canada.
Genworth is Canada's second biggest mortgage insurer after CMHC. They are just as awful, and they have a publicly traded stock.
To ensure there is competition in the market, the government also guarantees the mortgages insured by Genworth. So Genworth is free to backstop bad loans just like CMHC. However they are smaller and less well known than CMHC, and the guarantee only covers 90% of the loan value. So to compete, Genworth must have even looser underwriting than CMHC. Yes, their book is even more toxic than CMHC!
So investors will stay away from this abomination, right? Heck no! Pension managers and geezers love their growth rate and dividend yield. Yes, growth and yield. Genworth has gained lots of market share by loading up on new insurance during the peak of the housing bubble, with a wave of buying and refis at extremely low rates, with little down and 35-40 year amortization. Growth! At the same time they have paid out almost all of the premiums they are collecting to their investors while shrinking their equity cushion. Yield! Gotta cash out while the cash flow is good.
Canadians like to pat themselves on the back for avoiding a bubble and crash like the US. But they have simply managed to keep the bubble inflated by encouraging homeowners to buy in or refi with rock-bottom interest rates. And EVERYONE in Canada has a variable rate mortgage - even if they lock in a fixed rate, they only have a 5-year term with the lender. After that the rates reset and they are forced to refi. The 30-year fixed mortgage common in the US simply does not exist in Canada.
Sure, the national averages look OK. Included in the average are the boomers aged 55-65 who have paid off 80-90% of their principal. But there are millions of homeowners who bought or refinanced in 2007-2010 and have less than 10% equity at peak-of-the-market valuations. The national average equity may be 45% but that doesn't tell the story.
When rates go up, even a little, those millions will be completely unable to afford their re-cast mortgages. They will default. CMHC and Genworth will make the lenders whole, with lots of help from the taxpayer. But not before Genworth completely wipes out all their equity investors.
If you have the means (a Canadian broker), short this sucker before the crash.
yup, mic.to, short it.
There has been no peak yet in the national numbers. So I don't know how "millions" have bought or refinanced at the peak, unless your calling a peak.
Also, prices are up, YoY 8.8% nationally, 3.4% excluding Vancouver. Everybody cites Vancouver prices as insane, but it's one of the world's best places to live, a city surrounded by mountains (they have to build up, instead of sprawling, which is actually a more effecient way to live, albeit messes with supply and demand for space), and Asians come in droves to bid up prices. The 3.4% is right in line with real inflation. Add some GROWTH (a concept most Americans might not remember what that feels like)...and our commodities...
...well, good luck with your short. I think there are better risk/reward opportunities out there.
Without foreign buyers (China) Vancouver real estate prices would fall in half.
I have relatives in Vancouver and I can tell you, drug crimes and gang violence are rampant.
And PLEASE do not cite the GOVERNMENT STATISTICS that crime rates are falling. If you ignore the violence and do not count the crimes, then they always look like they are falling.
Quaint, provincial Vancouver of the past is gone. The lead stories on local TV news is always another gang violence, and killing story.
Real estate prices in Canada and Vancouver in particular depend on China exports and low interest rates.
And remember Canada, real estate prices NEVER GO DOWN.
/sarc off.
Yes, perhaps it would be good to wait until the precise moment prices reach their pinnacle and begin declining. Maybe you are one of those market timers who is able to ride the market up against the tide of fundamentals and then sell at the top. More likely you are going to miss it.
I would rather be right, early. Like I was in 2007 when I shorted (actually I bought puts on) US real-estate finance. It didn't work right away. Then I tripled by bets.
My point is that almost half of mortgages in Canada were originated in 2007-2010 with prices near their current levels. Prices established by loose money and low rates. There are lots of good old mortgages, almost paid off. They are safe. And they make the averages look good. But people who got in, refinanced, or traded up in 2007-2010 overwhelmingly opted for 35 year amortization, 5% down, and five-year terms, and 2% rates. And they got the biggest mortage they could, with as much as 40% DTI.
Go ahead and engage in the popular delusions of the masses. Prices are going up, so they will continue up. Vancouver is a nice place to live, so it's OK to overpay there. Hot money from foreign investors parked in unoccupied condos won't try to flee when things go bad. Canada's economy is healthy, because our real estate market is allowing Canadians to keep borrowing and spending.
The real issue is affordability. Those millions of Canadians who got huge mortages at rock-bottom rates drove prices up to where they are. If rates go up, suddenly the marginal buyer can afford vastly less. And when those 5-year terms expire, owners will be forced to refinance with negative equity and payments twice what they can afford.
I am talking my book, but I'm right.
And maybe the timing is right, too. Canada is about to elect another minority parliament where the goverment could be a Liberal-NDP coalition. That would give spendthrift socialists the balance of power. Just the sort of thing that attracts bond vigilantes and drives up costs of borrowing.
Could be very interesting.
you can go back 3 or more years and the Canadian housing doomsayers have been left out in the cold. I know Leo is a canuck but I would be interested in his comments on the 'housing bubbles' in Singapore, HK etc.
''you can go back 3 or more years and the Canadian housing doomsayers have been left out in the cold. I know Leo is a canuck but I would be interested in his comments on the 'housing bubbles' in Singapore, HK etc.''
Again, read my comment carefully. Never said this bubble is going to burst anytime soon. In fact, I see CDN stocks hitting a new high. When housing collapses, it will be extremely painful.
Since the CMHC may send the thought police after me I'll be brief.
For all you Canadians out there. If you invest in any fixed income instruments like tbill mutuals or money market funds look for something in the investment list.
Canada Housing Trust. That my dear friends is you owning crap mortgages in your fixed income funds. Scary shit. I moved everything fixed income like back into the banks products due to this.
Just think if you have Cdn Hoiusing Trudt crap in your tbill or MMF then you happily own a mortgage basket of mortgages taken out by 20 year olds who bought in TO or Van for 700K with 5% down.
Better yet, like Fannie and Freddie guess who owns the crap when it fails? Yup the taxpayer
Be very scared people. This will end ugly
My husband went through the holdings of every single bond fund he and his parents are in for just that reason. A couple of years ago he'd picked a few 'safe haven' bond funds only to see that recently they'd quietly increased their holdings of CMHC bonds. Needless to say he got out of those now. I'd have to ask him for the specific details...
Is she a Merideth twin from cnd?!
Leo don't try to sell me that Canada is worried about a housing or credit bubble, it's central bank clearly is not raising interest rates due to a Canadian dollar now worth more than the U.S. Dollar. When 85% of the goods Canada produces travel south it is sound business to have a cheaper currency guaranteeing the millions of Canadian jobs that depend on it. This "bubble" is an engineered process to guarantee a "cheap" Canadian dollar for years to come. You yourself even point to shorting the Canadian dollar as a way to make money from the fallout of this orchestrated event. It all just boils down to "Beggar thy neighbor, neighbor!"
Actually, the Bank of Canada started raising rates but the truth is it can't raise rates independently of the Fed and now that the Japan crisis hit, I doubt we'll see any rate increases anywhere. The CAD is rising because of global flows into Canadian stocks and bonds. It's not just interest rate expectations. Despite the rise in our currency, Canadian exports remain solid, but we'll see how long that lasts.
It raised rates 50 basis points ont time in early 2010. You are correct that it can't raise rates independantly of the FED because it would strengthen the CAD, you know this as foreign currency would flood into a lower priced bond market.
The CAD has strenghtened on 3 factors: a sound financial system, a fiscally sound government and OIL.
Canadian exports to the U.S. has dropped to around 70% from a high of 85%. To combat the strengthening CAD and losing the "competitive edge; crutch?" the government has cut corporate taxes to allow Canadian companies to continue to try and undercut U.S. competitors. Many trucking companies have been told shipping increases will not be tolerated and many have not been given raises.
Remember this Leo: "the parasite must always experience what the host experiences". Your housing bubble is being manufactured by your central bank just as ours was. Printing money and debt is just the medicine Canada needs to weaken it's currency and to continue to enjoy the fruits of NAFTA.
Beggar they neighbor, neighbor!
Spot-on observation/commentary.
Everyone's chained together, tethered to the US economy. And the US economy is slipping under the waterline.
Canada is a bit longer on the tether thanks to the US's addiction to oil/NG. The last thing that the addict gives up (before their lives) is what they are addicted to. But... there's no growth in a deadly addiction, only death, and the available customers will continue to die off, further cutting into Canada's ability to escape "unscathed." Canada's main exports are energy and automobiles. Not long prospects: growth in China won't save Canada, China will produce their own autos until, that is, their economy collapses (as China eases off buying US debt that US debt will start killing US consumers, and there goes China!).
Lots of great people in Canada, don't get me wrong (heck, I married one!), but it's my OBSERVATION that they suffer from a self-imposed insecurity complex that tends to make them over-inflate their real capabilities (trying to keep up with the Joneses [US]).
We're all just hanging on, waiting for the other shoe to drop over the railing...
I'd want to be *long* Canadian banks when this deflationary meltdown happens because they'll get paid their debts, at 100 cents on the dollar, from the CMHC. And be able to acquire deflated assets for cheap, if they want.
CMHC is nothing but a scheme, in the long run, to transfer all of the assets of Canadians to bankers and bank shareholders.
how did that work for Citi and B of A ? These banks will tank with the housing market.
Those organizations had duration mismatch which led to a liquidity crisis. The Canadian banks do not -- they run tightly matched portfolios.
In Canada, 5-year CD = 5 year real estate loan. Or overnight deposit = overnight housing loan. All 100% government guaranteed, of course.
In US, overnight deposit = 30 year real estate loan. Massive duration mismatch.
Canadian banks are not the same 'beasts' as Citi and B of A.
also oil costs should crimp operational costs on mining...i.e profits
Stifle debate and hide the facts. Seems Canadians certainly are close cousins of Americans.
CAD and AUD...that will be the trade from hell, once both housing markets implode.
chump666, can you please explain the exact reason for which someone will short CAD or AUD?
When the housing bubble burst in US it was nothing else but deflationary. Now I'm thinking on getting long CAD and see if it gets like JPY. If BOC will continue printing loonies without bondzilla crashing them, I will change my mind, but for now I think that CAD and AUD are a good choice.
Yup, but these currencies have to decouple from commodity prices. I don't see this happening yet.
good point. still parabolic rise in copper and iro ore need to correct. There is a commodity sell off soon, just trying to time that hopefully sitting in the march to june on a AUD put...
As one famous trader once said, "you know the trend is going to turn, but you'll go broke waiting..."
I have shorts ready for these banks. They are all way beyond pre lehman levels. A rise in interest rates and these banks are in trouble.
In response to your advice not to short banks, just because banks will be protected from the riskiest mortgages doesn't mean they won't be effected by a weaker economy on the back of a housing price correction.
Here's a funny cartoon explaining the cmhc & the housing bubble
http://www.youtube.com/watch?v=Xk3j6g50Krs
and here's a good buying tool for Vancouver real estate
http://www.crackshackormansion.com/
True, banks will not be completely immune and their earnings will get hit when the economy slows, but they're protected by the politicians. The six major banks in Canada carry lots of political clout.
While that is true, and probably an understatement that Canadian banks carry a lot of politcal clout, two things:
The first is that in the previous financial crisis their share prices dropped along with the rest of the exchange - some by half. If it happened once it can certainly happen again, at least for the short term and enough for someone shorting to turn around a quick profit
Two, I suspect it also depends on how much is owned by foreign investors who don't really know much about the Canadian political landscape and could panic and pull their money quite easily.
Leo! Sssshhhhhhh, please! Let's not awaken the Canadian sheeples yet, I still have some real estate to unload first and more PMs to buy ;-)
Leo perhaps you could help connect the dots
It would appear to me somone was watching, moreover the it appears CMHC was offering more agressive products for a two year period that ended back in 2008 yet prices are up since 2008.
The tone of the article reminds of old 60 minutes interviews, which later came out to be somewhat "biased" or in the vernacular hit jobs.
For example I am not sure 40 being characterized as nearly double 25 is a balanced comment.
Finally, but I don't have time now - the $500b number compared to the $2.7T number doesn't pass the smell test - There is not a chance that CMHC is twice (using rule of 10) the sized of fannie freddie - I think the author was comparing apples and oranges e.g. the 2.7 refers to securatized vs the 500b which is the total.
Conspicious by its absence is the author's failure to mention subprime except in one reference quoting the CMHC. Subprime was at the heart of the US crisis so why wouldn't the author bring it up?
Perhaps because alomst one quarter of US mortgages held that status at the peak of the US housing crisis. By comparison perhaps one twentieth of Canadian mortgages were sub prime. It is fair to say that CMHC during the 2006-2008 period became more agressive but they were reigned in and such exotics as negative amortization etc...
more later
If you look at the average cost of a home compared to income. Its blinding clear. Unless companies get really generous in Canada with wages it wont hold. Guess what oil and mining is only like 5% of GDP. You know the thing people keep saying why Canada is doing so well. LOL actually contruction is larger. This is going to end badly. Now lets see some smart ways to invest shortside as this unravels. Not nescessarily now but to know how to play this. Does Canada have any futures contracts that track housing accurately?
"It would appear to me someone was watching, moreover the it appears CMHC was offering more aggressive products for a two year period that ended back in 2008 yet prices are up since 2008."
Too little, too late. Flaherty was watching and did the right thing, but it's not enough and I can show you examples of credit unions and second tier banks aggressively peddling mortgages with ludicrous terms. I was careful in my comments not to directly compare the CMHC to US agencies or subprime lenders, but the fact remains the CMHC is not transparent enough. Read my comments on the weighted loan-to-value ratio pre and post 2007. Also, who cares about the "average equity in a CMHC-insured property being 45 per cent"? This says nothing because someone who has a home worth a million now and 1 year left to pay off their mortgage and someone else who has a home worth a million and has 25 years left to pay it off and put zero down, take the average and it's 50%. Does this reassure you???
The author puts front and center the Fannie comparison but is light on stats. I believe that Fannie/Freddie combined backed more than $5t in 2008 (much more now)
But underlying the author's thesis is the idea that the Canadian real estate market is about to go into freefall, yet he provides little evidence that will happen and instead implies that the Canadian and US housing market dynamcics are similar and Canada will therefore meet a similar fate.
They are not.
Some good data in this report (PDF) from a month ago
http://bit.ly/erNnNv
and an interesting article from FT in 2010
http://bit.ly/gQ6nX7
and here is Rosenberg's prediction from a year ago (wrong as usual)
http://www.moneytalks.net/pdfs/DR0716.pdf
Do you work at CMHC's risk department? Geez! Read my comment carefully, especially this part: ''Let me be clear on something, this bubble isn't going to burst anytime soon. When it does, it's going to be painful and last for years..''