Introducing.. VCI Comment Greatest Hits! Some of the comments on this site deserve more attention as far as I’m concerned. I propose we post some of the great ones as front page story topics. I’ll edit and format the following, but this is not my work, I’ll always credit the original poster and link to the original comment. This one is from Vancouverseniorsecondarymarket in response to relentless real estate cheerleader comments:
Vancouver home prices have increased quite a bit in the last seven years. Income has not risen, and banks have not increased their mortgage portfolio in the last 4 years. so where DID the money come from? locals will say rich foreign investment but this is only partly true. (more on this later)
So if peoples debt is increasing, and the banks aren’t loaning money and keeping it on their books, and there are not enough rich foreigners buying houses, where does the money come from?
If you answered mortgage backed securities, you are correct. What is a mortgage backed security? I am glad you asked. The CMHC takes the mortgages from the banks, securitizes them (pools them together) and sells them on the open market. The people who buy them get a stream of cash flow from buying the securities (cash flow stream comes from monthly mortgage payments).
Does this sound familiar? If you said “Jesus, this sounds like the sub prime meltdown in the US” you are right again. Look at the big brain on Brad!
Now why would anyone buy this crap after the US market went belly up? Canadians say they are different but is that enough for me, Johnny Investor? Hmmm, no.
So… what do. I would need some sort of iron clad guarantee. Now if only the Government of Canada, through the CMHC, would only guarantee all these loans. Then if these mortgages default, I wont lose money, the Canadian taxpayer will.
Done and done.
People will keep buying these securities if the government of Canada keeps backing them and prices keep rising (leading to ever rising cash flow streams)
Now if Vancouver real estate only ever goes up and the government backs it, eventually it will have unlimited liability.
So it said, hold on! lets tighten the requirements for the types of loans we will guarantee (insure). So now people go in, try to get a loan, and the bank looks at their income and down payment, and they don’t qualify for insurance.
So listings go up, sales go down, and prices stay the same or slightly rise. Jackasses like you think, well, that must mean no crash. Just because home prices have always lagged sales in real estate in every instance in recorded human history (lagged means sales rises, and later prices rises, or sales fall and LATER prices fall) you think it must be different here.
You come on here and say, well sales just tanked, but prices didn’t, so we are fine.
But as sales lag, prices will go down. When prices go down, cash flow goes down. As cash flow goes down, yield on mortgage backed securities go down, and investment from the secondary market goes down. As investment goes down, bank and mortgage loan origination goes down. As loan origination goes down, unemployment goes up. As unemployment goes up, defaults go up. As defaults go up, prices go down. As prices go down, prices go further down. Where once we have the positive feedback loop fueled by easy credit, provided by a secondary market trading in these GUARANTEED by the government of Canada sub prime loans, we now have a negative feedback loop that leads to price home deflation. Then a deflationary spiral.
So the sideways prediction in home prices that homeowners are predicting? WISHFUL THINKING. The downward spiral the bears are predicting? The natural outcome of moral hazard.
If you understand that the government of Canada became the biggest subprime lender in the world, you are right. If you don’t understand this, you are the one we are all going to laugh at.
If you don’t understand that the government of Canada is actively trying to deflate this bubble (praying for a soft landing that never actually happens) you are the village idiot!
So by all means, encourage people to buy overpriced homes in a system they don’t understand.
What the fuck do you care? Its not your money. Their financial ruin won’t lead to you losing sleep.
Before you post here again, ask yourself. Am I a man? Can I take responsibility for my words and advice? Or I am just an internet blowhard who doesn’t know their ass from a hole in the ground?
I think we all know, and I think you do too.
Original comment by Vancouverseniorsecondarymarket