Wednesday, November 27, 2013

IMF wakes up: Canadians shouldn't socialize mortgages


Is this a case of stupid housing policy begets stoopid housing valuations?

The IMF, big bureaucracy accountable to no one that it is, in its infinite wisdom points out that Canadian home prices *may* be out of whack with reality given that people who pay taxes to the government of Canada just also happen to be on the hook for a lot of the day to day mortgage lending decisions of the mortgage industry in Canada (give or take a lot here or a lot there depending on the government oversight of the day, or not).

The IMF, of course, says Canada's home prices are the most over-valued anywhere in the world.

Cheap mortgage rates and banks' tendency to give money to folks they otherwise wouldn't because Joe Public will bail them out regardless has a way to do that to a market.

Perhaps the most salient observation in the IMF's pontification: “We suspect the fact that banks may benefit from government-backed insurance on mortgages (…) it sort of makes it easier for banks to do mortgages than other kinds of lending which presumably, we think, is going to be more useful for the real economy.”

It's not like Canada wasn't warned before... like in 2008 by an anonymous schlep living in his parent's basement in Victoria because, despite an above average household income, he and his wife couldn't afford much more than a crack shack in a shady Vic West 'hood. 

60 comments:

Seth Perry said...

Thank you, caveat emptor, BtuB, SJ and yogurt for answering my question in the previous post and for providing investment advice. I've summarized it for anyone else that is interested.

"Get informed yourself and do some reading and then manage the money yourself" - caveat emptor

Books
* The Clash of the Cultures: Investment vs. Speculation
* Start with something like "Trade Like a Stock Market Wizard".

Website LInks
* http://canadiancouchpotato.com/
* http://canadianmoneyforum.com/

Where to start
* Set up a registered TFSA accounts online, (married, then two)
* Otherwise, open a self-directed RRSP account.

How to invest
* Questrade
* Virtual Brokers (charges 99 cents per trade)
* QTrade
* TD Direct Investing (e-series mutual funds)

Investment strategies / where to look

* Purchase some appropriate ETFs

* Mawer

* PHN (Fees / MERs)

* Vanguard (FTSE Canada index ETF at 0.09% MER.)

* Vanguard (VTI at 0.05%.)

* With 50K - 30% fixed income allocation (via ETFs or funds) that would leave you 35000 to invest in individual stocks. $2,000 each in 17 individual stocks

* US equity, world equity, bonds.

* ING Streetwise mutual fund.

* Broad diversification

* Stick to mostly global and US indexes such as VTI and VXUS to get exposure to the real, full global market.

* Invest the majority of your nest egg in boring all-index, lowest cost Vanguard ETFs, and only play in individual stocks with a subset of your money. (easier to just track and forget )

Thanks again. I hope this is helpful to more than just moi.

CS said...

Re: IMF Report

The IMF says: "Canada’s economy will accelerate in 2014 ..."

Unless of course it doesn't, which as the IMF is clearly aware, would be the case if a plunge in house prices shut down much of the construction industry.

Hence, the IMF states, there will be no need for the BoC to raise rates before 2015, by which time, the IMF believes, inflation will be picking up nicely, thus eroding real house prices and thus lowering the house price to rent ratio.

But even in 2015, the IMF warns:

"if any structural changes are made (i.e., in the regulation and government-backed insurance of housing finance), they should be gradual to avoid unintended consequences."

For the last six and a half years Victoria's house prices have been in a horizontal channel with a range equal to 13% of the mean value.

That's evidently how the policy makers would like to see the national housing market behave from now on.

But policy makers often get things wrong, it seems, so whatever it is that the BoC and the Finance Ministry does to manage housing finance, watch out for "unintended consequences"!

koozdra said...

Good catch way back in 2008. Desperate times call for desperate measures. Now it's time to pay the piper.

Just Jack said...

Forget Victoria, any changes designed by the Government will be focused on the Golden Triangle in Central Canada.

In Victoria, we'll just have to deal with those changes. Changes that would be designed to take the "bubble" out of the market in Central Canada may just devastate Victoria and Vancouver.

Just Jack said...

One way to deflate the prices but keep current home owners paying their mortgages is to drop the amortization down on CMHC insured mortgages to 15 years for new buyers while those with homes would be grandfathered the 25 or 30 years.

After owning your home for 5 years that new home owner could then refinace to the 25 or 30.

This will only affect a small group of buyers. If those buyers want 25 or more amortizations then they will have to save up a bigger downpayment. But it could be enough to cool the over stimulated segments of the real estate market. Like condos.

koozdra said...

@Caveat

About Carrick's article. I agree with it but there are some fundamental differences. Access to credit and low interest rates means that gen Y lives better than the previous generation. A band aid solution to a gaping knife wound.

I know people that are up to their eye balls in debt but aren't really concerned. As long as interest rates stay low they they will never get concerned.

The longer the rates are low the more dependent my generation will become. If rates increase we're going to have a bunch of very grumpy youngens out there.

koozdra said...

"drop the amortization down on CMHC insured mortgages to 15 years.."

That would probably be too drastic of a change.

I would just cap the amount that the CMHC can insure. A first come first serve program. We could break it down by province. Each province gets a million per month. Can't get insurance this month? Register to try again next month.

Even better, a CMHC lottery. Held nation wide.

Just Jack said...

I think the idea is for CMHC and the government to get out of the insurance game. There are still two private companies that offer insurance. But with CMHC not keeping the cost of the insurance down, the private companies would charge fair rates for a second mortgage. Say 3.5% on the first 80 percent and 9% on the balance. The government would no longer have to back these private companies if they were permitted to charge market rates.

The end of socialized housing is upon us.

caveat emptor said...

Lot of commonalities in the investment advice offered.

In particular no one suggested going with a commissioned financial advisor. No matter how honest your advisor is, he or she NEEDS to sell you expensive mutual funds to keep food on the table.

I saw how damaging this is with a relative. Her investments were managed by her financially savvy Dad. When he passed away she got a financial advisor (against my advice - I just recommended a few tweaks). First thing he did was sell everything she had and move it into a new selection of funds.

Net result - huge tax bill for capital gains, overall management fee jumped from about 0.75% (mix of individual stocks and low cost funds) to about 1.75 (mix of high medium and low cost funds) for a marginal improvement in diversification and asset allocation

info said...

@ HHV

Excellent!

Tweev said...

Hey - here's a story about how renting sucks. I got evicted this week - the landlord decided to take over the place. What a complete drag.

I have an urge to buy but I just can't take on that kind of risk. Anyway, if anyone knows of a 3 bedroom in Fairfield for long term tenants (3-5 years at least) drop a note in the comment section.

Thanks! (and yes I am also scratching usedvictoria, craigslist etc).

Tweev said...

Hey - here's a story about how renting sucks. I got evicted this week - the landlord decided to take over the place. What a complete drag.

I have an urge to buy but I just can't take on that kind of risk. Anyway, if anyone knows of a 3 bedroom in Fairfield for long term tenants (3-5 years at least) drop a note in the comment section.

Thanks! (and yes I am also scratching usedvictoria, craigslist etc).

info said...

The maximum size of home-mortgage loans eligible to be backed by CMHC was cut back to $1 M last year, which is much more than the amount that can be backed by Fannie Mae and Freddie Mac in the US.

Quoting:

"Currently, Fannie and Freddie Mac can back mortgages that have balances as high as $417,000 in most parts of the country and up to $625,500 in expensive housing markets, including parts of California and New York, and as much as $721,050 in Hawaii."

For the vast majority of mortgages in the US, $417 K was the limit during the inflation of the US housing bubble. $417 K was conservative in comparison to the limit (or no limit) in Canada.

Canada's housing bubble took twice as long to inflate and is much larger than the 2006 US bubble.

In Canada, many more high-risk, high-ratio loans have been backed by taxpayers in comparison to the US (per capita). As well, loans in Canada have been bigger, on average, than in the US.

Canada's correction/crash could be much worse than the US crash. The potential is certainly there.

MD80 said...

@Tweev
Try Padmapper.com. Great way to filter usedvictoria/craigslist/kijiji and shows everything on a map!

Marko said...

Tweev, I have clients that will be looking to rent out their newer three bedroom half duplex in James Bay but only 6 to 12 month lease. If interested email me to markojuras@shaw.ca

Tweev said...

Hi Marko,

Thanks for the offer but we are looking for a place for the next 3-5 years (at least).

Introvert said...

Neither owning nor renting is risk-free.

info said...
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info said...

"Neither owning nor renting is risk-free."

Enlighten us. Give us your top two risks of renting and top two risks of buying near the peak of a massive housing bubble.

DavidL said...

@Introvert
Neither owning nor renting is risk-free.

The neither/nor seems like a grammatical double negative to me! Does that make a positive?

koozdra said...

An interesting development..

CMHC Risk Fee

Introvert said...

The neither/nor seems like a grammatical double negative to me!

It's not a double negative. Don't quit your day job, DavidL.

DavidL said...

@Introvert

I'm not going to waste blog space by arguing semantics.

If your premise is that both owning and renting have risks... then as someone who has rented for 16 years and owned for almost 11 years - my experience has been that there are more risks with owning.

totoro victoria said...

My experience is that owning has been far better than renting. I rented for eleven years and have been an owner for ten.

Top risks with owning imo are failure to save the equivalent of a homeowner's equity and appreciation over time, and the fact that you may not have long term stability.

The failure to save risk can be mitigated somewhat by diligence and renting less than you can afford. The stability issue is something that can create short-term stress but not huge financial losses.

Top risks of owning are interest rate hikes while you have a mortgage, and having to sell at a loss if prices fall.

You can mitigate interest rate hike risks by having a locked in longer-term mortgage. The having to sell at a loss can happen but can be mitigated by planning to stay put at least seven years when you buy imo.

Leo S said...

The having to sell at a loss can happen but can be mitigated by planning to stay put at least seven years when you buy imo.

We are getting very close to that point. According to the MLS HPI prices are back down to the level of 6.5 years ago.

Just Jack said...

The Golden Handcuffs

The new reality for young families and ownership is that their homes may never be paid off.

I know of several families that have owned their homes for ten years now and still have 30 years left to pay. There seems to be always something coming up that causes them to refinace to pay down bills and extend the mortgage.

And a home without equity is just renting with debt.

totoro victoria said...

Your friends who have owned a home for at least ten years and have a 30 year mortgage may in fact have very low monthly payments. Or they may have remortgaged for 80% of the value - which means a withdrawal of likely over $100,000.

If they cannot sell for the 80% of current value they may be in negative equity territory - not sure how likely that is.

Overall home ownership has been a significant boon to wealth over the past ten years. It is not home ownership that is the problem - it is overspending.

Marko said...

The new reality for young families and ownership is that their homes may never be paid off.

I know of several families that have owned their homes for ten years now and still have 30 years left to pay. There seems to be always something coming up that causes them to refinace to pay down bills and extend the mortgage


This has nothing to do with the housing market thought, but either bad luck or just poor financial discipline.

patriotz said...

It has everything to do with the housing market, because rising prices enable owners to refinance to a higher mortgage balance.

It's called the home ATM and we all know it goes out of service when prices start falling.

CS said...
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CS said...
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CS said...

The neither/nor seems like a grammatical double negative to me!

No, it ain't neither.

Although if it were, I'm not sure there'd be much reason to object. Double or multiple negatives can give emphasis. For example, one might say of the contributors to a blog discussion: "There ain't nobody here knows nuthin' nowhow." (Not referring to the contributors to this blog, obviously.)

The thing is, most of us speak multiple dialects, the one used on any particular occasion being dependent on context.

In a blog discussion a fair degree of informality and a lack of obsessive attention to proof reading seems not inappropriate (to use a double negative).

A problem arises only when one uses a dialect inappropriately, as was Eliza Doolittle prone to do.

Just Jack said...

To me it shows that their debt service ratio is too high. Taxes, garbage, sewer, water fees, electricity costs, repairs and general living costs are rising fast and seemingly without control pushing these families deeper into debt. For most, I don't see a way out. They're caught between a rock and a hard place.

Although a banker or broker may suggest a 42 or 44 percent is an acceptable debt service ratio it would be more prudent to consider only 25 to 30 percent. And another prudent measure is to never have a mortgage that is more than 3 times your gross income. If you have to take in boarders like the widows in the wild wild west at least that's one step above what Miss Kitty had to do in Gunsmoke to pay the saloon's mortgage.

-And Festus was one kinky dude!

Or you can increase and extend your mortgage and deal with all of this later.

Leo S said...

Even many boomers are carrying mortgages into retirement and they had all the benefits of the rising prices. Not hard to imagine that a large percentage of current buyers will never pay off their houses.

Just Jack said...

If you never pay off the mortgage - why are you buying?

The whole idea is to suffer now with high payments, taxes and repairs so that you don't have to sufer when you retire.

Spending your entire adult life paying for a house that you never own!

What kind of BS is that!

I want to own a 5 million dollar home when I retire so that all the young 20 somethings will be in awe of me. Imparting my wisdom onto them as they sit at my feet.

Marko said...

It has everything to do with the housing market, because rising prices enable owners to refinance to a higher mortgage balance.

It's called the home ATM and we all know it goes out of service when prices start falling.


People make poor financial decisions all the time irrelvant of the housing market. Sure, the housing market going up (which it hasn't done in 6 years in Victoria) exacerbates the problem by changing the absolute figures but whether in a flat market or rising market you can always keep refinancing to 80% or whatever that number is these days.

To me it shows that their debt service ratio is too high. Taxes, garbage, sewer, water fees, electricity costs, repairs and general living costs are rising fast and seemingly without control pushing these families deeper into debt. For most, I don't see a way out. They're caught between a rock and a hard place.

To me it shows people are buying too much home chasing fantasy not thinking about long term financial consequences.

Simple solution, buy less house.

When I look at my circle of friends I see mostly a problem with financial discipline, not the housing market. A lot of my friends in health care and other industries make good money, but the problem is how many of them handle the money.

It is mind boggling how many people don't have something as simple as their TSFA maxed out, but they just got the PS4 to complement their S4. In many cases I've seen the luxury items they've acquired equate to a maxed out TSFA account.

koozdra said...

"When I look at my circle of friends I see mostly a problem with financial discipline, not the housing market."

I agree with on this but what is it that makes them not save. Young professionals are making good money but their savings rates are very poor (A generalization I know).

My theory is that saving is not required any more. With interest rates being so long and the possibility of homes losing a significant amount of value an impossibility turns these people into veracious consumers.

The savings vehicle that they have is their house. Sure things are "flat" now but soon they'll pick up and my investment will pay off like crazy.

Nobody considers this might not be the case. We're in it for the long term bro, you worry too much.

Tweev said...
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Dustin said...
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Dustin said...

Canada's new housing bubble may not be about to burst just yet, because the forces feeding them – especially easy money and the need to hedge against inflation – are still fully operative. Moreover, the banking system has bigger capital buffers than in the past, enabling them to absorb losses from a correction in home prices; and, in Canada, households’ equity in their homes is greater than it was in the US subprime mortgage bubble. But the higher home prices rise, the further they will fall – and the greater the collateral economic and financial damage will be – when the bubble deflates.

Canadian full recourse loans allow seizure of household income to enforce payment of mortgage obligations, private consumption may plummet as debt payments (and eventually rising interest rates) crowd out discretionary spending. Either way, the result would be the same: recession and stagnation.

Leo S said...

in Canada, households’ equity in their homes is greater than it was in the US subprime mortgage bubble

Sort of, but not like you always hear in the news.

Marko said...

Monday December 2, 2013 7:30am:

Nov Nov
2013 2012
Net Unconditional Sales: 412 366
New Listings: 698 706
Active Listings: 4,017 4,488

Please Note
•Left Column: stats for the entire month from this year
•Right Column: stats for the entire month from last year

Just Jack said...

Expressing last months sales as a percentage of the market by location and property types.

32% of the sales were for houses in the core districts.

11% were for houses in the Western Communities

5% were house sales in the Saanich Peninsula

21% were condo sales in the core
3% were condos in the WC
3% were condos in the Saanich Pen.

As for current listings
The core comprises 43% of houses for sale
The Western Communities 41%
Saanich Peninsula is 16%

Condos for sale
76% are located in the core
15% in the WC
7% in Saanich Pen.


Just Jack said...

Those percentages are the same as a year ago, except for house and condo sales in the core that dropped 2 percent from 34 and 23percent respectively.

DavidL said...

From the CBC:
Fake real estate ads prey on buyer desire for home deal
Police say fraudulent websites targeting potential renters more common than scams to sell homes

Just Jack said...

Damn this age restriction on condos and townhomes.

The prices are getting so low that one could write a cheque and not have a mortgage.

Except you're cursed by being young and damn good looking. The cross that some of us have to bear - young, witty, beautiful and the ability to propagate -often and well.

I envy Introvert for not having such a restriction.

Introvert said...

I'm confused. Do you think I'm old?

Just Jack said...

VAlUE INVESTING

Warren Buffet popularized value investing as “buying outstanding companies at sensible prices.” The basic premise of the strategy involves using fundamental screens like price to earnings or price to book value to uncover securities that appear to be underpriced, or trading at a discount.

vs.

MOMENTUM INVESTING

Momentum is based on the premise that securities that have performed well in the recent past will continue to perform well and those that have underperformed will continue to lag.

The momentum effect has been found in markets globally and in many different asset classes and may be explained by behavioural finance.

Just Jack said...
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Just Jack said...

I'm just dunking your pigtails in the inkwell.

info said...
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info said...

. . . . . Total Yearly Single Family Home Sales. . . .
. . . . . . . . . . . . . .Greater Victoria. . . . . . . . . . . . . .
. . . . . . (Percentage below 25 Year Average). . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 0%. . . .**. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .**. . . . . . . .* . . . . . . . . . . . . . . . . . . . . . .
- 5%. . . .**. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .**. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
- 10%. . .**. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . **. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
- 15%. . .**. . . . . . . .* . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . **. . . . . . . .* . . . . . . . . . . . . . . . . . . . . . .
- 20%. . .**. . . . *. . . *. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .**. . . . *. . . *. . . *. . . . . . . . . . . . . . . . . . .
- 25%. . .**. . . . *. . . *. . . *. . . *. . . . . . .*. . . . . . . .
. . . . . . . .**. . . . *. . . *. . . *. . . *. . . . . . .* . . . . . . .
- 30%. . .**. . . . *. . . *. . . *. . . *. . . *. . . *. . . . . . .
. . . . . . . .**. . . . *. . . *. . . *. . . *. . . *. . .*. . . . . . .
- 35%. . .**. . . . *. . . *. . . *. . . *. . . *. . . *. . . . . . .
-----------------------------------------------------------------
. . . . . .25 yr. . .08. . 09. .10. . 11. . 12. . 13 . . . . . . . .
. . . . . .avg . . . . . . . . . . . . . . . . . . . . . . (proj.). . . . . .

info said...

. . . . . Total Yearly Single Family Home Sales. . . .
. . . . . . . . . . . . . .Greater Victoria. . . . . . . . . . . . . .
. . . . . . (Percentage below 25 Year Average). . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
. 0%. . . .**. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .**. . . . . . . .* . . . . . . . . . . . . . . . . . . . . . .
- 5%. . . .**. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .**. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
- 10%. . .**. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . **. . . . . . . .*. . . . . . . . . . . . . . . . . . . . . . .
- 15%. . .**. . . . . . . .* . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . **. . . . . . . .* . . . . . . . . . . . . . . . . . . . . . .
- 20%. . .**. . . . *. . . *. . . . . . . . . . . . . . . . . . . . . . .
. . . . . . . .**. . . . *. . . *. . . *. . . . . . . . . . . . . . . . . . .
- 25%. . .**. . . . *. . . *. . . *. . . *. . . . . . .*. . . . . . . .
. . . . . . . .**. . . . *. . . *. . . *. . . *. . . . . . .* . . . . . . .
- 30%. . .**. . . . *. . . *. . . *. . . *. . . *. . . *. . . . . . .
. . . . . . . .**. . . . *. . . *. . . *. . . *. . . *. . .*. . . . . . .
- 35%. . .**. . . . *. . . *. . . *. . . *. . . *. . . *. . . . . . .
-----------------------------------------------------------------
. . . . . .25 yr. . .08. . 09. .10. . 11. . 12. . 13 . . . . . . . .
. . . . . .avg . . . . . . . . . . . . . . . . . . . . . . (proj.). . . . . .

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