Friday, December 17, 2010

Toronto Star Says No Housing Bubble

I noticed Ben over at Financial Insights has already debunked this Toronto Star article so be sure to check that out (and while you're there be sure to check out my guest-post). As it's the holiday season my posts won't be as frequent now. But I'll be back in January writing Monday – Friday.

Merry Christmas & Happy New Year!

If you visit this blog regularly or take a look at my previous posts, you'll find that I like to pick on the Toronto Star a lot. That's mainly because the physical paper is delivered to my house everyday. I don't subscribe to it, the people I live with do. But the temptation is too much. I know if I pick up the paper I'm only going to find Leftist propaganda, particularly in the business section where every economic fallacy known to man is purported as truth. But I gotta do it (it motivates me to write these rebuttals).

Do you think future generations will be taught in school that old-fashioned newspapers were really just propaganda for the State?

Here's some propaganda – Our housing market to side step U.S. style bubble by Mark Weisleder.

Mark is trying to convince people that there is no housing bubble in Canada. Let's examine why he's wrong.

As Bank of Canada Governor Mark Carney tries to talk Canadians out of piling up too much debt, the comments have led to a lot of speculation about whether Canada faces a U.S.- style housing meltdown.

Well I've been speculating about this before Carney was worried, and so have a whole bunch of other Canadians. Some of them actual experts.

Nothing could be further from the truth. The factors that led to the US housing crisis were unique to their market.

Exactly! Just like how the laws of physics in Florida are different from BC's laws of physics. Different geographical areas, with different people making different decisions always led to different results. Whether it be physics, economics or the effects of alcohol.

Next year should see strong growth in prices and sales, especially in the GTA, and I plan to write about why in the next few weeks.

(big smile on my face) – I cannot wait.

The differences between the U.S. and Canada can be summarized as: American politicians encouraged banks to make it easy for consumers to buy a home. The banks ended up lending to people who never would have legitimately qualified for a mortgage. Basically, if you had a pulse, you got approved.

And this is different from Canada how?

Government programs allowed buyers to get a down payment from the government as well. In other words, many bought properties with none of their own money.

Has this guy never heard of the CMHC? What about an AHP loan? There are a lot of incentives in this country to buy a house with other people's money.

These mortgages came with very low interest payments, but after a few years, the home owner had to make a large lump sum payment. Many couldn’t afford the payment and so these mortgages were called ‘sub-prime.’

No 'sub-primes' in Canada, true, but banks and governments have found other ways to mess up the housing market.

The U.S. lets homeowners deduct interest paid on their home mortgage from their income tax. Thus, whatever was paid by the borrower to carry the mortgage was taken as a deduction on their income tax returns. You can’t do that here.

Yet that hasn't stopped Canadian home prices from rising. If this income tax deduction was the basis for housing bubbles, then I'd shut up now. But it isn't, this is just a minor difference with the same outcome.

Many states in the U.S. have non-recourse mortgages. This means that if you default on a mortgage loan, the only remedy for the bank is to take back the property. They cannot sue you for any loss suffered. This also doesn’t apply in any province except Alberta?

The fact that Mark ended that paragraph with a question mark is troubling.

When you put this together, there was no incentive for home owners to pay down the mortgage principal. They just kept remortgaging and taking out the equity. Wall Street figured out a way to sell these sub-prime mortgages by convincing others about the great profits they would make on these balloon payments.

I'll meet Mark halfway – our bubble isn't 100% identical to the US's. In Canada we don't have Wall Street “convincing others about the great profits” We have the Government of Canada guaranteeing mortgages and securitized debt instruments that represent mortgages. Why would we need to convince anyone when there's a big fat Government guarantee attached?

...And Canadians are dipping into their home equity. What the hell is Mark talking about?

Unfortunately, none of these balloon payments were made and most of these loans were worthless. Currently, besides the hundreds of thousands of properties still in foreclosure in the US, it is estimated that almost 20 per cent of the remaining mortgage loans are “under water,” meaning that the homes are worth less than what is owing on the mortgage debt.

Thanks Mark for describing how the US ship went down. But what has this got to do with Canada?

While it may be true that Canadian household debt may be increasing, but with less than 1 per cent of mortgages under water, this is not the basis for any kind of housing collapse.

It's because our bubble hasn't burst yet. You can't have a collapse before the crisis.

Here are the main differences between the Canadian and U.S. markets:

It's about time, I'm losing readers (and so will you).

Banks have made sure over the last few years that even if you qualified for a 1-year mortgage rate of 2.5 per cent, you had to have the ability to pay the 5-year rate, which was closer to 5.5 per cent, in order to qualify for the mortgage. Thus, even if interest rates rise, as the Governor has warned, most Canadians will still be able to absorb the increased payments.

Banks and governments will always cook the numbers to make things look favourable. With so many Canadians in debt when interest rates rise (notice I said 'when', not 'if') expect all hell to break loose.

Banks have been much stricter in requiring evidence of real down payments before lending any money. There are no free down payment programs in effect in Canada.

A few years ago Canadians could get a mortgage with 0% down and a whole bunch of other goodies. The rules only started to change when the Harper-Carney-Flaherty trio saw how fucked up things had become.

In Canada, because you cannot deduct interest from your home mortgage on your tax return, you are encouraged to pay down the principal on your mortgage. American lawmakers want to go the Canadian way and remove the home mortgage interest deduction from the US tax code, but can’t for now as this may cause millions more to lose their homes.


Most Canadian mortgages, except in Alberta, are recourse mortgages, so if you don’t pay, you can be sued by the lender for any shortfall.

So when the shit hits the fan not only are Canadians going to find themselves heavily indebted, with homes losing value, they're going to get sued by their bank if they can't pay.... My suggestion: Move to Alberta (and rent).

Mortgage insurance companies are working proactively with borrowers who may be having difficulty making their mortgage payments to find solutions before the mortgage goes into long term default.

I hope the insurance companies have hired a lot of people, the number of these borrowers will probably soon outgrow the numbers of Canadians that are in hospital waiting-lines.

The Governor of the Bank of Canada has to walk a very fine line, looking at inflation on one side, interest rates and the overall economy.

Mark Carney should be walking the plank, if you ask me. That “modest inflation target” policy has debunked countless times by sane economists with a rational understanding of the “overall economy”.

There is a reason that the Canadian economy is now the envy of most of the G20 countries.

Because we got a free lunch? Tanstaafl, our debt crisis is coming.

It is also a reason for continued optimism for 2011. Enjoy the ride.

My only optimism for 2011 is that Canadians will be so pissed off when our economy tanks that everyone will look to the Austrian school of economics for answers. Perhaps we could destroy all the monuments to Trudeau and put up statues of Murray Rothbard instead (or Sam Konkin, if our national idols must have been Canadian citizens).... Hey, my optimism is no crazier than Mark's stupid “no housing bubble” dribble.

2011 is going to suck, nobody is going to enjoy the ride (not even the banks, if they get bailed out there goes the stability myth).

Real estate lawyer Mark Weisleder is the author of Put the Pen Down! What homebuyers and sellers need to know before signing on the dotted line.

Oh shit, that's why this article doesn't make sense. Kind of hard to see reality when your job depends on you living in a fantasy. Mark's got a lot to gain from convincing people to buy a house. I don't get paid for this, so I have nothing to gain... except bragging rights.

No comments:

Post a Comment