CMHC vs. Fannie Mae....round 2: More nagging questions about Canada's mortgage monster
SEPTEMBER 04, 2011
CMHC vs. Fannie Mae: Round 2
It’s nice sometimes to take a back seat and get some insights from some of the great analysts out there. Over the weekend, I received an insightful email from Jesse over at Housing Analysis, while Jonathan Tonge, author of the AmericaCanada blog posted an interesting comment on a previous artile. Both related to concerns over CMHC, and both are worth sharing.
Shades of Fannie Mae:
We heard recently from Chris Horlacher, a chartered accountant, who examined CMHC’s books and compared them to Fannie Mae, with some troubling conclusions. Officially known as the Federal National Mortgage Association, ‘Fannie Mae’ was a US government sponsored entity and a publicly traded stock that was essentially taken over by the feds in 2008 after its loan portfolio experienced significant losses.
The tale of mortgage insurers in the US ought to cause us to pause and closely scrutinize the books of CMHC, Canada Mortgage and Housing Corporation, the government entity with an analogous, though not identical role as Fannie Mae.
Let’s remember that no analyst worth listening to would suggest that the careless and blatantly fraudulent underwriting practices that went on in the US have been replicated in Canada to anywhere near the same degree, a topic I recently discussed when I looked at subprime lending in Canada.
That being said, it should be equally clear to anyone who looks critically at the data that house prices in many parts of Canada are at concerning levels. For those not convinced, or who may be new to the site, refer to the primer articles for more on that. The bottom line is that how we arrived at the current level of overvaluation may prove to be irrelevant. A realignment with underlying fundamentals will be painful, regardless.
Speaking of such a realignment, I have little doubt that a housing correction would be associated with a significant rise in delinquencies. This is in part due to the role that persistent negative equity plays as a motivating force behind mortgage delinquencies and foreclosures. Furthermore, as I recently discussed, the real estate boom has played a significant role in directly and indirectly stimulating the Canadian economy and labour market, meaning that a house price correction would also most certainly be associated with a nasty recession and persistently high unemployment for several years.
Bottom line: Comparisons between Fannie Mae’s and CMHC’s balance sheets may offer little in terms of predictive value, but they are interesting nonetheless. They may ignore hedging strategies and other factors that may help mitigate widespread loan losses, but they are not without merit. At the very least, they should highlight how quickly a stable balance sheet can erode in the aftermath of a housing correction. Furthermore, they do call in to question the true risk that CMHC poses to the Canadian taxpayers.
Inspired by Jonathan Tonge’s comment, I put the following chart together comparing some key ratios from CMHC’s mortgage portfolio in 2011 and Fannie Mae’s mortgage portfolio back in 2007.
Data for CMHC can be found in their latest quarterly financial results. Data for Fannie Mae can be found in this 2007publication from their website. Note that the ratios for Fannie Mae were already deteriorating in 2007 as the bubble in the US had already been deflating for a year and a half at the time of publication.
Again, let me stress that the Fannie Mae data was from well after their bubble had burst. Note that the Loan-to-Value (LTV) ratio had zero value in predicting the housing crash, a topic I discussed recently when we compared average owner equity in Canada and the US.
Fannie Mae confidently reported their strong balance sheet and prudent risk management back in 2007 using a tone that sounds eerily similar to CMHC today. Then 2008 hit. We would be wise to keep in mind just how quickly these balance sheets can erode when house prices fall and the economy sours along with them.
Thoughts from Jesse:
I have to highlight a fantastic email I received from Jesse, the author of the Housing Analysis website, regarding CMHC. Here is his email in its entirety. It is WELL worth the read!
Hi Ben,
I'm writing here with some general qualitative thoughts surrounding the ongoing CMHC "issues" being discussed in both the MSM and the blogosphere. I think you know I think CMHC has unfavourably contributed to overvaluation of housing in certain Canadian markets -- a sheep that has lost its way -- however I do take some issue with hyperbolic insurance reserve ratio criticisms meted out by some -- $600 Billion insurance under force and only $12 Billion in reserves -- but we can leave that aside for the moment.
I have been wanting to run some "stress tests" on what we know of CMHC's balance sheet for a while but, like others, have found required variables missing from public scrutiny and have been forced to put on my Holmes hat and cape to give it my best guess. But even then there were a few things nagging at me about what I was doing. All the numbers I was running were showing CMHC to actually be reasonably capitalized (and by "reasonably" I am speaking relatively here), based on current insurance under force, such that the net drain on taxpayers would be in the order of a few tens of billions of dollars spread over several years.
This indeed matches the claims made by CMHC of its current state of financial health of late. Horrible, yes, but nothing to the scale of the distress witnessed by insurers in the US. Leaving aside the "Canada doesn't have a subprime problem" platitude, I thought I'd put into words a couple of nagging concerns I have with "the books" that seem in some ways unique to Canada's housing finance market, and not in a good way I'm afraid.
My first concern relates to future liabilities. We can trace the accounting of this to see the problem: low-ratio loans are provisioned by banks with a relatively small capital reserve and the assumption that most plausible equity collapses can be recouped after a 5 year duration (i.e. falling prices won’t eat up the down payment over the loan duration), at which point the bank gets its money and tells the borrower to f-off or laterals to CMHC or private MI (mortgage insurance).
So far, no major risk shows up on the banks' books. But now CMHC faces a loan application from a desperate mortgage holder who needs to refi with little to no equity — potentially not even the minimum 5% — and CMHC makes them pony up the MI premium and assumes the liability, now using an insurance accounting model. The problem is that if prices are falling, historically defaults will happen close to a magnitude higher frequency typically with a 15%+ drop in prices.
CMHC has provisioned for uncorrelated risk when mortgage defaults are anything but. But the issue I'm highlighting here is that I haven't seen any stress test on what CMHC and the government will need to do to handle the banks' dumped loans in order to stave off a significant foreclosure spike. If you believe prices can fall 15% nationally of course...
The second concern has been highlighted before by CMHC critics -- lenders don't want high-ratio loans on their books because they have to provision significant, if any, capital for them. Someone once told me banks actually prefer loans with MI because under accounting rules they don’t need to provision any capital because it’s perfectly hedged by a government-underwritten body; with non-insured mortgages they are required to have a capital reserve. (On a side note, having fully-insured mortgages makes banks’ leverage ratios look worse if you don’t know how to read the reports properly.)
The trouble is again in the low-LTV segment of the market, where some lenders have been qualifying low-LTV borrowers under shorter duration and discounted rates, and using various favourable add-to-income ratios for secondary rental income, to get their DSRs (debt-service-ratios) under the requirement, but high-ratio CMHC-insured loans require approval at the 5 year rate. (Central parts of Vancouver CMA are often financed with suites 100% add-to-income. Not sure, but some lenders may still be using 80% rental offset when calculating payments.)
So if prices do drop there is an immediate disconnect between a borrower who was qualified at the favourable discount rate and what CMHC requires. That’s a big problem only solved by recasting the mortgage in an even higher LTV offering, if possible. Otherwise… As with my first point, this problem is currently off everyone's books.
My third and final concern of this letter is stating the obvious, that this is all in the context that the government is attempting to "cool off" borrowing using marginal buyers insured through mortgage insurers as the lever. What’s interesting about Vancouver, where I live, and other regions of Canada, is that, even after the CMHC rule changes earlier this year, sales are not “40% less” as cited, they are about the same as last year with prices ostensibly 7% higher as measured through the Teranet House Price Index. So much for crimping first-time buyers. The federal government should, I am hoping, be awaking to the fact that this market may not be what fire marshals call “self-extinguishing” and are indirectly picking up the tab for reasons previously mentioned.
(I haven't mentioned an impending interest rate spike here; the point I'm attempting to make is that there are problems even if rates remain low ad infinitum. Suffice it to say that if rates do spike, all the above problems are exacerbated and policymakers will sell out the brown pants section of local department stores that much quicker.)
As a bit of background: I highlighted some interesting insight into CMHC from House of Commons testimony here. Regarding the condition of 100% underwriting of CMHC-insured loans, where other private insurers are only 90%, meaning banks don’t require any capital provisions on CMHC loans, CMHC representative Karen Kinsley stated the following:
The issue of the differential in our mandate and the cost of that really gets to the nub of the difference in the guarantee between CMHC and the private insurers. We are, by virtue of being a crown corporation, 100% guaranteed by the Government of Canada. Recognizing that private insurers can select the markets they choose to be in, and obviously they will not serve those that are less profitable, the government has set the guarantee for private insurers at 90%. That 10% differential in the guarantee, in order to create a level playing field between us, compensates us for that difference.
We have been able to operate successfully on that basis, as is evident by our annual returns, and the over $12 billion that we’ve been able to return to the government.
This model concerns me. 'nuff said. I thought these issues important enough that their absence from discussion in the media would be doing Canada a bit of a disservice.
Indeed. Thanks Jesse!
For more on CMHC, check out the following posts:
Charting the growth of Canada's mortgage monster
Another look at CMHC: Canada Moral Hazard Corporation
-Ben
66 Comments
As long as there's a supply of renters, home prices will continue to rise or correct moderately. Still don't believe that immigration is major driver of home price speculation? Then here it from the mortgage monster itself.
OTTAWA, June 9, 2011
“Immigration continues to be a factor in supporting rental housing demand. Recent immigrants tend to rent first before becoming homeowners,” said Bob Dugan, Chief Economist at CMHC's Market Analysis Centre. “In addition, condominium completions moved lower in the past months, while rental apartment unit completions remained relatively stable. As a result, the overall demand for rental apartment units increased faster than supply for this type of housing. Accordingly, this pushed Canada’s vacancy rate downward.”
Now if you're the government, this is good news, and you would take quick action into speeding-up the immigration process.
And so they did—The Canada Fast-Track Immigration program reduces the process time for qualified skilled workers and students from 6 years to 6-12 months! So now you have a swarm of new renters on the market that will fill any excess inventory, which in turn, looks like demand to home investors/speculators. As long as that feedback loop continues the market will be fairly stable.
Look at the chart: Canada – Permanent and Temporary Residents
http://www.cic.gc.ca/english/resources/statistics/data-release/2011-Q1/i...
Notice in Q1 2011 vs Q1 2010 they cut down Economic (-15.88%) & Family Class (-11.08%) while skilled workers (+16.33%) and students (+28.24%) increased. It's the good ol' switcheroo trick!
Will it work? Maybe. Always remember when governments are desperate, they'll do desperate things.
Here's another recent comment from Aug 29, 2011
Mathieu Laberge, deputy chief economist for CMHC
"We expect interest rates to remain flat for the remainder of the year and increase in 2012, and NEW immigration is an addition to demand in the housing market."
So your position is that demand alone drives prices....with no consideration given to supply dynamics and demand for/availability of cheap credit? Pretty one-dimensional approach, no? I'm not at all convinced that it's that simple.
I never said demand 'alone' drives home prices; rather it's a major fundamental. Come on Ben, that's Eco101.
The 40% refinancing drop appears to be quite significant, however, if you’ve read the press, mortgages insured only dropped by 10%. This is nothing more then a compound of lower seasonal demand and weak home buyers/speculators being shaken-out. I don’t see this as a fundamental change in the big money whatsoever.
The drop in mortgages was no surprise and expected by the CMHC. These aren’t stupid people you know! They knew well ahead of time that Canadian’s are exhausted from debt and would not have the ability to carry future housing demand— even with rates as low as they are today.
That is why part of the motive behind the Canadian Action Plan was to ramp-up immigration in order to sustain housing demand (investors and renters), that would dampen the pressure of home price deflation. Ask yourself, what would have happened in 2008 if they scaled-back on immigrants from family class, economic, skilled workers and students. —Which is what they should have done to fix unemployment. Do you think we’d still have rent demand and an Asian buying spree like we have today? No way. Home prices would be falling and the economy would be in a depression.
As for the dynamics Ben, I think you may be surprised when housing data contracts while the housing market continues. The CMHC's partnership with the 'private sector' is what you don't see that's driving the market.
I just want to add—that is my fundamental view but I believe a global financial crisis is more likely to take down the market.
"Do you think we’d still have rent demand and an Asian buying spree like we have today?"
There were significant changes to temporary worker qualifications starting mid last year. I think the government understands that hiring temporary foreign workers means an unemployed Canadian citizen is wont for work, assuming of course unemployed Canadians even want the jobs these workers are undertaking.
Unless child-bearing-aged Canadians start "doing it" more, I don't see how slowing down immigration will solve the looming low working age population ratio problem.
We know that's true for Toronto http://i53.tinypic.com/33jk12x.png
Does nursing (having the highest positions) count as a job Canadians don't want? Why is the Philippines now the largest minority to immigrate to Canada? Last I checked the average nurse salary started at 30k and up to 100k for immigrants. Didn't the last employment report show that single woman are the majority of new employment?
Greg - I agree with your points. Unless we see the "collusion" between the government, CMHC and the private sector, we don't get an accurate picture. This is being "managed". We saw this in 2008, as you said.
Recognizing that private insurers can select the markets they choose to be in, and obviously they will not serve those that are less profitable
yeah CMHC should hire me to advise them not to ensure any mortgages in Brampton
great article Ben!
Ben what did you do to alienate Garth Turner? On his blog I posted a link to this blog but he cut it out.
Don't bother reposting any of my work over on Garth's site.
http://theeconomicanalyst.com/content/more-bit-disappointed-garth-turner
Its official, Canadians have turned homes into ATM's
What Garth Turner Wrote In 1999...
http://stockbullz.com/What-Garth-Turner-Wrote-In-1999
During the U.S. housing boom, speculation was rampant.
0 – 24 month flips as percentage of all sales (1999 to 2005):
Orange County, California – 25 to 30% of all sales.
Clark County, Nevada – 25 to 30%, then in 2004 rising to 40%. In 2005, about 42/43%.
Miami-Dade County, Florida – about the same as Clark County.
Over 40% of houses flipped? People were buying 2 and 3 homes (sometimes more), sucking the equity out of them in order to buy more homes. When the speculators unloaded their properties in large numbers, the bubble burst and the market collapsed.
Could this be happening here? We know Appraiser has a house he wants to unload (bought on spec). How rampant is this behavior?
What percentage are flips in West Vancouver? Vancouver total? Out here in the Fraser Valley, 25% does not seem too high for detached properties. These are not straight flips, most were reno'd (with good value added IMO), but others were clearly only staged.
From the TARP report cited above:
"...it was noted that that federal mortgage modification programs have met with only limited success due in part to the fact that they do not reduce the principal balance of underwater mortgages (where mortgage principal is greater than current home value), and thereby fail to address strategic defaults..."
Again Ben, I have to take issue with your consistent reference to negative equity being potentially highly correlated to foreclosures in Canada, based on the above quoted TARP data.
It is clear from the above quotation that negative equity COMBINED with the option of strategic default are together highly correlated to mortgage defaults in the U.S. That is simply not the case in Canada. My understanding is that even in Alberta, loans issued under the National Housing Act (which is administered by CMHC) are full recourse.
"It is clear from the above quotation that negative equity COMBINED with the option of strategic default are together highly correlated to mortgage defaults in the U.S."
I guess you missed the part in that post where I looked at the number of US states that are classified as recourse jurisdictions. Better go re-read it.
Here's the bottom line: Recourse only serves as a deterent when home owners have significant assets for the banks to seize. When all eggs are in one basket, and that basket is now worth significantly less than the mortgage, it becomes tempting to walk away...
" negative equity COMBINED with the option of strategic default are together highly correlated to mortgage defaults in the U.S. "
Well we should, then, separate various "recourse" states and "non-recourse" states and analyse separately. Florida is recourse; foreclosures spiked. Um.
How about California? It's non-recourse, right? Um. It depends. http://www.bills.com/california-recourse-loan/
And how about Canada? Well with the exception of Alberta for first mortgages it is recourse, though certain assets like RRSPs are exempt. Of course people can withdraw funds from their RRSPs to finance purchases, provided they repay them in the next few years.
The point I would take away is that without a marked drop in prices on the order of 15% or more, it is unlikely we will see foreclosures spike in the way the US experienced. Tracking foreclosures is like tracking flooding after a hurricane passes through. The damage and fallout will already have been baked in.
"Recourse only serves as a deterent when home owners have significant assets for the banks to seize." ~ Ben.
That's a fairly bold statement. Do you have any hard data to back that up with? Or is it merely another gut-feeling?
Speaking of which, here are some more bold statements made by you in the above-referenced article of Sept. 07, 2010:
"As I have long maintained a 30% correction is in the cards."
"This means that a mere 10% drop in house prices (we should see that by early 2011)..."
"This correction is just beginning and will be a long, drawn out affair."
How are those predictions / gut-feelings working out for you?
Let's examine further. Not only did you falsely declare a correction was already underway in Sept. of 2010, you completely missed the predicted 10% drop by "early 2011," and that fabled 30% correction that you were so confident of, still hasn't started fully one year later.
So much for gut-feelings and bold statements.
Yup...the market's run further than I would have bet. I don't hide that. It doesn't change the fundamentals or the end game. Speaking of predictions, how did I do?
http://www.theeconomicanalyst.com/content/where-housing-goes-so-goes-can...
http://www.theeconomicanalyst.com/content/mid-year-check-how-are-2011-pr...
But none of that is really relevant with regards to the article above. Is there something in that article that you would like to discuss, or are you only interested in filling my comment section with strawmen and non-sequiturs?
I agree with Ben - lets stay on the discussed topic instead of going into the general economics/immigration discussion and overall attitudes incl. past. It does not make it easier for a reader to keep up with the subject of the posted article, the discussion is getting all over the place instead of keeping relevant.
"Recourse only serves as a deterent when home owners have significant assets for the banks to seize." ~ Ben.
You can continue to dodge the question with references to the perceived use of logical fallacies, or you can answer it. Do you have any data to back the above statement up with? Yes or no?
Is it your contention that losing one's creditworthiness is a complete non-factor in deciding to walk away from a mortgage, or that that there may be other factors involved, including loss of dignity and pride from losing one's home to the bank?
Is it your firm belief that the "only" deterent is the existence of other seizeable assets - really?
"Is it your contention that losing one's creditworthiness is a complete non-factor in deciding to walk away from a mortgage, or that that there may be other factors involved, including loss of dignity and pride from losing one's home to the bank? "
Seriously, Appraiser? The rampant strategic defaults in the US have no relevant lessons for Canadians. You are willfully ignorant! Are we really that different than them?
@ Jim
Seeing that "strategic" default is next to impossible in Canada, then yeah, I'd say we are decidedly different than the U.S. - what's your point?
"Seeing that "strategic" default is next to impossible in Canada"
Ignorance = bliss
Ben, do you really see the Canadian government letting the housing market collapse?
There is no "Canadian" housing market. In certain regions, yes, it will 'collapse'. In others, it will stagnate. I wouldn't be shocked to see +20% shaved off the national average resale price over the next 5 years. Not sure if the government will have much of a say...
Appraiser - "The existence of other seizeable assets" is a HUGE, HUGE factor. The flippers I know had nothing to lose. They had nothing to start with, they put nothing down. No stake in the game, nothing to seize - "Here's the keys, good-bye, y'all."
The guy who has seizeable assets has something to lose, even if he puts nothing down.
That's why the government had to get the lower end into the game, because the higher end won't step out on a limb.
@backwardsrevolution
Aside from the fact that your last post begins with anecdotal garbage and then devolves into incomprehensible conspiratorial nonsense, I'd say your're spot-on, sport.
What's the matter, Appraiser, starting to get scared?
The only thing that worries me (and it's a good worry at that) is taxation on capital gains, as I lament the loss of our previous $500,000 lifetime captial gains exemption that was rudely taken away from us oh so many years ago.
I don't see Fannie vs CMHC as a good comparison as we are comparing a post-bailout to a pre-bailout. Remember Fannie was labeled solvent right-up until the collapse of 08. Only then was information received about their bad loans and how their sub-prime loans were rated AAA. Even then, lawmakers and those familiar with the situation didn't even know what was going on.
If you want an understanding of the CMHC, find someone who can explain the information below. Otherwise don't bother trying to quantify something you don't understand.
http://www.dbrs.com/issuer/56
I'm not sure if this article was posted here before.
Mises Institute FM vs CMHC http://www.mises.ca/posts/articles/a-second-look-at-the-cmhc/
Mark Hanson knows more than he can say about California mortgages:
http://mcaf.ee/5crf7
his posts provide insight on the California housing market which I think applies to Canada. For example:
“Higher rates of negative equity are creating a lot of latent vulnerability in the housing stock, where if the household then encounters some economic shock, like the loss of a job or divorce or death, then that household is much, much more likely to go into foreclosure,”
Interesting article here:
"Once our prospective real estate investor has built up enough cash in order to get bank financing, it’s time to start buying up properties. Of course, normal 30%-down mortgages won’t do. Why do that when you can get six 5% down mortgages and get 6 times the houses!? Then you live in one and rent out the other five. I wonder if this strategy has anything to do with this: [see chart at link]
Do these guys think this is really a sustainable, long term investment strategy? To go deeper and deeper in to debt in order to buy in to an unsustainable asset price boom? Don’t worry though, we’re told. If any of the properties start realizing a negative cash flow, you can just sell the property… at a profit we’re to assume. However, just ask an American if they think this is how it is really all going to pan out. The other solution offered to a negative flowing property is to just raise the rent. Somebody better tell these guys about the Landlord & Tenant Board because they’re going to throw a wet blanket all over that idea. You’re only allowed to raise rents by as much as the provincial government decides to let you, which is generally not more than the inflation rate.
Live the Dream, Tax Free
Now that you’ve got half a dozen properties under your belt, and your tenants paying off all of your mortgages for you, it’s time to get some tax free income. But rental income is taxable, so are capital gains. So how? Why, borrow it of course! It’s not really income when you have to pay it back. After all, those houses are going up in value and all that ‘equity’ is yours for the taking. So grab yourself a nice HELOC and start living the high life. It’ll all work out, they swear.
http://www.mises.ca/posts/blog/rich-dad-leading-you-to-the-poor-house/
I guess everyone is quiet because they are digesting the financial story of the century. A major western economy has just quit jaw boning and pegged its currency to the Euro.
Yes, I'm talking about little Switzerland going up against the financial forces of the world alone to defend the Franc. A country known through the centuries to avoid war through neutrality has just declared the First Great Currency War of the third millennium.
Ah, the silly Swiss, so unschooled in the art of war. They will be swiftly defeated.
No parallels to a government trying to peg an asset price market to current valuations...
What the Swiss need to do is ruin their economy, force high unemployment, and charge negative rates on deposits through bank fees. That, or pretend one of their banks is insolvent. That always gets the bees buzzing.
Let the Swiss go down with the rest as the last safe currency now stands alone and is ready to take capital inflows. Gold.
Money always flows to where it's welcomed the most.
Actually in all seriousness, there are examples of countries whose monetary policy operates off currency pegs, Hong Kong being the example that comes to mind. The issue with Switzerland is that they have dipped their chip in the Wonderful World of Finance, with all its benefits and hazards, became the last hotel on the block with a working air conditioner, and act all annoyed when the masses flock inside their doors to cool down during a heat wave.
The Swiss are relatively small fry in terms of economic output; I'm all confused why a currency peg is some sign of an economic meltdown...?
@Greg, the Franc still has some catching up to do wrt gold.
@Jesse, the strong Franc was causing balance of trade problems for the Swiss. They don't want those problems, which are only an artifact of flight to safety, so the peg.
It is extremely difficult, if not impossible, for a country like Switzerland to maintain a peg. They just don't have the resources. Note that Japan has tried to keep the value of the Yen down several times, once with the help of other central banks, and it hasn't worked.
It is a sign of financial crisis that so many investors are looking for safe havens. This is a race to the bottom.
"They don't want those problems, which are only an artifact of flight to safety"
I understand their problem. They have an actual economy to worry about and they're being hit hard. I was in Switzerland in early August when they were trading 1-1 with the Euro. We were eating dinner in Geneva and I ran out of Francs to pay the bill. I offered to pay in Euros and the lady only took them at 1-1! I was a bit perturbed until I walked by a currency exchange shop and, sure enough, CHF was trading at par. That was a mighty expensive meal!
The Swiss "problems" are in part because they have become heavily involved in banking and finance. The Swiss are more than the "argent du jour", they shouldn't be surprised their chosen path has downsides. A way out for them is to diversify away from toxic waste storage, but until then, well I guess we can say they've had a good "run", as it were.
Here's a take on the CHF-EUR fiasco:
http://streetlightblog.blogspot.com/2011/09/swiss-faqs.html
This is probably a good time to review the "impossible trinity" of monetary and capital flows. The impossible trinity states that it is impossible to have all three of the following at the same time:
- A fixed exchange rate.
- Free capital movement (absence of capital controls).
- An independent monetary policy.
Since the Swiss have such a large and established banking sector it is unrealistic of them to regulate capital flows. Fixing the exchange rate therefore means abdicating monetary policy to the Euro. This isn't necessarily a bad thing -- the vast majority of non-bank trade is with Eurozone countries. As I read it, the Swiss are risking more inflation volatility but this is deemed manageable in the near term, perhaps because the banking sector isn't as red-hot as it used to be.
As long as the Swiss are no more than Germans with funny accents, they can print or destroy Francs as much as they want. They can even start to revalue or devalue the Franc relative to the Euro and annoy speculators.
"Ah, the silly Swiss, so unschooled in the art of war. They will be swiftly defeated."
I'm guessing this is humor, and you do know that the Swiss were renowned as soldiers and mercenaries for much of European history. There's a good reason why Switzerland was never invaded, while Swiss mercenaries were highly prized (and well paid) during all of Europe's idiotic wars.
Why did you remove my comments ?
Add to the conversation or take a hike. We've been over this.
are you serious? i made a comment based on your 20% drop in five years, that is hardly a "collapse" My comment was simply based on your comment - you are saying that you expect on average a 4% drop on average a year based on your analysis. That is hardly a crash or collapse. Some markets are going up 20% a year for the last five years. Since inception of your blog, if people listened to your advice, they would have made a huge error and payed rent only to have the missed the up market that you now are saying won't even go back in reverse 2 years.
This is a very valid comment and you need to understand that you have been wrong and when people point to it, you simple avoid it or delete. Shame on you
" if people listened to your advice"
That's your argument? That Ben was "wrong"? No wonder you're being deleted.
You continue to be completely ignorant to what I've been saying and you misconstrue my perspective. You rely on hyperbole and anecdotes to make your case and you can only attack points that I haven't even made. You're lucky I let you post here at all.
Thank you Ben. Can you do the same with Appraiser? Although both Appraiser and SM provide great sidebar humour and are great examples of your typical blissfully ignorant Canadian I have talked to about this coming crisis. I have met only one person in the past 2 years, other than this blog, who 'get it'.
Keep up the great work!
Hi Ben,
Long time reader, first time commenter. I want to thank you for creating what is by-and-large the most civilized comment section of any real-estate or economics blog I have visited, the level of respect and discourse here is refreshing.
Based on my remedial economics understanding, any 'healthy' housing market is fueled by the first-timers buying-in at the bottom which then drives the higher rungs of the market from move-up home buyers (if I am not mistaken). Therefore, if my understanding is correct it must hold that this market is still being driven by first timers who are still jumping in. My question is two-fold: (1) Is there data available from either banks or CMHC that shows how many first-time mortgages are being issued (or differentiating between legitimate first-time buyers and specer's/flippers)? Secondly, what do you feel is the minimum number of first timers that need to enter into a given market on an annual basis (why don't we say in the GTA for example) to support the 'property pyramid' as it is today?
I was priced out of this market a few years ago (being a single-girl in lower management brings in enough income to pay apartment rent, not comfortably make mortgage payments) but I have watched friends who have lower income than I purchase $300K townhouses and I wonder how many more credit-worthy first timers are actually out there who are willing to choke on these mortgage payments? With around 70% ownership how much of a pool of property virgins is left and how many tricks can the powers that be use to lower the bar further to keep the newbies coming? I expected this market to start correcting over a year ago but it looks to still have legs and many of my renting-neighbors are now house shopping because they were called by their banks over the summer and told that they were pre-approved for x dollars worth of house. I am very puzzled by the momentum this market has and how so many of my friends and neighbors are willing to pay out a huge % of their take-home for a house, it is utterly baffling. Keep up the great work!
be patient. It will correct. And when it happens it will probably be quick. If you have made a conscious decision to wait it out, then remember that prices in a bubble always go way over the top. The same happens on the downside - prices will drop way below what people thought would be the low end. So after the market corrects, then keep reading this blog so you know when the bottom is close to being reached. You want to be mostly correct vs totally wrong.
http://www.cbc.ca/news/business/story/2011/09/06/rates-carney.html
Rates are going down down down while you bears rent rent rent
/s
"LOL! carney can't go any lower, LOL!"
I think anthony's comment sums up the article pretty well. I think an interest rate cut will have marginal effect on the housing market.
Although it is the most likely scenario, I wouldn't trust anything coming out of the BoC's mouth. We are entering the next phase of the financial crises—the bond market bubble.
Now with Canadian 10 Yr bonds yielding at 2.23% and soon to be 1.75% and then 1%... The market will have no choice but to go-long on commodities.
In all, I don't pay much attention to Canada anymore. It has no leadership and must now follow the world into a debasement of its currency.
i can't believe you deleted it again
are you serious? i made a comment based on your 20% drop in five years, that is hardly a "collapse" My comment was simply based on your comment - you are saying that you expect on average a 4% drop on average a year based on your analysis. That is hardly a crash or collapse. Some markets are going up 20% a year for the last five years. Since inception of your blog, if people listened to your advice, they would have made a huge error and payed rent only to have the missed the up market that you now are saying won't even go back in reverse 2 years.
This is a very valid comment and you need to understand that you have been wrong and when people point to it, you simple avoid it or delete. Shame on you
Sam, behave yourself. You continue to be completely ignorant to what I've been saying and you misconstrue my perspective. You rely on hyperbole and anecdotes to make your case and you can only attack points that I haven't even made. You're lucky I let you post here at all.
A 20% drop over five years would put an enormous number of first-time buyers underwater on their mortgages. The effect on the housing market, and the economy in general, would be devastating.
And I'd like to point out that I said +20%....as in it would very likely exceed that.
Actually, just for fun, I ran a calculation based on the dominant first-time-buyer situation in the market today (5% down, 30-year amortization) at a 3.8% interest rate based on a $400k purchase. Even after five years the buyers still owe $342k. If their house were to drop 20% in value, they would lose their down-payment and be underwater on their mortgage by $22k. These are the fruits of the low-down-payment environment that has made the current boom possible.
Joe Q - could you please run the numbers with 0% down (as many banks are giving 5% cash back)?
So are we greatly assisting the younger generation (with ridiculously low mortgage rates) in order to keep them placated and quiet and dutifully paying for the retirees (who, in order to keep getting their Canada Pension, receive ridiculously low interest rates on their hard-earned savings)?
Is this apparently a so-called win-win situation for everybody involved? The "new marginal" buyer helps out the "marginal retiree" who did not save enough, and everybody else in between gets screwed?
So the guy who has saved hard for a down payment is penalized because instead of diving into the market and buying at the lower end, he ends up getting in at the higher end and pays more? The marginal buyer with nothing down wins, even though he stupidly took a great risk (as interest rates could rise). The guy who saved hard to get a good down payment (as he didn't want to risk that interest rates would rise) gets hammered.
The retiree who did not save anything is not bothered by low interest rates (because he spent all his money), but the retiree who saved hard and did not rely on Canada Pension gets hammered because he doesn't get a return on his money.
Completely managed. Marginal helps out marginal, stupidity, risk and greed take all, and the rest get screwed. People who have benefitted by the government bailing them out with programs and tweaks in order to prop everything up are the beneficiaries, but they are dependent people. They think THEY'VE made the money, but they only made it because the government "let them". Any gain they make SHOULD be heavily taxed because, if not for the programs and the artificial suppression of mortgage rates, they would have made squat. They have had their gains "handed" to them on a silver platter.
If they had put down 0%, they'd be underwater by about $40k under those interest rate and amortization conditions -- but it'd likely be more in reality, as interest rates for cash-back mortgages are higher than 3.8%.
Ben, saw that in the early 1980's. Everybody was buying (it didn't matter what the interest rates were, and they were HIGH). The herd charged forward until it didn't.
The people I talked to were motivated by either greed or fear: buying second and third homes, or they were buying because they were worried prices would continue to rise and they'd be left out.
Eventually properties plummeted so far that 20% seems a ripple. People I worked with walked away, declared bankruptcy (and this at a time when there was a real stigma attached to such behaviour).
At the present time, with no money down, people will walk in a heartbeat (especially once they start losing jobs).
Hi Ben.
Thought you might be interested in a just released article on real estate cycles by Edward Chancellor at GMO (Grantham Mayo von Otterloo).
"Between Errors of Optimism and Pessimism – Observations on the Real Estate Cycle in the United States and China
Edward Chancellor - Published 9/15/2011
US housing has been through a prolonged slump, while China’s real estate market has been booming. Many people believe these trends will continue for a while. In fact, property is the most cyclical of assets. After five years of decline, the US real estate cycle may well be approaching a trough. Across the Pacific Ocean, however, it looks like time is running out for China’s overheated property market."
You need to register at www.gmo.com
Cheers
Thanks Tim. Will check it out.
Cmhc acronym for Canada Mortgage and Housing Corporation..Well Once our prospective real estate investor has built up enough cash in order to get bank financing, it’s time to start buying up properties. .