Fear not the housing bubble
Notice how there’s been all sorts of bubble-talk in the national newspapers lately? Even the Americans have noticed our hyperactive market. Well you don’t have to worry about it anymore. In November the Canadian housing market saw prices fall and listings rise, signaling a return to normalcy.
While Peter Aceto welcomes a moderation in prices, the chief executive officer of ING Direct worries buyers are purchasing homes they won’t be able to afford when interest rates move higher. He has advised his employees to run clients through different scenarios to make sure they realize how much more their payments would be under historically average circumstances.
For example, a five-year variable rate mortgage at 2.25 per cent on $300,000 would carry a monthly payment of about $1,300, assuming a 25-year amortization period. A move to 5 per cent would boost the payment to $1,750. It’s a 34-per-cent increase, something many family budgets wouldn’t be able to accommodate.
“I understand how people get caught up in a hot market, but they are doing some odd things that really worry me,” he said. “You see multiple offers, and houses going for 20 per cent above asking. Those aren’t normal things, and the high level of confidence out there really does make me scratch my head a little.”
Mr. Aceto isn’t the only one scratching his head. Mark Carney is wondering if Canadian debtors will be able to handle rising interest rates. Carney is also telling Mr. Aceto and his banker buddies that they must be responsible when handing out taxpayer backed mortgage debt:
Similarly, lenders have responsibilities. Financial institutions should actively monitor risk stemming from households and not take false comfort derived from mortgage insurance and past performance of household credit. As our simulations suggest, the overall credit profile of Canadian households could well shift if debt continues to grow at current rates. The Bank expects that Canada’s financial institutions will continue to apply their high standards of risk management, for which they are being justly lauded the world over.
So there you have it, everyone is aware of the risks and making sure all buyers are ready for interest rates to rise. So don’t worry you silly bears, everything is going to be all right alright. Mr. Carney hasn’t said when rates will rise or by how much, but here’s the BMO forecast:
A tip o’ the hat to Don for the links!
December 18th, 2009 at 1:52 am
@arit: Hah! Yes, Arit, point taken. The vast majority are still towing the line. And some people now are taking a warning of bubble and inflation as the reason to jump in now – today I saw a news story of a person jumping to purchase now before rates go up while things are still affordable, and I thought wow; you've got to be pretty confident you're going to have a raise by the time your mortgage resets…
December 17th, 2009 at 10:29 pm
@Absinthe:
You really express it nicely, I truly enjoyed reading your post. I do find it "premature" when you refer to the circumstances in past tense:
"You could find no end of people who would tell you that. Everyone in Vancouver said this was the new normal. Global News, the CBC, bankers, Rennie, mortgage brokers, Sommerville: it was those of us in the bear cave who were fringe and strange."
Because in my circles I am still considered the kookoo. At work and at social events people still think "Everything is going to be alright".
Only in a few months, hopefully, we will be proven right, but then, as you and I know, we will be hearing "nobody saw it coming", and not "arit was right".
Obviously I do not care: the only thing I care about is my precious stash of dry powder and RealPaul's health as I do not know how old he is and he will supposedly be helping me chose a house when I can afford it in cash, circa 2016. At that time there will be a BIG party, where I expect ALL of you to show up!
Best regards,
arit
December 17th, 2009 at 10:13 pm
Low interest rates are merely extending this party deeper into the night, thus making the hangover in the morning that much worse.
December 17th, 2009 at 9:50 pm
The revisions are coming, the revisioins are coming. As I said a couple of weeks ago when the gov't was re-electing Bernake and the economy 'suddenly' created jobs in the millions that it was all a farce. Sadly I was right, in fact there is no surge in jobs numbers in fact just the opposite.
http://apnews.myway.com/article/20091217/D9CL3AOG…
December 17th, 2009 at 9:23 pm
12 Wreck, with average prices soaring to 12 times income the fact is that NOBODY can afford real estate anymore. Its a grinding down of consumerism as we know it and a win win for the banksters who get to suck up every penny.
Who cares if you can't afford a pizza on Friday night or put your kid in baseball or an after school music program? No sir, as long as you can pay 99.999% of your net into a mortgage the government is happy. After all people with a great fear of change are not people who will act out. Stalin proved that. People in debt are slavishly subservient just like prisoners should be.
The number of sheeple who have been sucked into this peanut brittle economy and the idea that zero interest rates would prevail 'forever' just cause Carney said so is due a big boot in the ass and I agree that they deserve it. But man, theres a lot of really stupid people out there.
December 17th, 2009 at 7:53 pm
(( Although I sure as heck don't think CMHC should keep funding those folks. The crime already happened, in unsustainable loans. We need to pop this thing, like lancing a boil, even if it hurts. I do have sympathy for the patient, though…))
December 17th, 2009 at 7:48 pm
@G. Perscrepers: Humans are specialists, and some are particularly bad at math. It is a byproduct of society and specialization – both good traits that have brought us much – that we rely on experts: we don't re-invent each expertise for ourselves. Due diligence in an unknown field(neurosurgery or investing or technology, say), is usually about getting more than one opinion and doing a little research about what the consensus is.
For every amateur in a field who has truly informed him or herself, there are a handful who've missed the most basic fundamentals. That's why people rely on each other.
Bankers and financial planners have been trying to help me to greater debt for quite awhile, from RRSP loans onward. Yet I'm not an economist. I have a science background, which makes me less intimidated to plunge into the greater questions of why things are behaving as they are, perhaps. But mainly, it's that I happened to look at calculators that used historically average interest rates.
The debt being offered is like being told by a doctor to smoke for asthma. That was once done.
I'm as happy as anyone to let those people, who thought they'd get rich quick and retire by 40 by flipping (with or without adding granite), lose their money without much sympathy.
But all those people who worked and saved and scraped together a down payment they thought reasonable – and then went to their financial planner and their bank and learned their money was only 5% in today's market, but that's fine, because "times have changed and it works differently now"… well? You could find no end of people who would tell you that. Everyone in Vancouver said this was the new normal. Global News, the CBC, bankers, Rennie, mortgage brokers, Sommerville: it was those of us in the bear cave who were fringe and strange.
I thought the Emperor was wearing no clothes, sure. So did those here. However, there are experts in my life I don't actively challenge, whose expertise I accept because, meh, I have a life to live. In one of those areas, I'm sure I see clothes where there's only nudity. All of us have holes in our understanding of the world.
December 17th, 2009 at 6:43 pm
@G. Perscrepers:
Our legal system makes people who borrow money they can't pay back accountable. Creditors can go after all of their assets save retirement funds and personal effects. They must ask a bankruptcy court to discharge their debts and will be unable to borrow for years after.
Where are the realtors who promised RE was a sure thing regardless of price, the bankers who knowingly made mortgage loans that had little chance of being paid back, and the politicians who signed up you and me to be guarantors of those loans, to be brought to account?
December 17th, 2009 at 6:05 pm
"Real men/women take responsibility for their actions!"
Yeah, and SOME people need to BE protected.
Why else do we have laws against snake oil salesmen or against manufacturing defects?
DUH. It not quite as simple as you make it seem.
December 17th, 2009 at 5:42 pm
@patriotz:
Why is it that whenever anybody does anything stupid, it’s always somebody else’s fault? Individuals that take out loans they can’t handle are entirely at fault. It’s not the bank’s fault! it’s not CMHC’s fault, it’s not the government’s fault, it’s not the pidgin’s that lives in the eves, fault, or anybody elses!
It may turn out to be an accurate assessment that the CMHC and the banks have a arrangement that has helped create and prop up a RE bubble, and that itself is littered with ‘fault’, but it does nothing to diminish the fact that whoever takes out a bad loan in the first place is 100% responsible for their own actions.
Everyone is entitled to be, and has the opportunity to be, responsible. If they choose not to be, through laziness, inaction, or failure to do research or due diligence, they have absolutely no one to blame but themselves! Real men/women take responsibility for their actions!
December 17th, 2009 at 3:03 pm
Here is an eye-opening quote from "Canuckkid" commenting on CMHC and their bias in their publications. For the original article see
http://www.theglobeandmail.com/news/politics/has-…
"While it is to a far smaller degree on the marality scale, I can assure you all that this is a matter of routine in government/civil servant sectors. I work at CMHC and have been present at a meeting where we were directed as to the language we were to use in upcoming publications. The change was in direct conflict with our mandate to provide unbiased information to the public. When this concern was brought up and a request for written directions made, we were all told very directly that there would never be a written record of the meeting, or the directions.
As this policy remains in place, and we remain in violation of our own priniciples, the higher ups are having to scramble to cover themselves as dissatisfaction grows. The president recently had the director of our function `fall on his sword`over suggestions that it was her that had directed this change in policy.
We all await the next directive that allegedly doesn't come from her via the PMO."
December 17th, 2009 at 2:40 pm
@Wreckonomics:
Sure the borrower is at fault but the lender (and guarantor if there is one) also have a responsibility to ensure that they can get their money back, either from collateral (which in the case of RE is grossly overvalued today) or ability to repay from income (which will be clobbered when interest rates go up).
Indeed it is the lender and guarantor who are the more sophisticated parties, so the bulk of responsibility falls on them IMHO.
Bottom line is that responsible lending requires both responsible lenders and responsible borrowers. And I'm mad as hell that an irresponsible and conniving government is making me, and every other Canadian, guarantor to these junk mortgages.
December 17th, 2009 at 2:36 pm
BTW, everyone: CMHC published their latest rental market survey:
http://www.cmhc-schl.gc.ca/odpub/esub/64467/64467…
Wow, renting is cheaper than buying!
December 17th, 2009 at 1:45 pm
@realpaul: No offense, but if you borrow more than you can handle and bet it all on overpriced realestate it IS YOUR FAULT if you get into trouble. Debtors get no sympathy from me for being economically ignorant.
December 17th, 2009 at 1:14 pm
priced out: "I want to get on with my life!!! "
How exactly is not owning a house stopping you from doing so? Am curious.
December 17th, 2009 at 12:50 pm
@arit:
I feel the same way…especially when they talk about the example of how the mortgage payment is impacted when rates rise. Well….DUH, this is not a new scenario, a $500k+ house in Vancouver is certainly nothing new. I guess the new factor is the probability that interest rates WILL increase in July, so the media's jumping all over the math now and realizing that NO, it's NOT affordable for most families to carry a $500k mortgage at even 5% (which is still historically low)
Hurry up and crash, dammit! I want to get on with my life!!!
December 17th, 2009 at 10:18 am
"Don't blame us' is what the government is saying. They want no part of the clean up of the mess they have created. Its all 'your fault' for borrowing so much money after the government asked you too and guaranteed zero intrest rates for the 'foreseeable future'. This is all too funny.
Isn't it 'closing the barn door after the horse has bolted'? And now to blame the inflation on 'rising energy prices' is just laughable. Hey guys, the price of oil is half what it was a year ago. This new spew from the BOC is all politics no substance. We need a responsible media to reprint all the articles about this from over the past two years and not a media that simply prints every public statement that comes down from the government spinsters.
BTW I was on a flight from London last night with Boring-don Campbell. What an entourage he had in tow! You guys are so generous. I can't imagine what its costing you to have that many clowns flying first class and at European hotel rates. You guys are generous to a fault. I also noticed in the attached article that your wages are not going up again for the 11th year in a row.
http://www.vancouversun.com/business/Debt+laden+h…
Higher intrest rates, low wages, a currency which can't buy toilet paper….let them eat cake, said Mrs Gordon the Idiot as she swilled champagne over the Atlantic.
December 17th, 2009 at 9:40 am
#6 @patriotz: CPI is 1%, but the bank uses "core inflation" as its "operational guide". That is 1.5% (Nov) down from 1.8% (Oct) year over year. Their target is 2%, but the bank declares victory if it stays between 1-3%.
December 17th, 2009 at 8:28 am
If you go out on the street and talk to the average Joe he/she has no idea what's going on with regards to interest rates. They have no historical perspective because a)they don't care b)they're caught up in their own lives and c) most importantly, the idea of thinking about this subject matter is too unpalatable. This is the same reasoning why people don't do their homework until the last minute or don't return the difficult calls. All of these people will be victimized by circumstances that they should have seen coming. Do I feel bad? No, quite the opposite, I cheer for the pain so that I/we can take advantage of the slaughter. On the other hand, the super smart people sold in the last couple months or will have the opportunity to get out in the early spring before bond yields start dictating mortgage rates. One things for sure…it's going to be exciting!
December 17th, 2009 at 6:14 am
Just heard this on the radio – consumer price inflation is on the rise:
http://www.cbc.ca/money/story/2009/12/17/inflatio…
YOY CPI is now 1%. The BoC cannot let it pass the target of 2% as this would cause a bust in the bond markets. It will raise its own rates first.
IMHO the bond markets seem increasingly likely to bring this house of cards down, either through inflation fears or concerns about the federal deficit and debt (including the mushrooming CMHC obligations). Remember that there are no foreign deep pockets who have an interest in buying CAD debt to prop up the currency (unlike the USD).
December 17th, 2009 at 1:14 am
@domus: Its because Vancouver doesn't matter in the grand scheme to the policy makers. It's only now that the bubble is reaching across the national market that they are concerned. Who cares about the dopesmoking dreamers in the wild west?
December 17th, 2009 at 12:29 am
This is Carney's way of saying "Don't say you weren't warned" for when the zero interest rate policy nonsense has ended.
Ahhhh, it feels mighty fine to be a risk-free renter when I read stuff like this (as I stretch, intertwine my hands, crack my knuckles, put my hands behind my head, and lean back in my chair).
December 17th, 2009 at 12:24 am
Yes, I agree with arit. It all smells a bit fishy. For the past 5 years loads of people in Vancouver have been saying that valuations were crazy, that people were gambling, that first time buyers were taking huge debts for fear of being priced out. And yet not a single voice in the MSM or government would recognize the apparent discrepancy between reality and fiction.
The king was walking naked, but everyone pretended he was wearing a dress. We must be approaching the final climax of this madness, if so many people in so many positions of influence are starting to cover their backs for the inevitable.
Jump ship, it's going to crash. And the government won't save you this time round.
December 16th, 2009 at 11:03 pm
who cares
December 16th, 2009 at 10:53 pm
Yeah right… This is ridiculous! Now they say "Bubble"? Now?
Give us a break. Now it's too late. The only reason they say bubble now is to keep their chairs when the world ends starting in July.
Where were these guys when we crossed the affordability level way back in… Way back in…. when? I don't have that kind of memory anymore!
Regards
arit