CMHC debt threshold doubled in 2 years to keep housing bubble going

According to this article, the government has doubled the CMHC's debt threshold to $600 billion in 2 years (the latest increase was this March from $450b to $600b).

House sales are up by a third nationally. The average price is ahead 11% on average. Mortgage loans have hit an all-time high – rising an estimated 12% in 2009 alone. Consumer credit has soared 9% during the recession. And we now owe more, per head, than the Yanks. Household debt in Canada is 140% of income. Down south, it’s 132%.

So why do we have a real estate boom, when they are still wallowing in their bust?

Simply because CMHC, a federal government agency, backs all high-risk mortgages with taxpayer dough. By removing all risk from the banks, it lets them lend to people without money and little prospect of paying their loans off. It allows them to give the cheapest, lowest rate to those with the highest default risk. In case that sounds familiar, we used to call them ’subprime.’

In fact, the government encourages this. It obviously wants a housing bubble. It’s doubled CMHC’s debt threshold to $600 billion, just slightly higher than the current national debt – an amount of money which goes 100% into high-ratio loans and which is guaranteed by taxpayers.

And a very good comment about this on a local blog:

No, the CMHC even if it does implode and in a worst case scenario loses about 1/4 of the 600 billion it can currently insure won’t bankrupt the country, we’re 800 billion in debt now, it would just push the debt clock back a decade.

Still, a decade of paying off debt cancelled out by a few years of fiscal mismanagement from a so called “conservative” government is nothing to sneeze at. I could find a better use for 150 billion dollars other than propping up a market that will inevitably collapse and will only cause more damage the longer it goes on. Healthcare, education, daycare subsidies…

It’s beside the point that it won’t kill the Canadian economy, it’s grossly irresponsible behaviour that hurts Canadians for the sake of short term political gain.

Some other good reading material on the subject:

CMHC: Canada's Freddie and Fannie?

In March, CMHC was allowed to insure up to C$600 billion in mortgages, up from C$450 billion the year before, said a CMHC spokesman today. “Last year alone, CHMC did 919,780 deals worth a staggering C$148 billion, or about twice what it had planned. To accommodate that, the feds have raised its allowable insured mortgage limit to C$600 billion, or about double what it was two years ago.”

Why Canada's Housing Bubble Will Burst

What few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world.

I'm gaining an appreciation for Justin Timberlake's Futuresex/Lovesounds album. I couldn't stand it when it came out because each single was played about twice an hour on the radio, but the album is quite well done. I think the credit though is due to Timbaland for producing the album.

The Duct Tape Programmer

From the article located at http://www.joelonsoftware.com/items/2009/09/23.html

Jamie Zawinski is what I would call a duct-tape programmer. And I say that with a great deal of respect. He is the kind of programmer who is hard at work building the future, and making useful things so that people can do stuff. He is the guy you want on your team building go-carts, because he has two favorite tools: duct tape and WD-40. And he will wield them elegantly even as your go-cart is careening down the hill at a mile a minute. This will happen while other programmers are still at the starting line arguing over whether to use titanium or some kind of space-age composite material that Boeing is using in the 787 Dreamliner.

When you are done, you might have a messy go-cart, but it’ll sure as hell fly.

I just read an interview with Jamie in the book Coders at Work, by Peter Seibel. Go buy it now. It’s a terrific set of interviews with some great programmers, including Peter Norvig, Guy Steele, and Donald Knuth. This book is so interesting I did 60 minutes on the treadmill yesterday instead of the usual 30 because I couldn’t stop reading. Like I said, go buy it.

Go! I’ll wait.

Here is why I like duct tape programmers. Sometimes, you’re on a team, and you’re busy banging out the code, and somebody comes up to your desk, coffee mug in hand, and starts rattling on about how if you use multi-threaded COM apartments, your app will be 34% sparklier, and it’s not even that hard, because he’s written a bunch of templates, and all you have to do is multiply-inherit from 17 of his templates, each taking an average of 4 arguments, and you barely even have to write the body of the function. It’s just a gigantic list of multiple-inheritance from different classes and hey, presto, multi-apartment threaded COM. And your eyes are swimming, and you have no friggin’ idea what this frigtard is talking about, but he just won’t go away, and even if he does go away, he’s just going to back into his office and write more of his clever classes constructed entirely from multiple inheritance from templates, without a single implementation body at all, and it’s going to crash like crazy and you’re going to get paged at night to come in and try to figure it out because he’ll be at some goddamn “Design Patterns” meetup.

And the duct-tape programmer is not afraid to say, “multiple inheritance sucks. Stop it. Just stop.”

You see, everybody else is too afraid of looking stupid because they just can’t keep enough facts in their head at once to make multiple inheritance, or templates, or COM, or multithreading, or any of that stuff work. So they sheepishly go along with whatever faddish programming craziness has come down from the architecture astronauts who speak at conferences and write books and articles and are so much smarter than us that they don’t realize that the stuff that they’re promoting is too hard for us.

Here’s what Zawinski says about Netscape: “It was decisions like not using C++ and not using threads that made us ship the product on time.”

Later, he wrote an email client at Netscape, but the team that was responsible for actually displaying the message never shipped their component. “There was just this big blank rectangle in the middle of the window where we could only display plain text. They were being extremely academic about their project. They were trying to approach it from the DOM/DTD side of things. ‘Oh, well, what we need to do is add another abstraction layer here, and have a delegate for this delegate for this delegate. And eventually a character will show up on the screen.’”

Peter asked Zawinski, “Overengineering seems to be a pet peeve of yours.”

“Yeah,” he says, “At the end of the day, ship the fucking thing! It’s great to rewrite your code and make it cleaner and by the third time it’ll actually be pretty. But that’s not the point—you’re not here to write code; you’re here to ship products.”

My hero.

Zawinski didn’t do many unit tests. They “sound great in principle. Given a leisurely development pace, that’s certainly the way to go. But when you’re looking at, ‘We’ve got to go from zero to done in six weeks,’ well, I can’t do that unless I cut something out. And what I’m going to cut out is the stuff that’s not absolutely critical. And unit tests are not critical. If there’s no unit test the customer isn’t going to complain about that.”

Remember, before you freak out, that Zawinski was at Netscape when they were changing the world. They thought that they only had a few months before someone else came along and ate their lunch. A lot of important code is like that.

Duct tape programmers are pragmatic. Zawinski popularized Richard Gabriel’s precept of Worse is Better. A 50%-good solution that people actually have solves more problems and survives longer than a 99% solution that nobody has because it’s in your lab where you’re endlessly polishing the damn thing. Shipping is a feature. A really important feature. Your product must have it.

One principle duct tape programmers understand well is that any kind of coding technique that’s even slightly complicated is going to doom your project. Duct tape programmers tend to avoid C++, templates, multiple inheritance, multithreading, COM, CORBA, and a host of other technologies that are all totally reasonable, when you think long and hard about them, but are, honestly, just a little bit too hard for the human brain.

Sure, there’s nothing officially wrong with trying to write multithreaded code in C++ on Windows using COM. But it’s prone to disastrous bugs, the kind of bugs that only happen under very specific timing scenarios, because our brains are not, honestly, good enough to write this kind of code. Mediocre programmers are, frankly, defensive about this, and they don’t want to admit that they’re not able to write this super-complicated code, so they let the bullies on their team plow away with some godforsaken template architecture in C++ because otherwise they’d have to admit that they just don’t feel smart enough to use what would otherwise be a perfectly good programming technique FOR SPOCK. Duct tape programmers don’t give a shit what you think about them. They stick to simple basic and easy to use tools and use the extra brainpower that these tools leave them to write more useful features for their customers.

One thing you have to be careful about, though, is that duct tape programmers are the software world equivalent of pretty boys... those breathtakingly good-looking young men who can roll out of bed, without shaving, without combing their hair, and without brushing their teeth, and get on the subway in yesterday’s dirty clothes and look beautiful, because that’s who they are. You, my friend, cannot go out in public without combing your hair. It will frighten the children. Because you’re just not that pretty. Duct tape programmers have to have a lot of talent to pull off this shtick. They have to be good enough programmers to ship code, and we’ll forgive them if they never write a unit test, or if they xor the “next” and “prev” pointers of their linked list into a single DWORD to save 32 bits, because they’re pretty enough, and smart enough, to pull it off.

Mortgage Rates - up and away

Source: http://americacanada.blogspot.com/2009/07/interest-rates-have-no-ways-to-go-but.html

We are living off an excessive amount of fiscal and monetary stimulus. But none of it is sustainable. In the next couple years, we will have to raise taxes, raise interest rates and cut government spending. Furthermore, the United States, with the international reserve currency will need to resell over $1 trillion in bonds purchased by the treasury. This last action will dramatically increase bond yields. UK who embarked on a more generous quantitative easing plan will need to make the same dump.

Other countries such as ours will need to defend their currency. If the Bank of Canada and Federal Reserve in America lifts interest rates from 0% to 4%, still a very low rate historically speaking, the bank's prime rate will go up to around 6%. As the rate rises, Canadian home prices will most likely plunge and the banks will begin charging a premium over prime (instead of under prime, which right now seems to be the norm). This premium will help compensate the banks for the added risk. As a result, a variable rate mortgage of 7 or 7.5% is quite optimistic. Historically it is a very competitive interest rate. It also assumes that nothing crazy happens with the currency markets (such as a US or UK dollar collapsing – which will happen if the US loses its reserve currency status).

But many Canadians justify that buying now makes sense because of exceptionally low interest rates. So in other words, there is a rush while rates are low. So we are all in agreement that rates will go up. So for all those squeezing into the largest home they can afford on a variable rate mortgage, what can they possibly expect? I thought I'd calculate it out to show the risks that they are taking.

MARRY AND BOB

Let's assume Marry and Bob earn $60,000 and $50,000 respectively. They are approved for $500,000 loan and choose a 35 year, variable rate mortgage. After-tax income is $75,000 or $6,250/mth.

$6,250 / month income
less:
Two Vehicles:
$500 car payment
$200 insurance
$125 car maintenance
$500 gas

Home:
$400 property taxes
$100 house insurance
$300 house maintenance
$200 utilities
$150 internet, cable, phone

Food
$800 groceries
$200 work lunches, snacks and coffee ($100 a piece)



Total deductions:
$3,475

Total left over for mortgage payment, entertainment, debt repayments on loans, CC's and HELOC's, household improvements, disposable consumption, savings and investments.
$2,775

So let's see what happens when the couple signs on for their $500,000 mortgage for 35 years and the associated mortgage payment:

2.5% - $1,787 - "cheap, anyone can afford that, we have about $1,000 left over for everything else.. let's put a new deck in while the reno tax credit is still in effect"

3% - $1,924 - "we can cut back on our lunches and we'll be fine"

4% - $2,213 - "$500 a month extra, where are we going to get that? - we are breaking even despite cutting back on entertainment and lunches"

5% - $2,523 - "we are going to have to max out the cards this month to pay for this"

6% - $2,850 - "home prices are plummeting and we're in negative equity"

7% - $3,194 - "It's been like since like the late 90's since rates were like this!

8% - $3,551 - "Our mortgage has doubled"

9% - $3,920 - we're broke

10% - $4,298 - mortgage payment is now 2.4 times larger than the initial loan.

The point is, whether you are calling for a subtle 1.5% rise in mortgage rates, or 6.5%, the change is quite dramatic. This does not bode well for home prices.

A good post from VCI.

We’re heading into a difficult time in terms of Provincial tax revenues. One of the other areas that is poised to torpedo the Provincial budget ( aside from the forestry, fishery, retail, property, mining and buisness failures on top of higher welfare, retraining, , unemployment , crime etc etc as general cost increase, never mind the Olympic budget bomb that has yet to be made public) is the off the cliff drop in natural gas revenues and land leases auctions which have literally ground to a halt in late 2008 and died in 2009 due to excess capacity.

If the government projects a rosy outlook from the gas field revenues in the upcoming budget you’ll know they are lieing big time. The truth is the the industry is on life support and the government can no longer count on the juicy revenues it enjoyed from 2004 through 2008. There will be a collapse in royalties and a nero zero response from land lease contractors in 2009.

In 2008 the government sold almost 1 billion dollars of natural gas land exploration leases. Since that time the gas buisness has near collapsed and every company has near ceased to explore. Drillers are virtually going out of buisnesss due to lack of contracts. Unemplyment in the once invincble gas patch has skyrocketed and is shedding jobs in the tens of thousands. many of these O&G workers were the mainstay of many condo projects in the Victoria and Okanogan areas for example, all on spec, all based on future earnings and continued appreciation of property prices. For many ( as everywhere,) it’s the perfect storm of job loss and property price collapse.

In 2007 the tax revenue from Natural gas royalties to the province was 238 million with nat gas fetching $6.50 per G. The price of gas has fallen to $4.61 per G and falling, consequently many well heads are being shut in, not producing.

With a Provincial budget coming up ahead of this very important election I expect that the real numbers will wrapped in so many layers of obfuscating toilet paper as can be found to try and hide the stink of reality looming for this boom and bust Province. Expect the local media to play along and do a lot more SPCA stories and whale birthing exposes’.

Consumer credit

A good comment posted on a blog I frequent:

A friend of mine is heavily involved in the consumer credit business here in Canada and he’s seeing early warning signs that the Canadian economy is grinding to a halt.

Consumer credit drives a surprisingly large amount of business here in Canada. For example, if you were to walk into the showroom of a mom & pop snowmobile dealer in Saskatoon and you bought a snowmobile on a “plan” it very well could be my friend who is financing your purchase plan (y’know, you pay 10% down and you agree to make a low low monthly payment for three years… that’s known as buying on plan).

You might be surprised by what you can buy on a purchase plan. In addition to the obvious ones, like furniture, cars, motorcycles, snowmobiles etc. you can actually have dental work financed, or you can have elective medical treatments financed (can you say “augmentation”).

Anyways, apparently in the past month in particular, buying on credit is suddenly freezing up solid. With the economic downturn you might think the banks (who are his competitors) would be lending like crazy at the outrageous rates that these “buying plans” charge. Well guess again. He tells me that all of the major players in the consumer credit game in Canada are getting out of the business.

And the list includes some massive entities… like GE Capital Canada, HSBC Bank, etc.

The reason even major financial entities like GE Capital are having to quit the leasing and consumer credit business is that they can no longer “securitize” any of their loan portfolios. Securitize is a five dollar finance word for sell. The industry has historically been driven by the ability to sell some of their loan portfolios.

Well it’s completely stalled. So GE Capital Canada and other majors have closed their doors to new business.

So what does this have to do with Vancouver real estate you ask?

It’s like this. My friends customers (the mom & pop snowmobile store, or the the dentist, or the plastic surgeon) are seeing huge declines in their sales levels because their businesses are now “cash only.” As a result, their businesses are hurting. The mom & pops will have to lay-off staff, and cut costs… and it all becomes a vicious cycle.

Canada is not going to be protected from the economic downturn.

Vancouver real estate prices are already inflated in relation to Vancouverites’ average salaries and rents. On a long term basis, real estate prices are driven by the economic circumstances that prevail in the local market. High rents = high prices… and low rents = low prices. Well incomes and rents will be under pressure as the Canadian economy fails… and real estate will fall with the economy.

The weight of gravity on the Vancouver real estate bubble is growing.

Real estate buying strategy

A post on a local real estate blog about getting the best price on a new home:

If I was a predator I would know that the ‘ blood trail’ is the place to look for an easy feed. The best deals are not going to be found in the ‘mom and pop’ market who will tend to pull thier listings off the market when they don’t ‘get thier price’.

I would go after the specuvestor multi unit holders and especially the small builders. As a real estate school grad mentioned correctly in an earlier string ‘the builders profit is tied up in the last 25% of the project’ although this number isn’t carved in stone it is on the right track. This isn’t just 25% it is actually ALL THIER CASH .

You want to find someone who “HAS” to sell not someone who’ll only sell ‘IF’. i would pay attention to large projects who may suddenly ‘ blow up’ into recievership.

Single family home builders are particularily vulnerable at this point in the cycle. They simply cannot afford to hold on, the COC loan gets pulled every thirty days after the construction phase is completed, this type of builder has the most to lose. This is where the knives are going cut the deepest. I don’t think we’re at that stage yet. I would look for a small project.

Bottomline, as a hunter you must be very patient, the game is still afoot. I would look at every project and start to inventory, without any offers tendered. Research is power.

Last time I bought an investment property I waited for everything to be in my favour. I walked away from dozens and dozens of ‘deals’. I waited to find a true forced sale which turned out to be a marital breakdown and the occupier being transferred suddenly out of Province and they needed to sell immediatly ( that week). I offered all cash, no subjects and quick ( same week ) completion. I got a HUGE discount. I paid far less than other offers because I could make it happen , no subjects.

I waited for that deal to come along for at least four months and that was in a good market. I made money the day I signed that deal, thats the way it should be. I would have waited six months I don’t care about time.

The low ball offer is not an art it is a tool. If you don’t get the deal so what, walk away and keep looking, theres a deal a minute in real estate.

Baron Rothschild said ” Only buy when theres blood in the streets”, we are not quite at that stage yet, but it’s like a big wave coming into view. For now, sit back on your cash and good credit and wait until desperate sellers are begging you to buy. Be predatory, stay alert and don’t fall for some of the slick spin the developers and governments are puking up. They are desperate , you are not.

Realty Plunge-o-Meter

A very informative site.

http://www.canadian-housing-price-charts.235.ca