Avoiding Policy-made Crises

The-Mortgage-FilesA mortgage executive at a major bank (who requested anonymity) wrote to us today saying:

“Mortgage policy decisions are being made that may lead to the very outcomes that we are trying to avoid.”

He’s referencing the potential rule tightening and new mortgage liquidity constraints that are making headlines.

Both of those factors could raise the cost of mortgages and adversely impact homebuyer demand. These are risks, he says, that could cause a natural housing correction to snowball into something worse.

CAAMPIn a related vein, the Canadian Association of Accredited Mortgage Professionals emailed this message today:

“CAAMP is advocating the following fundamental messages:

  • Government has already tightened lending criteria significantly and mortgage volumes have decreased;
  • The issue of lenders and the mortgage insurance ceiling has nothing to do with lending practices, but rather liquidity and capital requirements;
  • Arrears and defaults in Canada remain low and are declining;
  • Homeowners have significant equity and are paying down their mortgages.”

CAAMP concludes:  “As an industry, we are vigilant and cautious against further measures that could precipitate a weakening of the housing market.”


Rob McLister, CMT

  1. Sounds like someone is trying to 1) displace blame and 2) blame someone else. What’s not acknowledged was that the seeds for a correction, should it occur, where planted much before the final chapter was written. What precipitates the weakening housing market is that lenders don’t want to shoulder the risk anymore, nor does anyone else.
    I think people are just getting tired of the long drawn out RE boom of 13 years in Canada.
    Sentiment is changing and emotions are running dry which is how all booms end – a random change in attitude across a large sector of people. Time to move onto the next big boom.

  2. I wonder whether this executive voiced concerns about a “policy-made crisis” when 40-yr, 0% down mortgages were made available?
    Or is he voicing concern now because his bank is about to do much less business which means he gets to pocket less bonus at year end?

  3. Beware unintended consequences. The best defence in mortgage lending is strong underwriting, which we are fortunate to have in Canada.
    Artificially toying with the market is never wise. There has been a great deal of noise but very little substance to most of the media hysteria recently surrounding the real estate market.
    I trust that Flaherty and Carney can separate the signal from the noise and continue to be pruden as opposed to rash, regarding the property market.

  4. “Dom”
    Save the bank bashing and look at the facts.
    The housing market is turning down on it’s own. Causing a precipitous slide with knee-jerk policy responses won’t help. That would be as irresponsible as any mortgage policies from the past.

  5. I believe this could be more related to the bond market as the BoC’s Senior Officer Survey showed signs of tightening starting in Q3. Around that time the BoC had hired S&P’s David Beers as a special advisor, followed by Ontario’s outlook changed to negative a few weeks after his arrival—perhaps this was a warning if the government issues more bonds rather then impose fiscal tightening, their credit rating would be at risk.
    Government T-bills & Bonds Outstanding: http://i41.tinypic.com/2dhczm1.png
    Bank of Canada Assets: http://i40.tinypic.com/hvxdlj.jpg
    I also believe the BoC’s monetary policies must be in-line with The US Fed (including QE, OT2 shown BoC chart above) as any attempt for Canada to ease further on it’s own would create imbalances between the USD/CAN. Stabilizing our currency next to providing liquidity is the BoC’s first priorities.
    Hard to tell if they’ll act immediately, but my gut tells me they’ll monitor the situation in real-time until it’s time to step in, if needed.

  6. I guess you are saying that we should not interfere in markets. What do you think CMHC is doing in the first place and raising the limit would be further toying. What is the end game?

  7. Glad you posted this Rob…this is exactly what can happen when government gets involved. People have to stop thinking of a market correction as a bad thing. It’s not! In fact, corrections here and there, adjustments up AND down, are perfectly normal signs of a healthy functioning market.
    If people buy too many condos and condo prices go up too much, eventually fewer people will buy condos and prices will come down.
    Most of the time government exacerbates the upswing (let’s ramp it up with 40 year ams and insured zero-down – what could go wrong?) and the downswing (holy smokes the market is overheating let’s step on the air hose) when neither solution is as beneficial as doing NOTHING and letting people figure it out.
    I echo the sentiment of the bank execs who are indicating that this is a self-made crisis. Crazy.

  8. This smells so much like the US debt ceiling circus of a few months ago.
    Hopefully the regulators, politicians and banks decide that playing chicken with the country’s future isn’t worth the risk and actually provide carefully calibrated, targetted measures against the GTA, Vancouver and handful of other BC cities that are creating this affordability mess.
    It would also be nice if someone in the cabinet acted liked they cared about the super high credit card rate fiasco. With their cost of funds near a historic low and double digit credit rates, banks must generating massive windfalls from cards, even after factoring in rising arrears. I hate to say it – but we could use a man like Jack Layton right now.

  9. @ Appraiser….
    No matter how well you underwrite, even in the best economic conditions,it’s still impossible to predict.
    Once the paper is written, there’s no going back.
    Keep in mind…..We are ALL, yes…including you my friend, part of the crisis we ALL find ourselves in.
    “tucking money under Sealy mattress”…

  10. don’t put everyone as responsible or part of the crisis.
    The opposite : Few are the cause of the crisis, many will suffer the consequences.

  11. Yep, it’s a good thing we don’t have stated income, skip-a-payment, cash back 102% LTV product that will reset to a higher rate in a few years, underwritten without an on-site appraisal, using only price, postal code and basic MLS info as inputs into an AVM that gives the thumbs-up in seven seconds flat, being underwritten by a lender who’s never met the borrower, insured by a GSE whose mandate is to serve all comers, then securitized using adverse selection criteria and sold on to investors who don’t know or care what mortgages are in the pool. That stuff’s dangerous.

  12. …We ALL went in with the same expectations,but we All came out with different results…..
    …is that better and more inline with the masses ?

  13. Well put Appraiser. Hasty policymaking could create a nightmare by magnifying a normal selloff. Regulators need to tread lightly.

  14. You don’t have to predict individual defaults. You can’t. The future of real estate is never known in advance. It has been this way since the first deed in the middle ages. Underwrite well and let the percentages take care of themselves.
    For the last four years we’ve heard a vocal minority warn that housing would cave in. Meanwhile arrears are a speck of dust at 0.38%. It is silly to suggest we’re in any kind of crisis whatsoever. If you predict a crash long enough, eventually it happens. But not this market. Not right now.

  15. Facts are difficult for doomers to swallow my friend.
    Contrary to the beliefs of fear-mongers, not only is the default rate miniscule,the fact is (according to CAAMP) that millions of Canadian homeowners are currently renewing their mortgages at rates well BELOW that which they were previously paying. Many of theses same homweoners are keeping their payments the same as before, thereby reducing their amortization periods considerably.
    This trend will continue, as it is clear that interest rates are going to remain much lower for much longer than anyone had predicted.

  16. Correction. Automated Valuation Models (AVM’s) do not utilize MLS information and far more complex than either you or Garth Turner (which is obviously where you got your information) portray.
    Attempts to compare Canadian underwriting and mortgage securitization to the sub-prime fiasco in the U.S. are the preserve of alarmist hysteria.

  17. I get information from all over. It’s a wide, wide web. If you’ve got details on how these AVMs work, I’d love links — I’m always willing to learn more. That said, here’s a recent article showing how easy they are to game: http://www.thestar.com/news/article/1111810
    Even a cheap and nasty “drive-by appraisal” (where the appraiser never leaves his car, but can see the subject property and comps from the street) has significant advantages over a completely automated one, but it costs a few hundred bucks and a day or two, and who can afford that?

  18. Doesn’t matter housing market is screwed anything the Government does at this point is closing the barn doors after the horses have run away.

  19. the whole default rates are low to me is a moot point. America didn’t have a foreclosure crisis until it had a foreclosure crisis. Today’s data doesn’t reflect the future it may help gauge the trend but it’s not a crystal ball.

  20. Great post ROB, I tend to agree with the fact that the gov’t is making their own bed of problems. They aren’t attacking it from the right angle. When is the last time someone had to prove their income with a NOA or letter of employment to buy a car ?? Credit cards are being handed out like candy, buy now pay later is killing the consumers. Their home is their only real investment and limitng the borrowing power is putting a stranglehold on their finances. Second, the other adverse effect of tightening these regulations are the baby-boomers who plan to sell their homes won’t have as many eligible buyers. Therefore, they’ll stay longer in their homes spend less and the younger generations will have to save longer for their downpayment and thus slow down the market. To another degree, might even stunt the market all together. It is already pretty hard for 1st time homebuyers to gather that 5% for that 1st homeand house prices aren’t going down the last time I checked !!….that was my 2 cents…thx all…

  21. Regulators should have been regulating instead of pumping. This is the problem with government profiting off its citizens. Profits can be blinding.
    CMHC regulates housing like OLGC regulates gambling.
    Just as OLGC denied there was a problem for years until it smacked them in the face so will CMHC. When the bugs come crawling out, everyone will say “Whocouldanode”.

  22. The Toronto Star article you linked to is a bad example, as the story has nothing to do with AVM’s or appraisals.
    It was fraud. The mortgages were all provided by private lenders and involved some crooked individuals and a very crooked lawyer to facilitate the transactions.
    As for AVM’s, they are heavily utilized in residential property assessment where mass appraisal systems are required, such as MPAC in Ontario. Most of the specific technology is proprietary but for an overview you can check out:
    http://en.wikipedia.org/wiki/Automated_valuation_model
    P.S. Where did you get the idea that a drive-by appraisal is “cheap and nasty”?

  23. yes, it is the unsecured revolving credit being handed out like candy by the institutions that gets people in trouble. Carloans, leases and other liar loans are indeed not helping maters either.
    This is where the institutions make money high interest loans and service fees.

  24. Does anyone have comparative data on default rates worldwide? I am willing to bet Canada’s .38% is the lowest of the G-20. Default rates are not a moot point. We are doing something very right in this country and the numbers prove it.
    Fear merchants predicted a housing crash by 2008. When will people finally realize that the Garth Turners of the world know nothing about when prices will fall. Once the critics can accurately predict massive job losses and soaring interest rates then maybe I’ll listen.

  25. Mortgages in arrears are not defaults and only payments that are three or more months overdue.
    The question you should be asking— Why is Canada the only G-20 nation that doesn’t disclose foreclosure stats to the public?
    The CMHC has been repeatedly accused of its secretive and non-transparent operations, while it was stated during a parliamentary session, that even Fanni Mae provided more details on foreclosure stats prior to their fallout.
    I’m still surprised why corporate interest hasn’t filed FOIA to obtain foreclosure stats.

  26. “As an industry, we are vigilant and cautious against further measures that could precipitate a weakening of the housing market.”
    That’s just funny. NO kidding they’re vigilant against anything that might pop the bubble. They’re also laying the groundwork for scape goating when the housing market ultimately does correct.
    I expect to hear a lot of this in the coming year:
    “It wouldn’t have been so bad, but the government tightened eligibility and term limits right when the market was already correcting, and now they’ve caused a major housing bust.”
    As though the housing market ever would have achieved a soft landing anyway. Bubbles don’t do “soft landings”. There is no example in history of this happening. Bubbles burst. Period. Don’t think we’re in a bubble? When why are industry folks so worried about modest tightening of the mortgage rules? Thinks about it.

  27. So you want lower rates on credit cards as though that would somehow alleviate our debt crisis. Don’t think it’s a crisis? It will be. Excessive debt always is. Too many people borrowed too much money. I’m not afraid of people losing their homes – that’s their own tough luck for buying “as much house as you can afford.” I’m worried about the government desperately initiating new tax credits and other expensive schemes to try to reflate the market. I have no intention of paying for that. I decided 6 years ago that houses had become too expensive and didn’t buy one. Refused to get into a bidding war. I’m not going to pay for the morons that did.

  28. Gord, it’s too late to do nothing, as the government has underwritten $550 billion worth of mortgage debt. That’s not nothing my friend, not even close. They never should have gotten involved in that in the first place. Go back to requiring 25% down and no mortgage insurance would be necessary.

  29. Everyone who bought or sold a house in the overheated market of the last few years is a part of the crisis. They all participated, and all hoped to benefit one way or another. They cannot now point the finger at someone else. Everyone wanted to believe the housing bull market would last forever, or at worst, level off into a graceful soft landing. That belief was never based on anything other than short sightedness and personal greed. The market owes no one anything. It will go up, and it will go down. And we all know how fun the down periods are.

  30. Precisely. We’re already in a bubble. Rent-buy metrics, price-income metrics, any measure you want to use. Housing is insanely priced and due for a massive drop. Of course the mortgage merchants, realtors, lenders and others are already laying the groundwork for scape goating. That way they can say, “See, we tol’ you tightening the rules would cause the market to tank.” As though continued inflation of the bubble is needed or desirable. It needs to be popped, because the longer we hold it off the worse it will be. Hopefully they’ll finally do the right thing and give it that little nudge.
    I eagerly await the accusations that I’m a ‘toopid renter living in my mother’s basement. (I do rent a beautiful townhome, but it’s 2000 miles away from Mom’s basement, where I’m always welcome by the way. :) )

  31. And lots of people are able to build up that consumer debt because they know they’ll be able to roll it into their HELOC at a lower rate when the mortgage is up for renewal. I’ve got mid-40s friends doing just that. Car loans. Vacations on credit card. Just “tap into our home equity” and roll it into the mortgage. Mortgages aren’t the only problem, just the biggest.

  32. It’s impossible to know if you’re in a bubble until the bubble pops. You don’t understand markets if you think otherwise.

  33. @Ranter
    You are in a micro-minority. The great majority want mortgage insurance because people want to own homes sooner. 70% of Canadians are homeowners, not renters like you. Your viewpoint of shutting young families out of the housing market does not represent the general public.

  34. And how does being a “micro-minority” invalidate what I said? Mortgage insurance was never about getting people into homes. It was about offloading risks from the banks to a Crown corporation.

  35. If the Fed’s do “tighten” mortgage rules a 4th time, mortgage rules will most likely revert back to where they were in 2003. And that is factoring in a reinstatement of the price ceiling on mortgages.
    If the housing market can not handle another round of tightening to somewhere around 2003 levels (and this is with ultra low rates) then it was a bubble.
    I believe the Feds had hoped the market would soften and maybe sales and prices have flatlined, but mortgage debt growth has increased in the latter half of 2011. And mortgage debt growth was stronger in 2011 compared to 2010. It will be interesting to see what kind of affect the interest rate firesales from BMO et al in the last few weeks will have on Jan mortgage debt numbers.
    The feds are in a precarious situation. They are desperately hoping for a soft landing in the housing market. A hard landing would only add to the troubles to our labor market as the Fire and Construction sectors contribute just over 13% of the total working population.
    http://3.bp.blogspot.com/-nVDfHTCk7qE/Ty2ox4Lx_SI/AAAAAAAACC8/6S65xE07bQM/s1600/Fire+++Construction+Sector+Employment+as+a+Percentage+of+Total+Employment+Jan+1980%E2%80%93+Jan+2012.jpg
    And the construction and FIRE sectors contribute about 27% to our GDP.
    http://2.bp.blogspot.com/-CESP46mcBlw/Ty2m33tVTaI/AAAAAAAACCs/XSmpJRUhXk0/s1600/Canadian+FIRE+and+Construction+Sectors+as+a+Percentage+of+GDP+Jan+1997+%E2%80%93+Nov+2011.jpg
    Some say these two sectors have been inflated by the credit and housing bubbles. And if these “bubbles” are popped, it does not take a rocket scientist to figure unemployment will rise significantly and Canada would be headed into another recession.
    Only this time, housing and lowering of interest rates could not be called upon again to bail out the country from recession.

  36. So, the people who saw the bubbles over the last decade, by simply looking at fundamentals to see them were, what, delusional at the time of the prediction?

  37. This is such a huge part of house price growth. All the players encouraging buyers to decide, extend, close, now now now live on churn. Without the next transaction, they don’t eat. They are not disposed toward acting in their client’s best interest.

  38. So, why is total consumer debt so high? Especially since take home is markedly lower in Canada compared to the U.S. Doesn’t that imply that loan decisions are being made on short term carrying costs and not total debt load, the essence of teaser rate mortgages in the U.S.?

  39. So, pushing house prices up to 50% above fundamentals so that young people have to chain themselves to debt slavery is your solution?
    What’s wrong with a downpayment? A real one, not one the bank lends you as is happening now. Otherwise the leverage on the purchase is insanely high and prices rise until they are unwise to enter into, even for young people who can save up a downpayment. How is that fair?
    By the, way, I own a house, just for the record. But I bought before this insanity began, meaning 1996. I’m just sick and tired of watching friends make horrible decisions based on the advice of Professionals(tm).

  40. Of course defaults are at record lows. Seriously, are you dissembling intentionally or do you really sit back and say, all is well because in a rising market everyone who personally overextends can simply sell to exit the situation, and when the market cools and that is no longer true then ____________(fill in the blank).
    Take your time.

  41. I agree with everything you said. I think it is far too late to hope for a soft landing. We are in for a world of hurt. There has been a huge misallocation of resources going on, and many people have quit lucrative professions to jump onto the RE bandwagon (including a Ph D. friend of mine who speaks 6 languages). When the market tanks, it will hurt like hell. I do not believe we can avoid it. But that does not excuse the government from acting – however belatedly – to limit the amount of risk on the taxpayers’ books. The argument that they might just make things worse is no argument at all. Clearly the bubble can’t continue forever, and clearly the government is NOT obligated to try to make that happen, regardless of what industry advocates might say.

  42. JD, YOU don’t know we’re in a bubble. I do. When rent vs. buy metrics and average or median income vs. average or median price get too far out of line, it’s a bubble. When a single market (like housing) gets too far out of line with the rest of the economy due to easy credit and low rates, it’s a bubble. The only thing I can’t do is tell you when it will pop. Timing anything is a mug’s game. Most people respond with, “Even a broken clock is right twice a day.” Well, I only need to be right once. A bubble bursting will be a calamitous and economically devastating event. When it happens is immaterial.

  43. Painting a whole industry with the same brush is a generalization that won’t give you any credibility on this forum. Try greaterfool.ca. They buy into weak arguments over there and will welcome you with open arms.

  44. while you here waste your time discussing, all other major expenses go up, taxes, fees, prices.
    so waste your time to protect housing market, at the same time govts will still take your money from the other sources you don’t pay attention at …

  45. The housing market is turning down on it’s own.
    Where? Outside of Victoria and the BC interior, and maybe Edmonton? Toronto, Vancouver, Montreal and Ottawa (the four biggest cities in Canada) are still going strong.

  46. I’m not so worried about the people who bought 10+ years ago (even though CMHC surveys indicate that only 1/3rd of mortgage holders made extra payments on their mortgage in 2010-2011 — hardly ‘many homeowners’)
    What concerns me most are new home-buyers that are taking on mortgages are already at the very limit of affordability at these very low rates. Remember, average down-payment among first-time buyers is 7%, typical amortization 30 years. Under these conditions, starting with a fixed rate at 3%, monthly mortgage payments on an average Toronto semi go up by ~$500 if rates go up to 5.5% at renewal. Scary.

  47. Fear merchants predicted a housing crash by 2008
    There was a correction in 2008 — at least in Toronto there was, Jan-Mar 2008 prices were down 8-10% from the previous year, DOM was up in the 40-50 range and listings-to-sales exploded. Then the gov’t took steps to make mortgage borrowing easier, and sales shot back up. The whole thing was over in about eight months due to regulatory interventions.

  48. so no one can afford a 5% down maybe we should get rid of that. Oh right we did… and extended mortgages to 40 years sorry the bill is coming due time to pay the piper

  49. Moot point my friend. “Those who forget the past are doomed to repeat it” yes I said doomed but it wasn’t me it was Mark Twain.

  50. It makes one wonder what would happen if the CMHC re-instituted the value ceiling on insured mortgages that they had prior to 2003. When that was removed, house prices took off like a shot.
    As for credit cards, I agree with the previous poster that lowering rates is unlikely to help our consumer debt issues in any meaningful way. Besides, consumer credit expansion through credit-card borrowing doesn’t affect market prices like mortgage credit expansion does.

  51. So, you are arguing that house prices rising above fundamentals should never ever ever be addressed by credit policy because, well, the bubble could just go on for a decade before it bursts and decimates the middle class.
    Can’t miss with that.

  52. Good job addressing the primary point, which is money sways all parties who take a cut of every transaction and will promote the next transaction because it is, well, stunningly enough, in their best interest. What is flawed with the argument exactly?

  53. Because home owners in distress can file proposals to their creditors before filing for bankruptcy. Proposals can help them retain some equity rather their creditors seizing all assets, however I believe there was a recent court ruling overturning some exemptions.
    http://i44.tinypic.com/wwj6gy.jpg
    There could be more foreclosures then you think while banks are flipping properties on the market.

  54. It has everything to do with AVMs. TD and BNS are named as defrauded lenders, among others. If a living, breathing appraiser had seen the properties before funds were advanced, would the loans have been funded?
    This wasn’t the kind of fraud where lenders advance funds to other than beneficial owners, it was the kind of fraud where lenders are tricked into advancing much more than the property is worth, and that’s precisely what an appraisal (automated or otherwise) is meant to prevent.
    P.S. Re. cheap’n’nasty drive-by appraisals: If it isn’t obvious to you that an appraiser who views the interior of a property has a huge leg up on one who only looks from the curb, and that fraudsters know this, then maybe you shouldn’t be posting under the ‘Appraiser’ moniker.

  55. Thanks Rob, I can’t believe I read all these comments on a Saturday night!
    Keeping in mind I know nothing about economics, I think there are too many extremist comments going on here. If the government does anything, I hope it isn’t much. I fear if any significant changes occur, the repercussions could be exponential over the next 1,3,5 years in the volatile housing market we have today. Fortunately we are just dealing with our houses today. If this breaks into the RRSPs and pensions of the younger generations, “canadian mortgage trends” will be the least of our concerns. I understand its all related but banks must be able to handle ‘saying no’ to financing mortgages in the 99th percentile of the LTV risk.
    Being in Calgary and actively watching housing prices for the past 4 years, prices have definitely stabilized and our local economy is relatively healthy. I just conditionally sold my first suburban house for 10% below what I paid for it 5 years ago – after 30 days on market, and I did it with a smile.
    People just need to realize a house is not the appreciating asset it used to be, if your thinking of becoming a new homeowner you better expect to stay in that house for 10+ years because it will be a bumpy ride and if your lucky you will maybe get what you paid for it. If your not prepared for that you better have 20% down and go in willing to lose it.
    Like I’ve said (and many others), we need to focus on preventing people from buying ‘the million dollar crack shacks’ and ‘all the house they can afford’ with no money down. This will cause the subtle corrections in the peak markets (sorry YVR and Toronto, your first), which may trickle down to the mid and low end housing markets (hopefully in a more subtle manner) and bring things slightly back into check.
    I think we need to do whatever we can to keep the foreclosure rates down, that would mean mortgage interest rates can’t change, and as a nation we have to focus on maintaining our employment to help counter-balance this market.
    Have a good weekend everyone, I know I’m looking forward to more unbiased discussion on this topic.

  56. Get your facts straight. The government started tightening mortgage policy in 2008. From that point on, it did not loosen policy. The only thing it did was bring in IMPP to save the market from the illiquidity of the credit crisis. If it hadn’t, the market could have seized up completely.

  57. 50% above fundamentals??? What kind of aerosol are you sniffing???
    Do you Turner-wannabes EVER deal in facts?

  58. Americans had option ARMs, NINJAs and rubber stamp underwriting. We have none of those things! When will you crash crusaders get that through your steel plated skulls????

  59. Define a real estate bubble.
    You can’t! There is no definition!
    So how can you label the market as something you can’t define. It’s madness.
    Affordability is near its longterm average. That’s a fact, and that’s not a bubble.
    Stop trying so hard to believe what you hope to be true. Ask the only question that matters: Can people afford houses today? Yes or no? (I suspect you’ll cite the typical million dollar crack shack example AS IF that’s representative of the whole country).

  60. Let me guess, even a broken clock is right twice a day? Is that what you’re trying to say. Well, I don’t even need to be right twice. Just once.
    Timing is immaterial to me as I have no stake in the market. Regardless of when the bubble bursts, the same overly indebted home owners are going to be left holding the same bag. And all the industry professionals will be standing there with the same “Who farted?” looks on their faces wondering what could have gone wrong. After all, real estate always goes up, doesn’t it?

  61. Right now RBC is offering 7% cashback loans on a 5% downpayment. Look it up genius. If it looks like sub-prime, and walks like sub-prime…

  62. Zealot, your posts are sounding increasingly desperate. You’re not worried or anything are you? Why so desperate to see the CMHC raise the ceiling once again? If the mortgage industry and all the home owners are just fine, then we should just see a tightening of mortgage eligibility as the cap draws nearer, and eventually the room would run out and people would once again need 20% plus down payment to buy a home. Since everything is just fine here, you’re not afraid of that are you? Or does your livelihood depend on the naive 5%-ers continuing to take out half-million + loans for houses they can’t afford?

  63. Housing prices have gotten way out of line in comparison with incomes and when using rent vs. buy metrics. They’ve gotten this far out of line despite a relatively weak economy over the past 4 years. That’s what a bubble looks like.
    “Affordability” is only due to the record-low interest rates we’ve got right now. Any return to a more normal interest rate environment would put many home owners underwater. In other words, the bubble would then become evident even to obtuse people like yourself.
    In any event, shouldn’t the fact that we supposedly can’t tell whether or not we’re in a bubble make us more cautious, not less? I mean, if you’re saying we can’t even see the danger signs, should we not put the brakes on the growth in mortgage debt, just to be safe?
    Or would that cause the housing market to tank, as the article suggests? And if that’s what would happen, doesn’t that just prove we are in a bubble?

  64. You’re mostly right, but I believe any efforts made to save people from default will only make the problem worse. The US housing market has been searching for a bottom for 6 years now, but it can’t find one, because the government and the Fed keep doing everything in their power to “promote a housing market recovery.” If people start defaulting, it’s better to get it over with and let the market free fall until it hits bottom. Otherwise we’re just prolonging the agony. As in the US, where housing grinds steadily lower, year after year after year.

  65. As a professional appraiser, I can assure you that you don’t know very much about the topics at hand.
    The vast majority of AVM’s (especially in the GTA) are inaccurate on the low side, not the high side. If you think you can prevent fraud by getting angry and blaming everyone and everything in sight – good luck.
    Now, if you meant that drive-by appraisals are less accurate than full appraisals, then you may have some credibility. Slinging dramatic epithets around just makes you appear irrational.

  66. Part of being able to predict things means you don’t have to take part in them (and suffer because of it). So yes, it’s totally useful to predict the bubble even if you get the timing wrong. Avoiding getting caught up in the bubble from the start is all part of the precess. Unless you can purchase to the next trough price, you’re going to suffer negatively when prices retract due to liquidity issues. Buying in the last 2 years is going to be calamitous for many undercapitlized people.

  67. Get your 2.99% mortgage now and in five years it will adjust to 7.5%. Glad to know that’s not a teaser rate mortgage.

  68. Just what are you basing affordability on? Housing prices have vastly outpaced inflation and incomes. Your affordability is based on the assumption that today’s artificially low interest rates are a birthright that will continue indefinitely.
    Historically, the mortgage a person could conceivably afford was based on 1.5 X annual income. Housing is way beyond that today in Canada.
    Just remember in 1989 housing prices fell 41% in GTA. It has happened before and it will happen again. You’re the one in denial saying it will be different this time.

  69. Toronto Detached Median is down 4% since November. Condos in central Toronto are down 7% since September. Ottawa detached is down 6% since May. Vancouver metro detached is down 3.5% since June. Maybe losing $31,000 in equity over 7 months isn’t a big deal to some people…
    Montreal I’ll agree with you on, but given that they are at a median multiple of 5x I’d say it’s just a matter of time.
    So correction: one big capital city is not declining.

  70. Do you ever? According to demographia, Toronto is at 5.5x median multiple. Long term sustainable on this is debatable (true enough), but it runs from 2.75x to 3.5x. So, what percent over valued does that roundly make Toronto? Care to provide some facts for YOUR case?
    Please don’t cite San Francisco or New York unless you also address the needed adjustment to contrast homeownership rates of 24-30% for those cities to 70% for Van and Toronto. Thanks.

  71. Yup. That’s why I don’t worry about timing. Buying a house any time since people went house-crazy (2004 or so, give or take a year) just didn’t feel right, so I didn’t. Sure I gave up on some fantastic equity gains, 100% or more in some cases, but I also avoided the risk. I’ll buy when I feel the opposite – when it turns into a sellers’ market with significant discounts from today’s prices.
    Now I’m reading preachy articles and comments that lecture us about how the government needs to continue to backstop mortgages and raise the CMHC ceiling to avoid putting the housing market at further risk – risks I avoided in the first place. I chose to stay out and thus did not partake in any of the benefits of a housing boom. As it should be. No complaint from me. But now they want me to assume more risk as a taxpayer to preserve their gains? Gee, do you think I might have some objections?
    Yet the pumpers avoid addressing those legitimate objections and choose instead to scoff and make snarky comments about how I can’t time the market and therefore I know nothing. Well that much is true. I can’t time the market, adn really don’t know much. But I know when I’m being asked to backstop someone else’s risks, and I don’t like it.

  72. Tightening mortgage policy while allowing more low-income individuals (self-employed and immigrants) to obtain mortgagees is not tightening, rather a continuation of fractional lending.
    I feel like I’m replying to the same individual on here who continuously contradicts himself by dismissing facts with no facts. Show us your formulas, inputs and outputs rather then speak rubbish of the middle ages.

  73. More to the point is that governments, nor anyone else, can really stop this bubble from bursting now that’s it’s been inflated. So now comes the blame game! Such fun! I bought in 2001 and then again in 2003, then things got stupid nuts so every time I looked it was more ridiculous. Just sold, close in April. Catcha on the upswing! What happens from now until the upswing in 10 years matters not to me. With the devastation will come great opportunity. And no, I don’t take joy in it, it just is what it is. You can’t fix stupid. For the last 3 years I’ve been warning people to be cautious, but it hasn’t mattered. People choose their own fate – that or fate chooses them. Either way, its not my concern.

  74. What most home-equity junkies in Canada do not realize is the sheer number of houses that were built in recent years will create a massive glut of inventory like in the U.S. and Ireland. Look at the countless suburban McMansion developments that have sprung up in the last 10 years in all major cities.
    Along with the glut of homes you have home prices that are dangerously high in comparison to incomes. By one estimate, a 1% rise in interest rates would put 12% of Cdn mortgages in distress. The historical average of mortgages is 8%. Can you imagine the carnage if interest rates rose to normal levels?
    For those who deny Canadian real estate is in a bubble – how much would your mortgage and HELOC payments increase if interest rates were at 8%? Saying, “But it’s different here” just shows how blissfully ignorant people are to the risks in the market right now. The only thing different is that we’re next in line.

  75. Absolute nonsense. You clearly haven’t a clue about housing, foreclosures, power of sales, bankruptcy, or anything else it seems.
    Spewing drivel such as: “banks flipping properties on the market” betrays your utter ignorance of all things real estate related.
    Go back to “Gart Squirmer’s” site where hyperbole, mindless giberish and uncontrollable drooling are encouraged.

  76. Get your facts straight. Making “extra” payments and keeping your payments the same upon renewal even though interest rates are lower, are two entirely different things.
    And if you think that 33% of homeowners making extra payments is not “many” then you have severe difficulties with arithmetic.
    P.S. All of your data is straight from “Gart Squirmer” – sad, but true.

  77. Were you not the guy last year who called me xenophobic because I stated the government was flooding the market with fast-track immigrants to give mortgages to? Go back and read Ben’s blog again—I was right.
    I know all your identities cause it’s always the same old baseless argument with no math or stats behind them—just headlines of hope.

  78. Zealot Buster, FST, Appraiser and probably other names… It’s all the same guy whose been jumping from blog to blog like a superhero trying to convince everyone to keep borrowing because rates are low and affordable. Every time someone debunks his comments he creates another character. He’s beyond desperate and in denial.

  79. I have no doubt we are next in line, I just feel hopeful that if we let the highest pressure balloons pop first maybe the rest of us more sensible people will be left to drift down to earth (slightly) more gently.
    What scares me is how many baby boomers with houses that were paid off recently re-fi’d to give their kids/grandkids 5% down to buy overpriced homes at the top of their budgets. I think that would be an interesting and ominous statistic. There is really no way any regulation would protect them from gambling their retirement.
    I’ve never borrowed against my house and I never will – though I wonder how many financial planners out there will tell you otherwise. In my opinion, even in debt consolidation, you should just refactor your budget (and fix the root issue) rather then automatically chipping away the roof over your head.

  80. Here’s what CMHC stated in their survey:
    “In fact, 39% of “recent buyers” have their mortgage payment set higher than the minimum required. Further, since taking out their mortgage, 20% of “recent buyers” have already made a lump sum payment to their mortgage.”
    ‘Recent buyers’ could mean any amount which doesn’t reflect their entire portfolio. Surveys are always skewed this way for those who read headlines only.

  81. ‘Normal’ is just a label. It’s been at 8% and higher in the past. It will do so again. When we do not know. But it could happen sooner than any of us predict. I’m not saying I think it will, I’m just saying things can happen that would surprise any of us.

  82. That’s the problem, the market has not been regulating itself due to the actions of central banks, governments, and the CMHC. We’ve had over 10 years of artificially low interest rates.
    8% interest is the historical average for mortgage rates in Canada. The scary part is that 1/2 the time rates are over this amount. We don’t know when rates will rise or what the future holds. Many are blissfully saying rates will never get that high again which is very foolish.

  83. “We’ve had over 10 years of artificially low interest rates.”
    Rates are absolutely not artificially low. Rates are set in global markets. They are low because inflation and growth are modest. We are talking simple economics here.
    You will never see rates average 8%in their country again with the Bank of Canada’s inflation target at 2%.

  84. Life must be lived by probabilities. It makes no sense to avoid driving because 3,000 people die every year in car accidents. Sure, 8% rates are theoretically possible, but they are extremely unlikely. Like I said below, in my opinion you will never see rates average 8% in this country again with the Bank of Canada’s inflation target at 2%. We’d have to grow faster than China to see that kind of inflation. That is not going to happen in our mature economy.

  85. 8% interest rates include the time when the inflation was in the double digit territory. Moving forward the “high” rates will mean 5-6%.

  86. Don’t get me wrong — my comment was made out of incredulity rather than boosterism (check my other posts). I just don’t see the price declines happening yet (month-to-month changes aren’t really meaningful, considering RE sales and price levels are highly seasonal in Canada — look at YOY stats comparing this January to previous Januaries instead).

  87. Lemme get this straight App.
    My monthly mortgage payments go from $1,500 down to $1,300 per month due to reductions in interest rates, but I choose to keep paying $1,500 per month, with that extra $200 going to reduce the principal. But yet you say that’s not actually an extra payment. How?

  88. Appraiser, if housing is so affordable right now, and interest rates are so low, wouldn’t you think that more than 1/3rd of mortgage holders would be taking the opportunity to pay down their mortgage principal?
    As for Garth Turner, I read his website occasionally but get very little from it. Most of the stats I use come from websites like this and others that you happen to frequent and troll on, too.

  89. The affordability calculation used by the banks is based on a set of assumptions that are no longer really representative of most first-time buyers’ situations. Longitudinal comparisons are almost meaningless.

  90. I am not dishing home ownership, I am a homeowner but its funny how the brokers always talk about home as an investment. What about the interest that people pay all those years. While its true money can be made on a home if you calculate interest paid, taxes, repairs etc “doubling” your money is really an illusion for most people. And another thing. Its funny how we are now trying to tell the banks (no, I am not a banker)that easy access to credit cards is the culprit and not refinancing your home – there is actually a huge correlation. Yes, there is too much easy access to credit and high rates. But lets face it, there are many who would always refinance there home every year or two when prices were going up to pay for this credit card debt. So lowering refinance LTV to 90% has actually made the people think twice about running up there debt because since the market prices have stabilized and LTV is now 90% people can no longer use their homes as a piggy bank.

  91. I hope there isn’t another war in the middle east. Otherwise we’ll see some real interesting outcomes for all financial vehicles and investments. Has anyone noticed how high gas has gone in Toronto? It’s a $1.25 a litre and our dollar is par with the US. What do you will happen to prices of homes in the GTA when gas hits $1.50 plus within the year. Meltdown city boys and girls. Enjoy the low rates while you can.
    Steve

  92. Normally this market would have been whack-a-mole’d by central bank tightening a long time ago. Economy overheats, CB spoils the party, people complain, economy slows down, CB eases, people thank them,… In this case the CB is sidelined. Welcome to alternative policy. Someone needs to take away the punch bowl only this time it’s not the central bank. As a reminder they don’t raise rates so they can charge more interest: it’s to /intentionally slow down prices/.
    The small silver lining of the outrageous amount of government involvement in our RE market is that the adults can (belatedly) target activity by restricting credit directly. This is a hell of a lot like raising rates: will CAAMP write letters to the BoC to ask it not to raise rates?
    Finally, pushing prices to fall a bit is not an insane policy tool. They are expensive. I would just come out and say as much: “We are leaving overall policy rates low to encourage economic activity, if your best idea is buying up more real estate, we are going to make that harder, any other ideas?”

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