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.

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.

Realty Plunge-o-Meter

A very informative site.

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

Stock Market 101

Stock Market 101

Once upon a time in a place overrun with monkeys, a man appeared and announced to the villagers that he would buy monkeys for $10 each.

The villagers, seeing that there were many monkeys around, went out to the forest, and started catching them. The man bought thousands at $10 and as supply started to diminish, they became harder to catch, so the villagers stopped their effort.

The man then announced that he would now pay $20 for each one. This renewed the efforts of the villagers and they started catching monkeys again. But soon the supply diminished even further and they were ever harder to catch, so people started going back to their farms and forgot about monkey catching. The man increased his price to $25 each and the supply of monkeys became so sparse that it was an effort to even see a monkey, much less catch one.

The man now announced that he would buy monkeys for $50! However, since he had to go to the city on some business, his assistant would now buy on his behalf.

While the man was away the assistant told the villagers. 'Look at all these monkeys in the big cage that the man has bought. I will sell them to you at $35 each and when the man returns from the city, you can sell them to him for $50 each.

The villagers rounded up all their savings and bought all the monkeys. They never saw the man nor his assistant again and once again there were monkeys everywhere.