Friday Free-for-all!

Alright!  The end of the week means it’s time to do our weekly economic news roundup and open topic discussion.  Here are a few recent stories I’ve noticed:

New mortgage rules to create short term boom?
Danielle Park on new mortgage rules (video)
Record household debt not a crisis
Your bubble is my debt burden
Canada not immune to downward housing pressure
Inflation rate jumps to 1.9% in January
US Jobless claims unexpectedly jump
Interest rates still headed higher

So what are you seeing out there? Post your news links, thoughts and anecdotes here and have a golden weekend!

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patriotz
Member
"Your bubble is my debt burden" Ottawa’s new plan to save us from our own bad house-buying decisions is a three-pronged approach. McNair's article is ridiculous. He's talking as though Flaherty's minor tightening of qualifications for CMHC insurance represents interference in the mortgage market, when in fact it's the opposite – a reduction in government, i.e. CMHC, interference in the market. There are no restrictions whatsoever on mortgage lending by non-bank, non-insured institutions. So how come such institutions are getting out of the business? How come the truly free market doesn't want to get involved in mortgage lending? All in all, I don’t think the moves are particularly disruptive, like a change to the minimum down payment would be. But it’s clear that the government now feels that it’s personally responsible in overseeing the stability of the housing market, a… Read more »
Wreckonomics
Guest
Wreckonomics

Those vancouver sun editorials are getting more and more rediculous (debt not a crisis). They say that comparing household debt to income is meaningless and debt should be compared to household assets. That works great unless your highly leveraged on an overpriced asset – house or condo in this case, since it's actually your income that is going to have to pay off that debt.

Love the irony of a bankrupt publisher (canwest) telling people debt is no problem. These guys are obviously financial wizards.

patriotz
Member

@Wreckonomics:

They say that comparing household debt to income is meaningless and debt should be compared to household assets.

That's entirely correct, as long as you use the fundamental value of the assets, i.e. based on the income which they produce (which in the case of a house is its rental value), not the market price, which is unrealizable by owners in aggregate. Because the interest on the debt has to be paid from income, which does include income from assets.

And what do you get when you do it that way? People are underwater, big time.

patriotz
Member

@patriotz:

BTW that's not a meant as a correction to the previous post, I'm just saying the same thing in a more analytical way.

arit
Member
That Vancouver Sun article is wrong in so many ways I don't know where to start. It's propaganda, and like their other propaganda, it has no name on it it and no comments section. "Debt is OK, nothing to see here….", " As long as you can afford the monthly payments, why worry?", "Let's take an example of governments metrics, as they are the golden standard of metrics". I like what wreckonomics said, it is so true: "Love the irony of a bankrupt publisher (canwest) telling people debt is no problem. These guys are obviously financial wizards." So this is what we do here…. We drown in debt, go bankrupt and start fresh, no harm done. Maybe we need to copy Dubai and institute debtor's prisons again. Why are we frugal? Why do we save? What's the point? This is… Read more »
Drachen
Member

@Dave:

Yeah, the 'offshore' component of the local real estate market could go from 1.5% to 1.6 or even 1.7%! That extra .2% could really boost the market!

Get off it Dave.

domus
Guest
domus

@patriotz:

Completely agree with you, Patriotz!

McNair is very mistaken in suggesting that the government is introducing more regulation. In fact, it is reducing distortion by (marginally) restricting access to the mother of all distortions: the CMHC!

It really is unnerving how most commentators consider limits to what can be borrowed through the CMHC as regulatory distortion! As if the CMHC was a private market participant, pricing risk according to standard private practices.

The CMHC is the distortions. Limiting access to it removes the distortions.

The CMHC is the purest form of government meddling with free markets. Anything restricting this massive interference should be considered a pro-market activity.

It's that simple, really. McNair should stop writing such nonsense.

BB
Guest
BB

@Dave:

If the weather stays like this, there just might be an uptick in foreign purchases of condos.

********

I hope so! I'd love to see them buy then find out how crappy the weather really is here. It will only increase the overall discount when they sell during the crash.

Dave
Member

@Drachen:

I never claimed it would boost the market. Why don't you get off it?

Anybody know how long the waits are for the zip line?

vreaa
Member
Alternative Investments To RE – Canadians Know Less Than Monkeys About TFSAs http://wp.me/pcq1o-wM Results of a Dec 2009 poll, from 'Canadians fail TFSA test', The Globe and Mail, 18 Feb 2010: http://www.theglobeandmail.com/globe-investor/per… A Mackenzie Investments TFSA test, conducted in December by Leger Marketing, asked 1,506 adult Canadians five basic true or false questions about Canada's newest investment account. Of those polled, 44 per cent answered three or more correctly, 8 per cent answered all five questions correctly and 28 per cent got them all wrong. … 68 per cent of respondents haven't opened a TFSA. When asked why, 59 per cent cited a lack of money while 42 per cent said it's because they don't know enough about them. VREAA comment: For many Canadians, real estate is their best investment. There are three reasons for that: (1.) We’ve just been… Read more »
Drachen
Member

@Dave:

"I never claimed it would boost the market. Why don’t you get off it?"

No? Then why did you bring it up at all if it's not relevant to the discussion?

Get serious, you were implying it would boost the market, then when you realized you'd been busted in an untenable position you disowned your weak-ass argument.

space889
Guest
space889

The only reason government loves to use debt to GDP over debt to income or interest to income or similar measures is because GDP used to be a much larger number which helped to make the ratio look small. It made deficit spending and taking on extra debt more palatable to the general masses who just can't seem to get past we want lower taxes, don't cut any services that I use, and surplus is bad/over taxation! Unfortunately government debt has been exploding and debt to GDP ratio no longer looked small like it used to be. Pretty soon we might be talking about debt to total asset level since total asset level is a higher number than GDP.

Crash
Guest
Crash

Some Real Estate agents are using the new CMHC regs as another lure for FTBs. This from an ad I saw on Craigslist:

"Hurry on this awesome home New Banking Regulations through CMHC coming into effect April 19, 2010."

Phew, anything to make a sale…

40 Year Amortization
Guest
40 Year Amortization

I don't know why everyone assumes the new mortgage requirements will result in a short term boom. Everyone, including the experts and economists, thought the elimination of 0 down /40 year amortizations in October 2008 would lead to a crazy rush to buy.

However, the "big rush" never materialized. Granted, we were heading into the recession, but buyers had about 6 months notice of the impending tightening regulation, unlike the 2 months notice for these changes.

Not much of a name...
Member
Not much of a name...

@Dave:

"I never claimed it would boost the market. Why don’t you get off it?"

Talk about f'ing semantics. You brought the issue up with the possibility of an uptick.

SD92129
Guest
SD92129

@40 Year Amortization Bust:

Its all marketing spin. Why would someone buy now if they new there was going to be an even greater chance of lower prices after April 19th.

Sometimes it works, sometimes it doesnt. Works better on the ignorant and scared. But people are getting so tapped out and so much future demand has been used up, especially in YVR, most of us would bet that a mini-boom wont happen.

I would put these new rules in the same category as the elimination of the 0/40 in the sense that it applies mostly to those that are on or near teh cusp of being able to purchase RE. And as I said, I believe most of those people already took the dive.

patriotz
Member

@SD92129:

Why would someone buy now if they new there was going to be an even greater chance of lower prices after April 19th.

People who can figure that out wouldn't be buying anyway. The realtors are just trying to rope in as many fools as they can before the rope gets shorter.

There will probably be a small rush to buy before prices go down, excuse me, before mortgages become harder to get. And then we can get on with the bust.

White Payer
Guest
White Payer
I find it funny, that if you live elsewhere in Canada, these "new rules" really aren't all that restrictive. I mean, if you want to buy a house in Ottawa, I'm pretty sure you will qualify for the "new" mortgage just as easily as you would today, provided you earn a regular salary and have a decent credit rating. It's just here in this strange microcosm of ours where theses small changes mean a difference between financial life or death for so many. We are but a speck of dust on the map of the universe and you can be sure nobody will shed a tear when "the best place on earth"TM goes bust. Still, I'm sure bulls around here are hoping for all sorts of countermeasures to be deployed to save their skin and our fake "economy". The thing… Read more »
Anonymous
Guest
Anonymous

White Payer:

Good point. And to go a bit further, if you cannot afford an average home with 10% down for 30 years on a 5 year term in Ottawa you definitely have no business getting into real estate at all, beacause you're either unemployed or really, really bad with money.

40 Year Amortization
Guest
40 Year Amortization
#22 The measures were not designed to target the rest of Canada. They were openly designed, in part, to target speculation in the big bubble cities. As for "bullish" measures that could be implemented, do not think for one moment that the feds and province have used up all their ammunition. Did you see the interest rate cuts coming? The change in FTB RRSP withdrawals? How about the renovation credit? Or the recent provincial property tax deferral program? Did any of the bears? If we are following the US, do you not foresee first time buyer credits? Do you not see banks providing mortgage relief to prevent foreclosures? If anything, Canada has has an opportunity to see what works and what doesn't around the world. They can keep implementing these types of measures for years and create the slowest deflate… Read more »
Wwhite Payer
Guest
Wwhite Payer

@40 Year Amortization Bust:

"If we are following the US, do you not foresee first time buyer credits? Do you not see banks providing mortgage relief to prevent foreclosures?"

Still, none of the above were able to prevent the monumental RE collapse down south…

White Payer
Guest
White Payer

Oh, and BTW, I'm not waiting for anything. Merely looking forward to enjoying the upcoming horror show.

domus
Guest
domus

#24: "ou could be waiting another decade before fundamentals” align with prices."

You mean 10 years of underperformance of RE relative to other ways to save your money. Good outlook…

Aleks
Guest
Aleks

In defense of Flahertey's contention that there is no RE bubble in Canada, he's right. There's really no such thing as a national RE bubble because there isn't a national market. Even in the US, what you had was a lot of local bubbles all fueled in part by the global credit bubble and the lack of regulation on lending and securitization. But the individual markets were all independent, and huge areas of the country never experienced a real bubble.

In Canada, we have the exact same situation. Places like Toronto and Calgary are in a bit of a bubble, but it's really only BC that is in full-on speculative insanity. And if you don't know by now that Ottawa doesn't care about BC, my telling you again won't help.

patriotz
Member
@40 Year Amortization Bust: The measures were not designed to target the rest of Canada. They were openly designed, in part, to target speculation in the big bubble cities. You sound a bit confused. Second sentence seems to contradict the first. Only one big bubble city here. The rest are in Alberta and Ontario. Anyway as I have said before, IMHO this measure is ALL about capping the price increases in the Greater Toronto Area. If they were allowed to get any higher the region would inevitably correct in a bust comparable to (or bigger than) that of the early 90's, which would be disastrous politically and have major macroeconomic effects due to its size. Now certainly prices are going to go down in the GTA from today but if now is the top we might not see a bloodbath… Read more »
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