Sometimes we have to look past RE in our town

and look at the bigger picture. The 'and then some', in the title of this blog.


We know that the CMHC is finally going to be roped in, the question is, is it too late?


It may well be. The CMHC has accounted up to 60% of all mortgages in recent years according to it's $600 Billion Cap and the $1.1 trillion Mortgage industry.


That is an astounding number for one institution. Then when you learn that the institution is Government backed, you wonder if we live in North Korea or a few of the last bastions of Government run economies. Except this semi-socialist animal has in fact made a few (brokers, speculators, developers) very wealthy and spread the risk to many.


To many of us bloggers, it was obvious what a scam this was which was benefitting a very few people. here's how it goes:


1) Bank of Canada keeps rates at zero.


2) Savers get zero on deposits + banks sell bonds at near zero as  they have implicit Gov of Canada backing = accumulate a lot of cash which has to be put to work.


3) Banks offer mortgages to everyone with a pulse..money back, high leverage, speculative, stated income, mortgage holiday etc etc


4) They get CMHC insurance - hence the bulk of the risk is transferred to you and I.


5) The banks sit back and clip coupons - getting 3-4% gross on each dollar lent, but since they are leveraged up, multiple times this amount.


6) banks look sound. Speculators, developers, mortgage brokers, bank CEOs and some realtors make great huge chunks of money.


The profit comes from the hide of savers (zero rates) + first-time buyers (higher prices) + the tax-payer (future liability)


No wonder they didn't want the golden goose to be killed. Several years ago David LePoidevin a money manager at National Bank pointed at the CMHC as the creator of the housing bubble. 


The CEO of National Bank jumped in to defend the CMHC and said that he did not share his manager's views. Who could blame him, the wagon kept on rolling and the bonuses kept on coming. A cool $5-6 Million a year, which is a lot for a small bank.


Since then the problem has been made a lot worse. About $300 Billion worse. 


When Flaherty doubled the CMHC lending cap, and dished out money to the banks, yes he saved Canada from the worst of the financial down-fall -But he knew what he was doing long-term.


- He was adding air to the housing bubble. A LOT more air. $300 Billion more in a $1 Trillion market! Now the bubble will deflate from a much higher level and cause a lot more collateral damage.
- He transferred risk into the future.
- He cynically backed a semi-socialist organ (which was set up after the war to help the poor get mortgages) and turned it into a financial megalith, a bonus generator for Bay Street.
- He bought Stephen Harper his majority.


In case any of you still think that it is wise to have a debt-burdened economy (and remember we are now at the same level of consumer debt that the US was before their collapse) then I would suggest you read this excellent summary from the most astute money managers in the US.


Economies which are debt laden from RE booms (think Japan, Spain, the UK and the US)  go through very painful adjustments. There is no reason why we should be any different.


The sad part is, it could have all been prevented. It is hard to imagine how we could all have been so foolish.
- 

David Dodge in Denial

Usually past Bank of Canada Governors keep their lips closed and sit on their criticisms when they leave office.


Not David Dodge it seems. In a speech in Calgary he wanted to have his say. Basically it boils down to the fact that housing is not in a bubble except in pockets like Vancouver and Toronto, and that is driven by off-shore money, not low interest rates and so interest rates should not be used to try and control housing.


While I agree that there is a significant effect from the HAM Tsunami on the markets, my answer to David Dodge is the graph produced by the Bank of Canada itself (below). If low interest rates are not the problem then why the huge run-up in our consumer debt, considering that only 20% of the population of Canada live in the two most bubbly cities

The C is Coming Back

What does C stand for? Convicted of Fraud? Ex-Canadian? The Face of bloated Capitalism?  Looks like 'the Conrad' wants to come back to the country he foresook and bad-mouthed.

And even though we don't usually let in people with criminal convictions, however minor, money obviously over-rules these genteel considerations.

Conrad was kicked out of the exclusive Upper Canada College after being accused of stealing and selling exams, his father was the president of Canadian Breweries Ltd, his mother was the daughter of the founder of Great West Life.

Frequently critical of Canada and especially those who dared to criticize the  US,  he eventually renounced his Canadian citizenship - how ironic that he was nailed by the US, our fragmented securities commissions rarely jail such a high-profile, well connected miscreant.


So when he is out of jail, can we expect to see him holding soirees with his nouveau riche wife Barbara?  and maybe Macleans can put his porky face on the cover a few times to try and rehabilitate him, and before you know it, he will be back to being the same old arrogant wind-bag telling US how WE should run OUR country...sheesh.

Only a Few Hours left

For comments to the OSFI about the CMHC

If you have a moment send a quick e-mail here:

B20@osfi-bsif.gc.ca

You can mention the $600 Billion Liability that is sitting on our shoulders, the weak, pro-RE CMHC board and the criticisms of risk management heaped on them by the IMF, Nomura, Bloomberg, the Globe and Mail and others.

You can mention that they have distorted their mandate of helping Canadian's buy housing they can AFFORD and have helped fuel the current housing boom which has brought prices to a record lack of afforbility.

You can mention how the CMHC has led to lax lending by the banks, with the same US-style zero down, money back mortgages due to the risk being immediately transferred to the tax-payer. Anything will do. Now is our moment...The prudent, the cautious, those who do not want to put our country at risk of financial ruin.

Big Drop in SFH Average

See Larry's Post.


Ok lets not get too excited, we have seen this movie before and it didn't end well. We saw a big drop in mid-2011 only to see it rise like a phoenix to new heights and I am not even talking about 2009 when tweedle-dee and tweedle-dumb rigged the system so that we were denied our correction.


Fingers crossed. 


Lets see what the official number say and how the GVREB spins it.

Midway into the Spring Market

And the numbers will be telling. Has the sales slump affected prices or are the big purchases propping up them up?

Will the weakness from the periphery move inwards. We have already seen from Larry's numbers that in Coquitlam higher inventory and lower sales are cracking prices.

It was the OK, then it was the Sunshine Coast, Whistler and Victoria...then the Fraser Valley and now we are into the GVREB area.

The best we (bears) could hope for is a small steady decline in prices and activity. What we DO NOT want is a sudden drop. We had that in 2008/2009 and the Captain Flaherty and Bosun Carney swung the ship right round to prevent any correction.

Well these two jolly fools are still at the helm, and any sign of signficant weakness and you can be suure the pressure from the RE lobby and their own fear of what may come will make them change course again. They will drag the CMHC out again and put an even more pro-RE board in, increase the cap, throw out tax-credits like life vests and try and keep the bloated ship afloat.

Better a small leak which they think is the result of their jaw-boning rather than the result of lack of affordability and the tendency of bubble to burst if left alone.

A small drop would make me a happy fish.

Garth takes it to Flaherty- for the record.

The Flaherty and Carney circus act keeps going. They pump and pump and then hope a few stern words will dampen the animal enthusiasm that has driven the biggest Housing bubble in Canada's history.


You remember Canada, the country with the world's second largest land mass.


Well Flaherty is trying to shift the CMHC monster to the OFSI and hope that any bust fall-out falls on them. Here's what Garth had to say: (I agree with him 100% BTW)


It might have been F’s finest hour to date. The man who brought us government-insured 0%-down mortgages. The guy who invented lifetime amortizations. The dude who, for three long years, refused to let the B-word depart his lips. The elfin protector of the real estate industrial complex. Amen, brother Flaherty. Have you finally repented? Does it matter anymore?
...............

Of course, what could be more unfavourable, unforeseen or shocking than F?

So, here’s what he did. As I told you a month ago just before the federal budget was unveiled, the little pecker knows the real estate market is on borrowed time and our debt binge must be corralled, but he doesn’t want the spray. That’s why the plan was always to shove the blame on the bureaucrats and regulators. And it’s happened.

The budget implementation bill tabled this week will make mortgages more expensive and harder to get. It slaps CMHC around and puts the whole home lending business under the thumb of OSFI – the bank cop regulator with the Tommy Lee Jones swagger. No longer will CMHC slop around as a thinly-controlled quasi-department of the government, with a board of directors that might as well be running HGTV. As befits the stature of a financial behemoth with a balance sheet the size of the national debt, this agency will now be stress tested, microscoped and regularly reamed.

Gone is government-backed insurance for mortgages the banks use to back their covered bonds. That means their borrowing costs will rise, and so will mortgages – by about .15% very soon. More later. This is deliberate – a way for F to bump lending costs and cool housing without jacking up interest rates in general and knifing the economy.

This tightening in mortgage funding for the banks will likely make it harder for people without money, the self-employed or misguided property virgins to get financing. As one risk-management guy said after hearing the news:  “It will have the beneficial effect of preventing the most vulnerable borrowers from getting access to mortgages, so these people will have to wait longer to get into the game.”

See the irony? Here’s the father of the 0%-down, 40-year am, government-backed mortgage. The chief money guy of a government which brought in a home-buying tax credit and bloated the RSP Home Buyer’s Plan for first-timers. Now scrambling to chill the market through the back door.

Nobody is more responsible for houses in Toronto, Vancouver, Saskatoon, Calgary or Winnipeg that people can no longer afford, than F.  He’s the architect of the family debt he decries. Now that detached homes cost a million, while incomes trail inflation, he lectures us. How weak and disappointing.