Thursday, June 21, 2012

Is a perfect storm brewing?

We have the new mortgage rules briefly outlined here. Gotta give some kudos to Flaherty for finally doing something significant about the bubble. The CMHC insurance being limited to homes less than $1 Million is one of those..duh, isn't that obvious, moments.

Isn't the CMHC supposed to help Canadians buy homes? How on earth can it fulfil that mandate by helping squeeze people into multimillion dollar homes? Or help them buy investment properties? All the while having us insure this folly!

Slowly people are coming to their senses (driven by comments from the IMF, Bloomberg and Nomura not to mention our local commentators) and this huge enabler of excess debt and risk is being defanged.

The question is, is it too late? Has the bubble got so big that the collateral damage from it's bursting will be painful for everyone.

Throw in a slow-down in China and significant weakness in commodities and we could have some significant downward pressure on RE.

Bank of Canada Rates will stay low for another year or two, that seems certain. However I would not be shocked, in 6 months or so, to see an event push long rates quite a bit higher and that could deliver the final coup de grace.


  1. "coup de grace", not "coup de gras", which could be translated as "the fat kick" lol...

  2. Quite right. Thanks for the correction.

  3. Thanks for a well articulated pov. Exactly my sentiment.

    On another note, Richmond's housing market is bad. So bad that even driving instructors are lamenting no new business compare to the previous years.

  4. I don't think long rates will go up significantly. Remember the yield curve. Canada is vulnerable if commodities crash, which they could due to China's bubble. China is consuming upwards of 40% of some commodities. It is bat-shit insane.

    1. Long term rates will likely be pressured globally once the first sovereign default occurs, some countries more than others depending on debt quality. But once that link scheme is acknowledged watch out. Canadian rates often follow US rates and if they keep with their unsustainable deficit spending, markets will let their feelings known... Just take someone like China to pull a Russia and dump US treasuries. There are two possible scenarios for you

    2. Link = ponzi

  5. How would higher long rates deliver the coup de grace if short rates remain low. Won't buyers just go variable in their mortgages?

    1. Hi Anon

      It would take a big chunk of the investment crowd out of the running. Buying and renting out for 3% return seems pretty good when you get 1% on your one year GIC and 2.2% on your 5 year GIC.

      However if long rates go up and that 5 year GIC goes to 4% then who wants the hassle of plugged toilets and finding good renters, especially if capital gains are going the wrong way.

      Investment opportunities are usually compared with risk free longer dated (5 or 10 year) fixed income alternatives.

  6. The best way to make housing more affordable is not to have Government gimmicks which insures people who cannot really afford their mortgages or once in a life-time low rates which will can only go up- it is to allow the price of housing to to fall to a level where it IS affordable. Common sense.

    As to the CMHC this is another slap in their face. If I was on their board or a senior exec I would have resigned by now. They have basically been told their risk management sticks by international bodies, they have been put under the auspices of the OSFI and are having their activities curtailed on a regular basis.

    But no resignations. Everyone clings to their positions even when it is clear that the better thing would be to leave and let more risk astute individuals take over.

    1. The bears have been right all along, and they come out as decent regular guys with more integrity than those holding public posts. It isn't just the madness of overinflated economy (aka housing bubbles), but the supposedly respectable parties knowingly participated in the longest ponzi scheme in our history. To bad for them.

  7. dropping inflation ( recessions have that effect) takes the pressure off rate increase

  8. I'm starting to think they went a bit too far as far as Vancouver is concerned. We were already on the way down, and this might be enough to push us down even faster at panic speeds.

    Again, talking Vancouver only, the $1 million thing OR the 25 year mortgages would have been enough to ensure our market doesn't come roaring back in the next little while. Both might push us down a little too fast.

    In terms of Canada overall, this was the right move. Of course, they have pretty much moved us to where we were before the Cons took power, but at least they did something to try and fix it, even if it is probably too late.

    I eagerly await the next few months to see how much of an effect this has on the market.

  9. davers, I think it's not about supporting the market anymore, but rather the government's liability when the market reverts to the mean. Bears believe Vancouver runs on debt, not income, with the government promising to cover all losses. We may see that hypothesis tested.

  10. Jim Rogers: EU will start to come apart in 2013 - Freeland File

  11. fwiw
    "According to Citizenship and Immigration Canada, 5,744 investor and entrepreneur-class immigrants landed in B.C. in 2010. More than 70 per cent of those immigrants arrived from Asia with Europeans, at 13 per cent, the next largest immigration source."

    A difference of 234. No biggie.
    Yet it only took one Horus Gu to wire US$80 billion abroad.

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