Paying debt with debt

This Globe and Mail article starts like this:

A new poll suggests that most Canadians are quite comfortable with using debt as a financial strategy – at a time when debt loads have risen to alarming new highs.

Shouldn’t that be the other way around?  Canadians are quite comfortable using debt as a financial strategy and that has driven debt loads to alarming new highs.

The survey shows 9 out of 10 respondents would consider borrowing money to pay for an unexpected $2,000 cost.  Yeah, that’s right: $2k. These people appear to have little or no financial buffer.

While 55 per cent said they were extremely or very confident they could raise the cash, 92 per cent said they’d consider borrowing to come up with some of the cash.

Less than half – 45 per cent – said they’d never faced a debt problem.

The poll results come as Canadian debt-to-income ratios sit at a record 152 per cent and top officials issue warnings to start paying down debt before interest rates rise.

The findings suggest consumers have been unmoved by warnings that rates will inevitably rise and that the resulting financial burden could sink some households.

“It’s frightening to see that Canadians have become totally blasé about debt – it’s becoming their new ‘normal’ and they’re numb to this dangerous trend,” says Douglas Hoyes, a bankruptcy trustee with Hoyes, Michalos & Associates Inc.

“For many, the use of debt to not only pay for big ticket items like cars, but also to cover day-to-day living expenses, has become commonplace.”

Now compare this to the USA in 2006 where household debt grew at a record level, but a housing boom had also boosted networth.  Some were concerned about unsustainably high house prices, but Ben Bernanke said that he would not prick asset bubbles.

And he didn’t.

In fact the US government did everything in its power to prevent house prices from collapsing.  They pumped money into the system, drove down interest rates and came up with all sorts of programs to prevent people from losing their homes.

You may be surprised to find out what happened to house prices in the US since then, especially the ‘hot’ markets like Florida, Arizona, California and Nevada.

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My name got taken
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My name got taken

So you have $2k just sitting there doing nothing? Obviously our taxes are too low if folks have spare change.

Yalie
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Yalie

Canadians are not worried because most have not yet experienced the crushing effects of debt due to the ever-rising prices of their homes. Credit cards maxed out? Car payments due? Lost your job? No problem, just refinance the mortgage or take out another HELOC. The irony is that 10 years from now, once all the bankruptcies and foreclosures have worked their way through the system, we will collectively have far less debt and yet be far more afraid of it.

yvr2zrh
Member
Anecdotes from the front line. One of my new direct reports is Irish. Young woman, at most 30. Moved here to Switzerland from Dublin in 2006 originally for 2 years (but stayed). I thought I would ask her what it was like to be in Dublin, and wanted her first hand comments as to what happened. I happened to go to Dublin for business in 2005 and at the time, it was seen as the next big economy of Europe. Suddenly it’s not. (I think it’s one of the PIIGS). In 2006, she bought a pre-sale. 420K euros. As the project went along, many of the buyers started pulling out, not making progress payments and ultimately defaulted. The entire project ended up only being 50% completed. She did complete and now the unit is worth about 220K. She said it… Read more »
patriotz
Member

Why I don’t regret buying my home – or renting longer

1.) Buying feels good (warm and fuzzy)
2.) Meet the neighbours (more warm and fuzzy)
3.) A harsh dose of reality
The last – and most important – benefit is what can best be described as the financial awakening that buying a home brings about. You don’t truly understand the word “budget” until you’ve got a mortgage.

Aha! A buy versus rent comparison with real numbers? Nope. More warm and fuzzy.

But the real “harsh dose of reality” is on its way. Maybe the author can do another article then.

registered
Member
registered
“You may be surprised to find out what happened to house prices in the US since then, especially the ‘hot’ markets like Florida, Arizona, California and Nevada.” Only on your first day on VCI or RET. “In fact the US government did everything in its power to prevent house prices from collapsing. They pumped money into the system, drove down interest rates and came up with all sorts of programs to prevent people from losing their homes.” Citations required. The American bubble was driven far more by the mortgage industry’s practice of hiding dodgy loans inside the securities they sold to unsuspecting investors than by overt government policy. By removing the risk and consequences of making bad loans from lenders, they were free to flood the market with housing money to anyone capable of making an ‘X’ on the signature… Read more »
Many Franks
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Many Franks
Here’s a good one. It’s got some choice bits — boomers downsizing… “I’m in my 50s; it would be wonderful to have an account full of a few hundred thousand dollars, absolutely.” …a dose of the macabre… But while last year this home would have likely seen multiple offers, it’s now been on the market for 130 days with no takers. It’s even had a price reduction. A price reduction! Horrors! A dose of financial illiteracy courtesy of a realtor… “I think buyers are hoping ‘the bubble’s going to burst, the bubble’s going to burst,” but you know, people have so much equity in their houses, it’s gone up so much, nobody’s really is forced to sell,” he told CTV’s Steele on Your Side. …Bank of Mom ‘n’ Dad… Others are looking to sell off high-priced real estate so they… Read more »
Anonymous
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Anonymous

@YVR2ZRH: “So – what does this mean for Vancouver, I would say that any large decreases have to be driven by further credit changes or changes in unemployment.”

There will always be something to point at when the bubble bursts but the bubble will implode on its own. Just like when someone has a heart attack there is usually some physical stress involved but it is not the physical stress that causes the heart attack and the heart attack would happen at some point even if that particular stress didn’t take place.

patriotz
Member

@Anonymous:
Further, the rest of BC had already tanked pretty well before the recent lending restrictions came out.

The root cause of falling prices is simply excessive prices.

Badmath
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Badmath

@fixie guy: “Many of the actions noted in the quote were a response to the collapse, not a cause of the bubble’s creation.”

That’s the meaning intended in the quote: once the bubble burst the US government kept intervening to stop prices from falling. Look how effective that was for them.

market stats
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market stats

Re the Toronto new house/apt Aug sales number, is there no access to those numbers in Vancouver? Or are those sales factored into the mls numbers?

jesse
Member

” the US government did everything in its power to prevent house prices from collapsing”

It became evident quickly that they did everything within their power to look like they were trying to prevent prices from collapsing. Fed Chairman Bernanke himself admitted he whiffed in identifying the housing bubble as it was forming (even after it was obviously collapsing) but eventually figured out it was unsustainable and prices had to fall. Less was forthcoming from the Obama administration and congress, but various schemes they undertook were paltry compared to the efforts required to truly attempt to keep prices high.

The various HARP, HAMP, etc. schemes meted out by the government were more palliative care for an inevitable correction.

Eddie
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Eddie

Remember that a high percentage of Vancouver’s employment is in the very sector that is beginning to tank. Expect the downturn to really accelerate once construction slows down.

painted turtle
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painted turtle
@patrioz Why I am not willing to buy even if prices fall by 50%: 1) My money, and money I owe, will be trapped in an illiquid asset. I know people who have been trying to sell for two years. Scary situation to be in. 2) I will be worried that interest rates go up, i.e. BoC will be in charge of my future and well being. 3) I will be worried for the house. I know someone who had a crack over two floors because of the condo built next door, plus loss their view/ sunshine (condo was on the Southern side of the house). Another friend’s house ended up slanted by several degrees (the condo next door made the land collapse). None of them were compensated for the damage. 4) I do not want to figure out after… Read more »
PCinWA
Member
PCinWA
I am a Canadian living in Washington State since 2004. When my family first moved here, trying to get a credit card with a $500 limit was next to impossible, considering my Canadian credit history wasn’t worth spit down here. For two years, I had to use cash or my Canadian credit cards for purchases. Then 2006 came along, and by then I could get any credit card I wanted. I could get my limits raised to practically any level I wanted. We then bought our house in 2007 (yes, yes, we pretty much top-ticked the market), and getting a mortgage obviously was very easy. After we signed on the dotted line in May 2007, I got a call from someone at Bank of America congratulating me on being approved for a $280,000 HELOC that we did not apply for.… Read more »
jesse
Member

@Eddie: “Expect the downturn to really accelerate once construction slows down”

Not that Canada is the US or anything but construction employment in the US fell drastically after prices had fully accelerated downwards. Construction activity is historically a horrible (i.e. lagging) indicator of house price crashes.

victoria
Member
victoria

I have been talking to a dear friend in Ireland (Dublin) about Canadian RE. He is a banker in Dublin. He said we look just like Ireland did a few years ago.

VanRant
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VanRant

Imagine 25 red Honda Civics parked in the parking lot at this condo….”Free Honda with condo purchase at Ironwood Gate”

registered
Member
registered

7 Anonymous Says: “Just like when someone has a heart attack there is usually some physical stress involved but it is not the physical stress that causes the heart attack and the heart attack would happen at some point even if that particular stress didn’t take place.”

Healthy hearts are not normally at risk. Physical stress triggers an underlying condition. Expansive medical fields of study focus on exactly those causes. Few doctors would maintain heart attacks ‘just happen’. Bubbles don’t ‘just happen’ either.

Bag it and tag it
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Bag it and tag it

@jesse: ” Fed Chairman Bernanke himself admitted he whiffed in identifying the housing bubble as it was forming (even after it was obviously collapsing) but eventually figured out it was unsustainable and prices had to fall”

How did this guy get re-appointed as Chairman?? For that position, he should be one of the top economists in the world, plus he should know his own economy inside out, plus he has priviliged access to economic data…and yet he ‘whiffed’ on identifying possibly the most obvious bubbles in history?

Patiently Waiting
Member
Patiently Waiting

@patriotz: In Vancouver, meeting the neighbours can be your “harsh dose of reality”.

Can't wait
Guest
Can't wait

@Bag it and tag it: I feel you’ve got it wrong. It’s not that they picked the wrong man for the job, it’s that the job itself is flawed. Having a ‘wise’ man supposedly manage the economy and create unlimited prosperity is impossible and bound to end in disaster.

Bo Xilai
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Bo Xilai

@YVR2ZRH:

“So – what does this mean for Vancouver, I would say that any large decreases have to be driven by further credit changes or changes in unemployment.”

I sense that credit tightening is in the process of happening right now… Let’s review…

– No more CMHC insurance for $1M+ properties… That’s 5K homes in the lower mainland knocked out.
– HELOC maximums being lowered from 80% to 65%.
– No more 5% cashback for use in CMHC downpayments.
– Stricter enforcement of TDSR and GDSR in loan underwriting.
– 25 year amortization maximums for CMHC insurance.

Credit will be cheap for the forseeable future, but will be hard to obtain and only the ones with the most sterling credit score will get access to the vaults.

Anonymous
Guest
Anonymous

@Bag it and tag it: I think he knew it was a bubble and is lying about ‘whiffing’. His job isn’t to help people with their bad investments, or inform the public about the state of the economy. He manages monetary policy. Always telling the truth about the state of the economy makes his job impossible because the markets will react speculatively to whatever he says.

I’m always amazed people expect central bankers to always tell the honest truth and that they can take them at face value under these circumstances. Ben didn’t do anything about the bubble because there was nothing he could do, something he can never ever admit to the public.

Chem Guy
Guest
Chem Guy

Hey, not enough people in Vancouver earning their living off real estate, do a Real Estate MBA:

http://business.financialpost.com/2012/09/24/real-estate-mba-programs-adding-value-to-property-pros/

This will be interesting, how can you go through an MBA program and then look at Van RE and think anything other than RUN! But of course, you just plonked down $50K to earn your letters so you want RE to keep going up so you get that job to pay off your letters; swallow your pride and pump pump pump knowing you sold your soul to VANRE

dire straits
Guest
dire straits

http://business.financialpost.com/2012/09/24/toronto-new-home-sales-fall-to-record-low-in-august/

In this article Building Industry and Land Development Association. “BILD” claims that:
“The group said other factors contributing to the slowdown were a lack of housing supply and choice for consumers which can be attributed the Ontario government’s demand for intensification.”

Do you think this is valid claim or Building Industry trying to scapegoat government for obvious decline in sales?

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