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Guest Post: Primer #4: CMHC- The Enabler To Canada’s Housing Addiction
Submitted by Ben Rabidoux of Financial Insights
Primer #4: CMHC- The enabler to Canada’s housing addiction
In our primers, we’ve now covered some of the important concepts that will be
referenced frequently on this blog, namely deflation,
the housing
bubble, and the significance of mass
psychology in financial events. This primer will add on to the primer on
the Canadian housing bubble and give some insight into what has enabled this
bubble to reach such significant proportions.
It is not possible to understand the Canadian housing bubble phenomenon
without understanding the role of CMHC (Canada Mortgage and Housing
Corporation) in mortgage lending. First, a bit of history.
CMHC was created in 1946
(the known as Central Mortgage and Housing Corp.). The mandate of CMHC was
to administer the National Housing Act and the Home Improvement Loans Guarantee
Act. Essentially it was created to provide soldiers returning home from war
with access to affordable mortgages.
Today, CMHC describes their role as follows:
“Canada Mortgage and Housing Corporation (CMHC) is Canada’s national housing
agency. We are committed to helping Canadians access a wide choice of
quality, affordable homes, while making vibrant, healthy communities
and cities a reality across the country. CMHC works to enhance Canada’s
housing finance options, assist Canadians who cannot afford housing in the
private market, improve building standards and housing construction,
and provide policymakers with the information and analysis they need to sustain
a vibrant housing market in Canada”
It’s the bold part of this statement I want to focus on. We will see shortly
that the mandate to ‘(help) Canadians access…affordable homes’…by…’enhancing
finance options’ is a self-defeating mandate. CMHC works by acting as the
guarantor for any mortgage where the purchaser is unable to pay a specified
amount as a down payment (20% for residential properties). Essentially CMHC
guarantees the full value of the loan so as to protect the lending institution
in the event that the buyer defaults on their mortgage and the bank is unable to
recover the full value of the loan by selling the home. Consider an example:
Imagine a homeowner buys a $200,000 home with a 5% downpayment, leaving a
mortgage of $190,000. Since the homeowner does not have the required 20%
downpayment, they pay a CMHC insurance fee and CMHC guarantees that they will
cover any losses so the bank can be assured of a profit. A year later the
economy sours, the homeowner loses their job, and real estate falls by 10% (I
know real estate only goes up, but just use your imagination). The home is now
worth $180,000 but the bank has lent $190,000 leaving them with a 10K loss.
Seeing as how we embrace capitalism some strange system
where we guarantee private banks a profit at the expense of taxpayers, we can’t
allow that! How else can the bank CEOs get their fat bonuses. So instead the
bank waddles up to CMHC and ask for the difference. CMHC obliges and promptly
hands over the 10K.
As I touched on in an earlier
post, any time the government steps in to guarantee things, they actually
defeat their own purpose. In this case, let me ask you whether or not CMHC has
been successful in helping to keep the costs of homes affordable? Let me
refresh your memory of how affordability currently measures here in Canada (and
this is with record low interest rates):
FAIL!
So what is really going on here? A more appropriate wording of their mandate
might be, “To provide artificially cheap mortgage rates for borrowers who may
not otherwise qualify for such rates and to ensure that the banks have no
reservations about lending to said individuals”. In this respect, they are a
resounding success. In a mortgage market free of government manipulation, a
lending institution would carefully consider what interest rate to charge a
person. They would take into consideration their credit worthiness, payment
history, and down payment since negative equity is one of the important
determinants of default rates. Now imagine two people came in to a bank.
One with a FICO score of 800 (excellent credit) and a down payment of 25%, the
other with a FICO score of 650 (average or slightly below average credit) and a
down payment of 5%. In a normal, functioning mortgage market, who should get
the lower rate? If you were asked to lend money to one of them, which would you
choose? If you did decide to lend money to the less credit-worthy person, you
would ask for a higher interest rate to compensate for the increased risk. And
so it should be. The effect of the CMHC guarantees ensures that both
individuals get the low rates, one of which would be an artificial, manipulated
low rate.
You may ask, “why hasn’t CMHC spurred a bubble before now?”
Excellent question. To answer that, let me walk you through some key events that
have greatly changed the mortgage market landscape in Canada.
In 1954, the federal government expanded the National Housing Act to allow
chartered banks to enter the NHA lending field. CMHC introduced Mortgage Loan
Insurance, taking on mortgage risks with a 25% down
payment.
In 1999, the National Housing Act and the Canada Mortgage and Housing
Corporation Act were modified, allowing for the introduction of a 5%
down payment – a change launched as a five-year pilot in 1990, extended
and finalized in 1999 – removing a significant barrier for first-time home
buyers. Yes….imagine the injustice of actually having to SAVE to purchase a
home, as all the generations prior had done.
In 2003 CMHC decided to remove the price ceilings limitations. That is, it
would insure any mortgage regardless of the cost of the home.
These two developments had the effect of increasing the outstanding mortgage
balance in Canada by 125% between 2000 and 2009. Thanks once again to Jonathan
Tongue for compiling the chart.
In 2007, CMHC allowed people to purchase a home with no down payment
and ammortize it over 40 years. This was changed back to a 5% down
payment requirement and a maximum amortization of 35 years in late 2008.
In an effort to prop up the real estate market in 2008 (when affordability
nosedived and the economy soured), the Harper government directed the
CMHC to
approve as many high-risk borrowers as possible and to keep credit
flowing. The approval rate for these risky loans went from 33% in 2007
to 42% in 2008. By mid-2007, average equity as a share of home value was down to
6% — from 48% in 2003. This resulted in a shocking 9% increase in household
debt between June 2008 and June 2009, the only such increase during a recession
in Canadian history.
I have long maintained that the net effect of these policies has been to pull
demand forward, particularly in the past few years, and to raise home ownership
rates to artificially high levels. In Canada we are currently at the highest
home ownership rate in our history, hovering around 70%. How many more people
can buy? CMHC has been absolutely pivotal in getting many new individuals into
the market, but have massively skewed prices in the process.
So just how much does CMHC insure and what is the risk to taxpayers? In
March 2010, the Fraser Institute released a study
highlighting the risks to taxpayers and suggesting a privatized mortgage market
structure similar to the one Australia uses. This study confirmed that the
taxpayer risk from a housing collapse is greater in Canada than elsewhere. It
notes that a stunning 90% of all insured residential mortgages in Canada are
covered by the CMHC. This amounts to an estimated $480-billion (now no doubt
over half a trillion) for which Canadian taxpayers would be on the hook if the
housing market tanked (although any loss would obviously only be a fraction of
this amount).
Those who have payed CMHC fees may protest that it won’t be taxpayers on the
hook, but that their fees will cover future losses. Perhaps. Bust consider
that standard loan fees reach a maximum of only 3.3% of the total loan value.
Not much of a cushion. As you can see in the following chart, the standard
premium for a non-traditional down payment (such as this
ridiculous offer….gotta love our ‘conservative’ banks) is 2.9%, plus a 0.4%
surcharge if it is amortized over 35 years.
It’s not hard to see that CMHC is the crutch supporting a wounded housing
market. It has had a role analogous, though not identical to the one played by
Fannie Mae and Freddie Mac in the US. See how things turned out for them.
Canadians are on the hook for a significant amount of debt and it is absolutely
my belief that we will pay up in the next few years. Government interventions
in free markets can have the effect of propping up demand over the short term.
But free market principles will win out over the long term. In the case of our
CMHC-aided housing bubble, the long term is now here.
Cheers and blessings
Ben
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Is it like Fannie and Freddie in the US? Or is it a government agency?
Yes and yes. Confused? So are most people.
It's a commission, so it's not quite a Department. A commission is given a mandate over a certain period of time with start up Capital from the federal government, the commission then has the right to levy fee's to keep itself operational. So it has all the worst pieces of government and the worst pieces of private enterprise except it has a license to do as it sees fit.
In CMHC's case if you contribute less than 35% to the down payment of your home you pay a fee, monthly, from this schedule.
http://www.cmhc-schl.gc.ca/en/co/moloin/moloin_005.cfm
Five years ago it was 20% and you could wave the fee. Note how the schedule has changed to punish those that are good at saving their money.
So in addition to paying a mortgage you get to pay interest on the interest on the interest on a bank loan. In addition to GST or HST sales tax on the sale of ANY home (used or new)
So why are people buying homes in Canada with less than 100% down. Mainly because most of my fellow countrymen are total fucking idiots that are so pussy whipped they deserve to be robbed repeatedly.
90% agree with you, however, some people make a living just buying half-destroyed multi-unit houses, repairing them a little and renting them. These properties are cash-flow positive with 20-30 year mortgages. Deposits are paid out from HELOCs.
For most people this is death sentence, however, there are a few people that are CAPABLE of pulling this off. But in Woodbridge, where I live, there's a housing bubble as any. The concept of backyard virtually disappeared, even for houses that go for 600K. They are literally littered across from each other, and people are jumping on them like flies to a lamp.
20-30 year mortgages? Those don't really exist in Canada, do they? Maybe 20-30 year amortizations, but not true 30-year mortgages.
(actually..they do exist, but the rates prohibitive, like 300-400bp above GoC 30-year bonds, typically, because there's no secondary market for securization or guarantees!)
I don't know much about MBS, especially in Canada, as I'm more familiar with USA markets, but I was fooling around on Bloomberg terminal and saw over 100 pages of Canadian Mortgage pools. I would assume the securitization arket is not as hot as in USA, but the 'stability of Canadian banking system' myth is gaining momentum (moment-ful - sometimesyou have to coin new words) and don't be surprised that as the last up-leg in our and Australian housing bubbles securitizing shops will sprout up to buy any toxic pools they can get their hands on.
There were 30 and 40 year mortgages, but you're right, many people go for refi every 5 years or so.
Another interesting development is the appearence of many small mom/pop mgt. lending shops. That's certainly another needed component for a complete blow-up. There's just so many of them now, and they are far more noticeable.
+1000000000000000 for the last sentence.
Not all are whipped though - I know plenty of single guys who think 'owning' a bunch of Toronto condos that sit empty are a great 'investment'.
It why I finished selling mine in Ottawa and bought more farm land today. Buy Ontario, you'll be buying my corn next year and the year after that. Managed services are shit, food (well seed) is the bomb.
Had some Monsanto asswipe around today though, going to have to take care of him.
Taken care of. I wonder what the next crew will look like...hopefully they bring some people bigger than dutch valley boys next time and meaner than the scots and irish when threatening dollars on the hundred from their wallets. Next time we'll meet on Mohawk land and I'll let some feller use them for a tour.
Enjoy the harvest next year. Best fertilizer in the ground now. Corn is better than pigs sometimes in breaking down material, reason why a sown field needs a shit load of ferts to get it working. When seeding corn, large amounts of protein is a good gardening tip.
Helpful gardening tip, human hair is one of the richest nitrogen sources to compost with btw. As an ex-scientist I really like biology as a great place to determine the outcome. More examples available how human investment scearios work out. Physics is good, but the only law humans follow is entropy.
Night.
Buy Ontario made indeed! I love my strawberries, once a year, we even go to a farm nearby and pick them.
Where are you located btw?
Do you know what's up with tomatoes this summer? They all seemed to be of surprisingly poor quality.
Also, please enlighten me regarding potash, it seems like a huge hype to me, you could plant something like corn and it makes the ground 'richer', what use does potash have?
Don't you think that the Canadian government is going to be stuck printing and taxing to bail this CMHC out ?
I think the CAD is going to get debased.
Just like every other currency, of course!
What do you mean? just the opposite will happen. Mass defaults will cause race to liquidity, most liquid is cash and gov't treasuries.
Also, what devaluates the CURNC is printing of more CURNC, but defaulted bonds have the effect of destroying CURNC, so to some degree the effect is neutral, it's more of a shift of who has the risk.
That's not quite accurate. CMHC insurance is required if one uses less than a 20% downpayment per the Bank Act. Banks may, in their discretion, require insurance on those >20% downpayment loans if they are not comfortable with the level of risk posed.
This requirement exists even today. 5 years ago, it used to be 25%, but they lowered the downpayment threshold to 20%.
Interest isn't deductible in Canada either, which makes Canadian housing prices even more absurd. At least, in the USA, as interest rates trend higher, the mortgage interest deduction trends higher as well.
So basically anyone not working for the Canadian government. Go look at the chart again. It was revised AGAIN and it's no longer 20% because of the power of sales.
For our American cousins, the US has foreclosures, in Canada after the early 90's and the war of word (aka Political correctness) in became power of sale. Some basic terms for everyone to understand the terms here.
Employment insurance - The Dole (UK), Unemployment Insurance (US)
Refugee - Bum
Social Assistance Recipient - Bum
MP, MPP, Senator, Premier - Bum
Hope that clears some things up. To listen to dissent in Canada, we listen to our American cousins and fully understand the situation isn't too far away for ourselves.
Regardless of the jingoistic canuck horseshit you'll hear from my fellow collection of numbnuts talking about how peaceful Canada is and how awesome our Healthcare systems (yes there are many, province to province and they barely talk to each other...seriously it's that retarded) are.
There is something we don't have is a voice. It's closer to a muffled rape victim perpetually being robbed and some asshole on the tube explaining things are great.
Again, waiting in a deck chair, watching it burn, drinking a pint and waiting to collect heads.
"Mainly because most of my fellow countrymen are total fucking idiots that are so pussy whipped they deserve to be robbed repeatedly."
Ha, ha, ha, ha......ha, ha.
I'd say the same for here in Australia. Maybe it's a Commonwealth (sic/k) thing.
No, Americans are stoopider than us, yes....& we all know New Zealanders fuck sheep... ...really they do.
I honestly don't think the Yanks are. Like everyone else, we're trying to get by. We've all thrown down with each other historically, but like the friends that have stuck with me to this day, I've had some knuckle busters behind a rink with them. All I see right now is cousins getting robbed and noting certain similarities in the local situation.
It's a little concerning to say the least.
And Yeah, I do not give homage to the old bitch in England, others do in the Commonwealth. We just got stuck with parlimentary nonsense that removes people from the process of actually growing a pair. Austraila and Canad have a couple things in common, we're the white people the Empire deemed expendable to build the doormat for the inbred blue blood trash running the rock there. Not much else other than a taste for good pints and good looking chicks. (Seriously UK dramas has some of the ugliest bitchez. wtf)
Great stuff Ben,
Can you explain what the CMHC does with the fees they collect? who manages those funds? And what are the levels of current reserves from collected fees?
They hire armies of Civil servants in a really nice building off Montreal Road and the Parkway in Ottawa. I've had guys contract into there usually to do a year end budget burn.
They turn the fees into bonds, which are built into Canuck savings bonds or leveraged into portable derivatives. (Canada is infamous for having a huge hardon for developing derivatives...aka betting on your own house x 10 the going rate)
The funds themselves are collected when you buy a house here, they are managed by CMHC and the reserve tally's aren't publically available unless you ask through the freedom of information act.
In Canada it's like asking what the current reserves are in the Canadian Pension Plan (public SS type of fund). Nobody really knows. There is obviously some sort of discretionary number out there, nobody can seem to add the numbers up at all. I do know that they've been trying to impliment SAP unsuccessfully for around 12 years in an attempt to manage it but they just can't seem to find any secret cleared programmers at $400 a day when everyone else is offering $1200.
Atleast Canadas banks can pass off the risk. Here in Australia our Banks just lie...
http://www.moneymorning.com.au/20100910/has-commonwealth-bank-deliberately-misled-investors.html
Funny how they did not mention free health care,plenty of drinking water,low crime rate,abundant resources,constant asian immigration,somehwat fiscally responsible gov't and a population/arable land ratio.
These factors might or might not support housing prices.
the socio-economic demographic model a side, you might want to research a little further into how all that is made to happen rather than the fact it's currently the norm.
Sow's ears and silk purses come to mind.
The point is that the perception of a fiscally responsible government is not supported by the facts... although they have done a masterful job (with the help of the MSM and the real estate / banking lobby) of spinning the myth.
The key moves are spelled out in the following quote (and these actions were taken very quietly, only coming into public view much later by a handful of whistle-blowers, who were vilified in the MSM until now)...
The next few years will be very difficult for Canadian real estate (contrary to the "Great White North miracle myths)... especially in the major cities.
The same ,low crime rate,abundant resources,constant asian immigration,somehwat fiscally responsible gov't and a population/arable land ratio. Is used in Oz aswell.
Classic "oh its different here - this time"...
"Asian money" is such a myth, it ain't even funny. But the police/banks have started to uncover instances of people within certain ethnic groups, at least in Vancouver, of flipping houses to each other, to obtain progressively higher appraisals, and valuations for the purpose of obtaining more CMHC money (which, I would presume, is immediately shipped back to China).
This one is probably more prevalent than anyone would like to admit:
http://www.ctv.ca/CTVNews/Canada/20100505/bmo-mortgage-fraud-100505/
Even alleged to involve a member of parliament! At any rate, there's never just one cockroach.
From a Canadian who has lived in the country all his life, I have a few issues with your statement:
- Our government isn't as fiscally responsible as people may believe. The federal government deficit exceeded $50B in 2009, and that excludes provincial deficits of $34B. Municipal budgets aren't much better, i.e. Toronto.
- Our 'free' health care is becoming more expensive, with provinces beginning to charge premiums based on income. For the most part, health insurance is required if you need anything more than the basic 'free' treatment.
- As for constant Asian immigration, this is true in many city centers (especially Vancouver), if the China bubble were to pop then further pressure would be placed on Canadian housing.
The article does a good job of summing up the current strength in the Canadian housing market, the CMHC.Sry,I forgot Toronto is the center of the universe.
Sorry but Canadians are fucking morons with money. I am one of the few that isn't. Dispite having some assets, Canada is still in the same boat as most western nations.
Shit, not only am I embarrassed to be male but also Canadian as well now.
Spitzer is Canadian - who would have thunk it!
I actually disagree with some of the points made in the article and some of your comments. Canada is not in the same boat as most Western nations especially wrt real estate.
I will get my ducks in a row (do some analysis) but any analysis on the Canadian economy has to look at regional conditions. Let's look at the three largest cities in Canada. Vancouver, because of inflow of Asian money, probably is in a bubble - from what I've seen with housing prices this probably is true. Toronto not so much (though there is a glut of condos here - good for me who rents!) However, the size of Toronto, its amenities, its status as cool, urban centre, financial centre of Canada and from what I've heard tech people like it too... I think housing costs are pretty reasonable. Compared to what I was paying in Manhattan around two years ago - 50% less plus more space. Compared to what I was paying in Upstate NY, ~25% more (now that was a bubble!).
And what about the 905 - fastest growing area in Canada but still affordable. My sister and husband just recently sold one house in a good area of 905 (out Niagara way) after owning it for two years and bought another slightly larger one (also in a good area) to accommodate their growing family. They made a bit of money on the sale but nothing to suggest a bubble!
Montreal bubbled early in the first decade of the 2000's - once investors realized that it was safe to go back because there was little or no chance of the separatists gaining power again. And part of that was a correction because real estate values were so undervalued during the 70's and 80's.
And wrt to your post on the CAD - unless there is massive central bank intervention - it is going to go up versus the US dollar (at some point).
Okay first off.
Toronto is a shit hole, it's a strip mall that starts in Bellville and ends around Waterloo, there just happens to be a building larger than 30 stories somewhere in the middle of the strip mall and tiny little houses stacked on one another sold for 600k+.
Vancouver is the city is is today because Mike Harris and the wholesale return of Hong Kong at the end of it's lease to China. In 90 I worked for Microsoft and used to travel to Vancouver because it was cleaner than Seattle and a lot less crime ridden plus I would visit family. Now the place is Chinese herion dealers and Ontario Junkies. I suppose it's a problem that solves itself, but unfortunately the Indian and Triads moved in and it's just not that friendly anymore, unless you are a junkie. Other than the natural beauty of the Rockies, the people of Vancouver can't help themselve but be massive self righteous douchebags. It has been my opinion that the green movement of the west coast should help humanity more by leaving a smaller foot print, namely by killing themselves. Vancouver = dump Seattle is the cleaner, nicer city now btw.
Montreal, next to St John's. Women are nice, food is good, everyone is broke and they don't pretend to be rich but they have fun. Both cities have something in common, great people and an infrastructure that needs a bit of work. However not a dump because both cities have a great flavour to them.
Calgary, fun and hard working.
Winnipeg. Anus of Canada. They built a city and nobody came. Place is run by Indian gangs and has surpassed ANY first world city in terms of car theft and stabbings. Burning the town down to cinders would be kindness as nobody knows why it still exists after the idea of central rail distribution collapsed.
I will admit I am no expert on the east but the west is fucked up. i do think Toronto is cool, not a shit hole. Its the gold mining financing capital of the world.
Trust me it's a shit hole. People are pricks, it's a strip mall that Detroit rivals and TO residents (like Vancouver) love the smell of their own farts. You could sell rats on a stick with a proposal and have a line up of prospectus client to eat the rats on a stick. I have. As previously mentioned, deserved to be robbed.
And the bad demographics and aging population, much of which wants to retire to Florida or Arizona, after selling their house!
Yup, Canadian demographics look like a turnip Fat on top, and very skinny on the bottom.
In recent years the impetus behind Canada's immigration policies has been the declining birth birthrate. I don't think immigration will solve the problem but do think it will help mitigate it.
And in case of any ZH readers are interested ;) here is a link to a gov.ca self assessment test for professionals and skilled immigrants to see if you would be admitted:
http://www.cic.gc.ca/english/immigrate/skilled/assess/index.asp
In some cases, depending on profession and ability to support yourself, you may not even need an offer of employment first.
Good article. This structure actually has the perverse effect of incentivizing banks to raise their spreads, and to send their customers into default. Big risk for Canadian banks is seeing headlines in the Globe and Mail, "Flaherty: no choice but to pay RBC $50B", when deficits because of the CMHC are running out of control.
Mark my words, the Canadian housing market is in the process of melting down, and banks will be milking the CMHC guarantees for all they are worth.
The Canadian housing bubble is fairly simple. Canada has a more traditional banking system so it will take a more traditional recession to pop the bubble. HIGHER INTREST RATES.
The Cad housing bubble will last as long as the bond bubble.
It'll deflate for the same reasons the US one is deflating, despite low interest rates -- you simply cannot shove any more housing down the throats of Canadians.
Canadians are tragicaly underweight equities, and other financial assets, and overweight housing. Mean reversion pretty much dictates what will happen to housing.
No. The US hit a debt ceiling. If it is going to deflate for the same reason, it would have already
Nah, Canada is always a few years behind the USA in everything. Should be interesting to see how aggressive the government becomes in trying to prevent foreclosures or defaults once they become more widespread.
No
Fuck, like I said, the bubble is contained in a more traditional banking system. the reality is, even if the banks did more homework on their borrowers, they did not price in higher rates. its only higher rates that will kill this thing.
Buddy, the defaults were already accelerating and prices going down, even before rates started to go up. Canadians had simply exhausted their ability to consume more housing.
An (ex-girl)friend of mine is the caretaker for an appartment block in Winnipeg. Her tenants, mostly welfare bums, in a run down downtown appartment block were being bombarded with "buy a house cheaper than you can rent" flyers. Now, it was sheer absurdity that someone could buy a house for the same $450/month her building charged, for $170k. But that's what was being pushed at the top of the bubble, no downpayment required. Those properties, which, just 3 or 4 years ago, cost $20-$30k a piece, most certainly will all be in default sooner or later.
Of course, because of the aformentioned bad demographics, the Canadian pension system will probably start to crash at around the same time as housing--should be a fun time for the snowbirds drinking Margaritas in Miami and Tucson.
Something most people are missing in the latest policy rate upgrade is that Ben Bernanke tried stemming the tide of the housing bubble collapse by jawboning about how rates will remain at 1% and won't go any lower.
So here we are in Canada, on the cusp of a housing bubble collapse and our rates are @: TaDa!!! 1%.
Primary difference as to why CMHC hasn't taken a dirt nap is because it was never publically traded. Well that's a lie really, they are semi-traded when people assume the responsibility of a Canada Savings bond.
CPL,
Considering the bancruptcy laws in canada, what will happen when people walk away from their house because they are underwater ?
Will the banks garner wages ?
A first time bankrupt would only have to pay into bankruptcy for ~12 months, unless there was fraud involved. After that, they are discharged.
Of course, it seems likely that the Asians in Vancouver will simply skip the country once their highly mortgaged houses go underwater. So no consequences for them.
so wages can only be garnered for 12 months .... there is ways around that
These mortgages sound like a great investment, who do I buy them for my IRA?
Call your broker, Canada NHA MBS are a dime a dozen, and any reputable bond broker will be able to obtain them for you.
Buy handfuls of them.
I hired a kid out of school years ago, awesome kid, but stupid. Took his first pay check and ran (yes ran) to the closest lotto center and spent his entire first pay check on 6/49 (US version is the power ball lotto). The day came for the draw and he was so positive he was going to win. When he didn't I thought he was going to kill himself. I ended up issuing him another paycheck to make sure his Lebanese (might as well be Italian) parents didn't tear him in half when he needed to settle family payments (his rent).
Now he's a director of a great startup in Kanata (outside of Ottawa) and I get to still annoy him about how retarded he was and he has never, ever gambled again.
You want to make money, make something people want to buy.
Pitz has it on the money. For the Chinese and Indian's ditching on the property...maybe, most likely though if they bail they'll never enter another white man's land again, nor will their children. We still have ancient 300 year old british slum house rules as we are a commonwealth in Canada much to the chagrin of my Irish ancestors. Debt is allowed to be inherited if the case is pressed effectively much like the Japanese.
And yes there are ways around it depending how liquid you are. Having an Inc. after your assets helps if you want to move like quick silver. That, or just involve yourself in the underground economy depending on what you do, it work quite well in the Ottawa Valley. Just make sure not one penny of the cash ever touches a bank account.
It's all about painting a picture that's believable.
CPL, they'll be back, with all the cash they've stashed in China, once the Canadian market has crashed.
They might buy the houses in the names of the kids though.
There's no debt inheritance in Canada, although, obviously mortgage charges against real property don't dissappear upon death.
The "cash" they've stashed is backed by US treasuries. If we have a government that accepts a fist full of disney dollars for real property it's just time to remove the real problem is it not? The Chinese can actually "buy" something here with the Rim-bing, last I looked they still can't feed themselves.
You and I and everyone here on this blog will see China versus China in the next two-three years. Not because of the nonsense we read on ghost towns, massive unemployment, poor working conditions, commodities or even leveraged currency exchanges. It'll happen because of water. Pure and simple drinking water. The Chinese need to shed around 700 million people to stay in the game because it's fairly appearently they've shit in their own sand box enough to begin to understand. The assholes that are here have "just" enough to escape the hot box for a little bit, just like my ancestors did and yours. Rich on shore, poor on land.
With a currency that isn't worth shit in a hole, both the Yuan and the Loonie, plus the frequency it shuffles around all that does is make for dumb decisions. I know that there have been loses all through the Canadian investment groups.
Can you imagine what a country that has been done in China. 15 years ago a computer was a serious investment, a bike was the mode of transportation.
In terms of Star Trek, they've just learned a new science and are willing to LIE and lie big about how well off they are using it to avoid losing face. Unfortunately like children with a automatic C-16, they'll end up shooting everyone and themselves by accident while professing their ability with the tools at hand.
Other than theft of Intellectual Property or Serious Development, has China actually produced anything in 2000 years. No.
My guess is like how the Maoist got into power, kept it because of poor economic conditions and the relative retardation of peasants. We'll see the proper switch to the neo-objectivist in China. We will see someone step up to the plate, wipe out 700 million people for the sake of saving humanity and start nutering people.
In Canada we would never, but to be blunt we are snotty shits when it comes to getting into other people's business and should leave well enough alone.
And yes in Canada we do take on debt inheritance. It's a system built on the sins of our for-parents. Thanks to Trudeau, we've been kicking the can down the road for 30 years. You are in debt already even if you aren't willing to believe you are. It's just someone else spent your money and you believed them. Like the asshats that believe that a tax break is a good thing. When are taxes a good thing? When is a central government that is unable to control anything beyond a ballooning civil service a good thing when the fact now is the City state is a better model for all at this time.
Ben - just a little note: Its "Jonathan Tonge"
Excellent article and comments in here. Thanks to all.
What is the CMHC policy toward foreclosure? What is their policy towards temporary real estate holdings?
I won't hold my breath for these disclosures, either.
p.s. Even if they disclose something, I won't care because these Fascists have lost all credibility.
The situation up here is a little different, you can't really walk away from a mortgage. The banks if they want, will hunt you down forever.
yes but if the banks are insolvent then the game is over. if there is a run on mortgages the banks are done.
But the mortgages are fully guaranteed by the Government of Canada, so how could the banks be insolvent?
Only the banks LOSS is covered. The difference between what the mortgage was valued at, at the time of forclosure and what the property is worth when it is sold. Seems to me that until the bank realizes that loss (ie. sells the property) that a correct valuation cannot be made. Watch for a shit load of parasitic companies being created in the coming years with the sole purpose of buying up these forclosed properties at ten cents on the dollar because the banks won't care. CMHC will make up the difference.
interesting..
the first thing to go usually is the property taxes though. If a ton of property goes to the tax sale then that is where the values will be determined i think.
As we live in Canada our "freedom" costs a bit more than people understand.
If you do get caught and sent to debtors prison (minimum in Hamilton, might even see a flake of snow) make it cost a fortune to the Canadian taxpayer. Take as much university education as you want and make excessive complaints on the quality of the food by writing to the legions of women writing for the Globe and Mail. Bitchez will believe anything.
While in there, make a legion of smart annoyed white collar debtors to throw a proper legal coup. Then we'll line all the fuckers up at dawn with their families and be rid of the blue blood trash once and for all.
CMHC makes the banks whole for the non-performance of the borrower. The properties are sold, and whatever deficiency there is between the outstanding loan balance, and the proceeds, is made up by the CMHC.
The banks really don't care about extracting maximum value from the assets because they get paid no matter what, in full. So, unlike US banks, they have no economic incentive to "extend and pretend", or to slow down the foreclosure process.
This is why the Canadian housing market will correct to fundamentals (ie: 2X income) quite rapidly compared to the debacle south of the border.
I don't see the banks unloading properties at less than market value (whatever that market value may be -- probably 25-40 cents on today's dollar!). All CMHC loans are full recourse, so creditors will not allow certain creditors (ie: the banks) to abuse the process. Its not like the US non-recourse loans where the debtor is out of the picture once they give up the title.
Ben - I have enjoyed your articles on Canadian housing. However, I can't understand all of your conclusions. Even if half a trillion is insured - it is very unlikely that there will be more than a, say, 20% drop in prices. So only 20% is at risk. Not all people will default - in fact, only a small percentage will. Also, the main omission is that you say the taxpayers are liable - I agree - but first CMHC can call upon their vast accumulation of insurance premiums. Isn't it all just like normal insurance?
I think 100,000 or 200,000 dollars could be wiped off most property prices. At least. A house in "Lagley BC"(suberban rat hole 45 min from vancouver) selling for 450,000 now will go down to 250,000.
Some 70's condo buildings in Edmonton selling for 325,000 now will drop to 125,000. The losses will be bigger then you think.
Wow, I think you're an optimist. A good chunk of that Edmonton garbage will end up just like Florida I bet -- $50k.
Mean reversion implies that for a period of time above the mean, there is a period of time below the mean.
I have to agree. Edmonton is Indians and the homesteaders. Last I looked both are being cared for by the government and discounted as "unemployed".
I've often wondered what Canada's unemployment really looks like. We don't count Natives, people off EI, Students and Welfare. Near as I can guess it's 20-23% Lowest in around 15%
I know....
I didn't want to look too extreame, I agree
But all housing prices in Alberta have moved up because of supply and demand - namely work in oil and mining has risen over the past decade attracting lots of workers and the housing wasn't there.
I have a bunch of extended family on the east coast and some of the boys did end up going to work on the rigs or whatever for a few months or a few years (maybe we need a Stompin Tom song here) - and from what I heard there just wasn't enough housing to supply them all - so housing prices went incredibly high - because of supply and demand. That is different from a bubble.
I was in Edmonton once for a conference and I really loved it. Loved that I could still see the sun at 10:00 pm and I had the best steak ever - can't remember the name of the restaurant now but it was brilliant.
I open this article and what ad pops up:
http://www.amazingmortgageoffers.ca/
I guess it thinks that I am interested in a Canadian residential mortgage. You can see the pitch: the same low rate even with poor credit.
Canada is 3-7 yrs behind the US. It's all demographics. Take a look at the population pyramids of Japan, US, and Canada.
I've noticed the last few years that many Canadians who bash their own systems or cry wolf after a disaster in the U.S. tend to believe that a lot of the political, financial and economic structures in the U.S. exist in Canada as well. I think that may be because over 90% of the media comes from the U.S. As an example, only recently people in Canada have started discussing things like "what happens if we walk away from our mortgage?" In fact, you cannot do that in Canada (or in many U.S. states) and never could. You would have to go through bankruptcy proceedings which then people refer to as "Chapter 11" even though that refers to a chapter in the U.S. bankruptcy laws.
There are lots of things to criticize in Canada, like anywhere. But before criticizing, especially publicly, it may be worth educating yourself a bit.
"Chapter 11" USA = CCAA (for businesses) or "consumer proposal" (for individuals) in Canada.
"Chapter 7" USA = full bankruptcy in Canada.
Consumer proposals in Canada have no effect on secured debt. Lenders will not entertain reducing a principal balance or a mortgage interest rate under a consumer proposal, because they can simply dump the loan back to the CMHC.
wrong.
I live in edmonton. These morons that live here are up to their asses in debt. everyone is up to their nuts in debt. Its a fact.
I know a 24 year old girl that makes $14 an hour with a 260,000 mortgage. Not uncommon.
Yup Spitzer, been to Edmonton lots, $30k appartments just 10 years ago, were being hawked a few years ago as $250k condos. Up in the Capilano Mall area, right behind that new fire station.
Pretty hilarious. And pretty obvious that it was going to end badly.
I used to pick bottles on the construction sites along 124st after school. The government allowed the stratafication of wood frame walk up apartments. The remaining rental market shrunk and those places became real dumps; bedbugs crack heads and all. Forced lots of people to buy at the peak because the rents on a one bedroom went over 1000/mo.
Edmonton junk is right. I heard of one girl who bought near 118ave. The owner only sold a couple of units and is renting the rest to low lifes. She can't find a buyer.
I can't argue how much the drop is going to be but there will be one because interest rates will have to adjust at some point and people are scared. Some of the older neighborhoods are not worth saving either because there are too many homes on the street that are shacks with plumbing.
My home town is now an expensive urban sprawl.
"Canada's 1.5 birth rate per woman, far below the replacement rate of 2.1, has led to a number of government studies and reports...." July, 2010.
Its probably 1 per woman once you strip out the higher-growth Aboriginal population, and the recent immigrant population.
White girls don't have babies anymore. Probably because white men don't have jobs, for the most part.
There were a couple of white girls in the Yukon. They convinced some dude to donate a load. One girl used a turkey baster to inseminate her friend.
Only in the Klondyke
Housing price chart updated monthly from Getting Technical:
http://www.gettingtechnical.com/01_home/market_commentary/can_en.html
So what's gonna happen in Canada? Currency devalues along with the rest of the world, oil, gold, stocks, go to the moon, but nobody has any money to buy stocks because its all being sucked out of them with higher interest rates?
That's basically what happened in the 1990s. TSE 300 tripled that decade, but very few Canadians had any money to invest because of all the joblessness, declining home equity, and high interest rates.
US bubble pops...borders are meaningless, we all fuck until we're the same colour and bump around saying g'day to each other. Not fucked by far.
When the power when out in Ontario a couple years back, as one of our Canuck Philiosphers (Comedians) MacDonald has said:
"When the power went out, the first thing people did was head to the pub and wonder if the patio was open."
(To the world we had a week long power outage on the east coast 6 (5?) years ago that knocked everyone off the grid, and yes it's true, no riots, just hand primed pumps and full patios)
Same shit during the ice storm. It was like a two week long BBQ.
I don't think people will go head to head, I do think that the powers that be, will be properly ignored and NOT PAID FOR THEIR SERVICES. Like ignoring a bum.
Thats a good question.
What I did gather from this article is that the government is going to be forced to print in a big way eventually. The CAD is not safe. Even a guy like Peter Schiff likes the loonie because of our resorce assets but still, he has not looked under the hood of this housing market good enough.
Schiff is a good strategist. However, he's built for two. In his universe the world goes to shit, he doesn't see beyond a very comfortable lifestyle. He is suburban and "normal" as it comes. As are most of the doom sayers. The bunch of them suck other people's cocks. you work for a living and have debt, guess what? You are in the majority. Best choice is to destroy the assholes by literally destroying them. Get rid of them down to their children.
There is a reason no Irishman is invited to Israel, we did our job so well with everyone that 700 year later we don't need to be invited. Not like we needed to be invited last time. I believe our families lives were at stake and homes. So we put forth the arguement of kill everything (man, woman and child), appearently we're still here by good graces of the slut queen and king prior.
Now look around you. There is a ancient reason your town lives. In Ottawa, it's that piece of shit canal. People love cooing about it. But it's purpose it to distribute goods from the valley. See that railway from Vancouver, it shipped crap from Asia (that crap line from Asia is paid for btw). We all have a place, if over burdened with people to do it, than we're in trouble aren't we?
Interesting article. Australia has no such govt.-backed mortgage system, yet along with Canada we have kept our housing bubble well and truly inflated. In fact after a small dip it has reached new highs. Our interest rates are relatively high (4.5%) w.r.t. the rest of the world (though below historical average), people are mortgaged up to their eyeballs, yet it just keeps working. Seems like low unemployment (thanks to mining boom i.e. China) and Chinese buying up Oz property like there is no tomorrow is keeping our prices well propped up. Doesn't bode well for us if China stumbles.
I conservatively see Oz prices falling 25-40% at some future point. Huge number of property 'investors', low rental returns, capital gains (finally) starting to slow or stagnate and boomer investors retiring and looking to cash in will all be factors that will lead to this. Just a matter of when and what will be the trigger. I think the large number of investors looking to sell up and get out once they see the writing on the wall will lead to a sudden flood of properties on the market. Just as we have experienced an unprecedented bubble, I believe we will see an unprecedented crashing of house prices here. May not be for a while though as our economy is motoring along quite nicely at the moment. Will make for interesting times as here in Oz you can't walk away from your home and mortgage. Default will have serious consequences for thousands and thousands of people.
Divergent Opinions on the Canadian Housing Bubble
http://www.cbc.ca/consumer/story/2010/08/31/con-housing-bubble.html
I considered the Canadian housing situation as a sort of ponzi: my interest rate is 3.5%, and house prices go up by 5%. I sell my house 20 years later for a huge 'profit', and someone else jumps in to buy it and experiences the same situation.
Eventually, house prices are a gazillion dollars because no one has ever paid the interest! Brilliant I tells ya!
Say this to your real-estate agent and watch their puny little brains fry! ;-)
Thank u, i found this for a long time.
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