Category Archives: Canada

IMF pessimistic on Canadian outlook

The IMF has put on their grumpy pants and come out against the Canadian Economy again, so says the Globe and Mail.

Markets worldwide reacted with some shock to the news, posting modest declines. But the Toronto Stock Exchange took a bigger hit than most others, falling 1.2 per cent.

The Canadian stock market has been sluggish, relative to other leading global markets, as economic doubts have risen this year. The TSX has grown just 2.7 per cent to date in 2012, compared with a 14.6 per cent jump in the S&P 500 and even 6.7 per cent growth in the Euro Stoxx index.

“We’ve been saying for a while that the Canadian stock market would underperform,” said Pierre Lapointe, the head of global strategy and research for Pavilion Global Markets Ltd. “It has. And we continue to think that it will underperform.”

The IMF report focused heavily on Canada’s deeply entrenched trade relationship with the United States. While Canada’s recovery has been faster, “growth has been constrained by sluggish expansion in the United States,” the report said.

Read the full article here.

What if mortgages were harder to get?

Right now mortgages are easy to get and interest rates are dirt cheap.

But the one thing you can rely on in economic cycles is change.

What will it look like if interest rates start to rise or mortgages get a little more difficult to obtain?

Or worse, what if the CMHC wasn’t there to insure low equity mortgages and everyone required a 20% down payment?

The Globe and Mail has an article outlining some of the repercussions: lower prices, economic fall out, etc and comes to this conclusion:

For the time being, mandatory 20-per-cent down payments are merely an academic discussion. Our government wouldn’t risk such a bold change. That said, the trend of transferring more housing risk to the private sector may continue.

Other countries deem us lucky to have a proven and reliable housing finance system. Rather than dismantle it, it’s likely safer to spot the risk areas and carve out those malignancies with a scalpel. That would minimize collateral economic damage, incentivize proper risk taking, and further reduce the odds of government-funded mortgage rescues.

It would also preserve housing options for qualified Canadians who have lesser payments but can afford to own.

Read the full article here.


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.

Housing market keeps on cooling

The Globe and Mail has an article about the drop off in real estate sales across the nation.

It’s got some gems in it for predictions from bankers and real estate associations, but it’s also got the standard partial information about ‘government interference’.

As evidence mounted that rock-bottom interest rates were fuelling house prices and consumer debt loads, Mr. Flaherty has changed mortgage insurance rules four times, each time making it more difficult for consumers to take on housing-related debt.

While the three previous rounds crimped both housing activity and the demand for credit, economists and real estate industry experts say this latest round, which took effect July 9, looks as if it is having a bigger impact.

And off course what’s missing is any mention of the government previous moves to make it easier for consumers to take on housing-related debt: moving amortization from 25 to 30 to 35 years, dropping down payment requirements all the way to zero down and shoveling money into mortgage buybacks via the CMHC.

So anyways, it’s getting harder to buy than it was when you could get a zero down mortgage with a longer amortization schedule.  And what sort of horrors has this wrought?

A number of economists, real estate agents, and industry observers say that many prospective first-time buyers have found themselves unable to secure a mortgage, especially in Toronto and Vancouver, and are therefore remaining renters.

Paula Roberts, a mortgage broker based in Markham, Ont., said one of her clients, a young teacher, was preapproved under the old rules, but now that she has found a home she likes, is having trouble securing the mortgage. She will likely have to get someone to co-sign the loan, or come up with a larger down payment, Ms. Roberts said.

“It’s really hindering people,” she said. “Her rent is basically the same as her mortgage payments.” In Ms. Roberts’ opinion, “it’s always better to try to buy something instead of rent.”

Of course, it’s always better to try to buy ..Says the mortgage broker.  Business slowing down Paula?

But this article ends on a bit of a down note for those hoping for a ‘plateau’

David Madani, a bearish economist at Capital Economics, reiterated his forecast Monday that house prices will fall 25 per cent in the next year or two. “The first sign of trouble at the peak of the U.S. housing bubble was that home sales began to drop in 2005, well before house prices began to fall in 2006,” he wrote in a research note.

Read the full article at the Globe and Mail.

What sets house prices?

Jesse put together a nice clear presentation on our housing market.

Check it out.

His argument is that the factors that set house prices are different for the long term than they are for the short term.

If short term factors drive up supply and pull demand forward, what happens in the future to balance this out?

With housing affordability in Vancouver hitting an all time low and sales scrapping along under 100 a day It sure looks like Months of Inventory is starting to flash a big warning sign for current buyers.