A Housing Crash Rescue Cannot Be Legislated

There is talk of possible government interventions aimed at preventing the housing market bubble from imploding.

“…if another rebound occurs, it will likely be triggered by Ottawa. The Harper government has repeatedly intervened to micro-manage the $2.8-trillion housing market.”  …. “Ottawa may loosen mortgage restrictions once again if the housing market craters.” – ‘Avoiding the crash’, macleans.ca, 4 Sept 2010

The recently much publicized Canadian Centre for Policy Alternatives report ‘Canada’s Housing Bubble: An Accident Waiting To Happen’ [David Macdonald, Aug 2010], acknowledged the existence of the bubble, but then called for attempts to orchestrate an ‘orderly’ unwinding, concluding:

“Government policy makers, the Bank of Canada, as well as rate setters at the big banks need to work together to steer the Canadian market towards a soft landing. The alternative is not acceptable.” – CCPA report

At the very most any policy intervention would only forestall the inevitable crash. To cause an ‘orderly unwinding’ of a bubble you require an orderly and never-ending supply of buyers willing to take on large amounts of (albeit cheap) debt to buy assets that are falling in value and still grossly overpriced. That isn’t going to happen.

Where would those buyers come from? The vast majority of Canadians anywhere near qualified to buy have already been sucked into the vortex that is this market, and a large minority own far more RE than is good for them in the form of more than one property, or by being financially overextended by their principle residence. Mortgage rates are already very low, and when they recently dropped even lower, no new wave of buyers stepped up to take advantage of them. The ranks of the responsible buyers have been exhausted.

Whatever bizarre huckster-saleman plan a government comes up with (free money; first time buyer grants; 0/40 mortgages; free closing costs; 1 year of mortgage payments ?) would essentially entail dragging individuals into the market who shouldn’t be there in the first place.

“Home ownership rates in Canada are about as high as they can possibly go. In fact the only way to drive them higher would be to further increase the rate of sub-prime lending to allow completely unqualified buyers into the market.” – Daniel Gibbons, commenter at Macleans.ca 5 Sept.2010

Policy change to prop up the market via new buyers would simply delay and magnify the bust, not resolve it. The pool of people facing certain future financial hardships would grow even larger. If a government attempted to engineer this, clear-headed citizens would (1) object to it happening and (2) make sure that any politicians responsible for such foolishness were held accountable for their actions. The vast majority of literate and politically involved citizens are real-estate owners, and there is therefore an inherent conflict in them being able to step up and speak truth about the bubble. Almost everybody with any influence has been co-opted by the bubble.  Therefore, unfortunately, we don’t expect to hear any loud public voices objecting to attempts to rescue the unrescuable. -vreaa

21 responses to “A Housing Crash Rescue Cannot Be Legislated

  1. I don’t doubt the Harper gov’t would take steps to “save” the market if they thought they would benefit politically. Despite their conservative “free market” ideology clearly Harper would sell his soul for a majority gov’t. However as the US situation has been clearly shown there is no way out in the long run. Any stimulus will be a temporary band-aid only.

  2. Pingback: Daily roundup- Monday, September 6 | Financialinsights's Blog

  3. I think you want lower prices.
    I was in Cleveland, now in Phoenix. You can buy a little house here for 60,000 or a 3 bed /2 ba. little ranch from $100,000, with pool 150,000. Wouldn’t that be better?

    • Yes, it would.
      Prices in Greater Vancouver will likely never see those particular low levels again, as fundamental supports come in well above that (for instance, as determined by returns from rental income).
      However, we could still easily see price drops of over 50%.

  4. The government has been supporting the market for decades. Down payments shrank from 25% to 10% to 5% to 0 (then back up to 5%). Mortgages went up from 25 years to 40 years (then down to 35 years). There are still lots of rabbits left in the hat if they want to use them. If nearly 70% of voters are homoaners you know politicians will do what it takes. I hate it, but this is reality. I agree it will merely delay the inevitable but they could easily delay it till I’m retirement age.

  5. What rabbits are left? In terms of sheer magnitude nothing can come remotely close to the recent halving of interest rates.

  6. “What rabbits are left?”

    http://en.wikipedia.org/wiki/First_time_home_buyer_grant

    Because of the leverage involved in housing, this type of thing tends to boost prices by 10x the value of the grant overnight. We have a long way to go with this, and I do not expect affordable houses in the next decade or more. It really was “buy now or be priced out forever”.

  7. rp1 that kind of grant did little to bolster prices in the US for very long and merely handed out money to those who were already willing and able to buy, iow they would have bought anyways. Besides, prices had already fallen 20% nationally before this grant was approved. The effect in Canada would be muted at best.

  8. The US market had been falling for two years by the time they introduced the credit, so it had no effect on sentiment. In Canada, sentiment has yet to turn. I think a big tax credit could easily extend and grow the bubble, just like it did in Australia. They can keep doing this indefinitely. Eventually the government will face default, but we’ll have those problems either way.

    Nobody is going to take responsibility or fix any of this, it will only get worse. We can’t even collectively admit that the bubble exists. The politicians and bankers who caused it aren’t going to fix it – they’re going to kick the can down the road. This should have been made quite clear a year ago – there is no Plan B, it’s bubble all the way.

    A free market will correct, but that’s not what we have. This is a structural imbalance in the economy, and structural imbalances only get worse. It will continue to get worse until whatever is causing it gives way, and that would be our government. 70% of voters won’t change a thing. The remaining 30% will be completely impoverished, and society will just shrug. Then when someone speaks up we’ll blame the victims. That’s how it goes, you’d be crazy to stay.

  9. Given that most mortgages in Cda are full recourse, we didn’t end up in the same toxic situation our friends to the south are in. The Cdn housing market did not collapse in a matter of weeks, banks did not go bankrupt overnight (although they were indeed bailed out by the govt) and people didn’t simply wipe their hands off and walk away from their homes (because it was harder to do here). This isn’t to say that the laws of gravity do not (and will not) apply in Cda at some point and that buyers will go into hibernation for a very long time. Of course, this all changes once Obama rolls out his multi billion $ bailout to the millions of underwater homeowners further distorting an already messed up situation, signaling to markets worldwide that it’s “RISK ON, BABY!!!” and reiterating that the plan to “extend and pretend” in still on track (maybe for years to come?) With the ability to inflate their way out of trouble by printing an unlimited amount of money, nothing would surprise me. Hey, it’s all good. Don’t worry, be happy.

    • While the market works differently in Canada, I don’t see how that can prevent a price collapse. To me it just means that if the banks have been prudent and covered their risks, the the homeowner is going to catch the brunt of the pain.

      The “full recourse” thing may work against you if prospective new buyers see a bunch of current owners trapped and financially ruined by their homes.

      • Yes, homeowners in Cda are going to catch the brunt of the pain and will end up trapped (and unable to sell, tradeup/down or even walk away)…eventually. In the meantime, expect all the powers that be to help everything along for the foreseeable future. Maybe they’ll cave in and relax the mortgage rules again? Or maybe they start allowing everyone (not just first timers) to use all the money in their RRSP’s (instead of just $20k) to buy RE? Who knows?

        In the US, millions of reckless, irresponsible homeowners walked away from their homes (and therefore the mountain of debt as well) en masse pretty much overnight and things spiraled out of control very quickly. This would be akin to being able to borrow 100% of the cash with no recourse to buy dotcom stocks, have them collapse on you and end up not having to take a loss or pay the money back. Very perverse stuff indeed.

        In Cda, we will end up with millions of folks who are chronically “house poor” and/or completely underwater without the option to sell simply because they don’t have the cash to cover the loss. For these people, simply declaring bankruptcy isn’t an option either until things really hit rock bottom. So, instead of a full on market collapse like you suggest, we just get a gradual tightening of the noose over the coming years and one by one people will end up suffocating or hanging themselves. So, perhaps the timing and mode of transportation are different, but I am in complete agreement with you that the final destination will wind up being the same.

        The problem with the Obama admin is that they are acting on rules to a game that defies all common sense and logic. They are also holding all the cards and control the bank meaning anything and everything is possible (barring an outright purchase by the govt of every deadbeat’s home at 2005 prices!) and that scares me. If they can somehow get the RE market turned around at least temporarily (or create the illusion that it has been) then this whole discussion is pointless.

      • I see what you mean bullwhip. In Canada it might play out in slow motion compared to the US, as the supply won’t come flooding back as quickly. That makes sense.

  10. Then again, maybe we do end up in the same toxic situation our friends to the south are in.

    http://www.househunting.ca/vancouversun/buying-homes/Builder+flavours+offer+with+mortgage/3480265/story.html

  11. I have to correct you bullwhip, there are a few states with non recourse mortgages but most states have full recourse just like in Canada. Alberta by the way is non recourse.

    One of the biggest problems with what happened in the States was predatory lending problems such as mortgages that had balloon payments, negative amortizations and the famous ninja loans. Home owners planned to pay these mortgage lenders once they sold there much higher priced house a few years down the way. My hubby was in California just before the crash and this is exactly what was going on, everyone was selling their house every two years and buying something new.

    In the US a mortgage has a term equal to the length of the mortgage, as long as you can make your payments you’re ok if you’re underwater. In Canada that is not true, mortgages usually have a term of 1 to 5 years. The banks may or may not choose to renew, in fact they may not be allowed to by law. Imagine trying to refinance a 0/40 house after 5 years after prices drop 30%.

    • Rachelle: thanks for the feedback. Sure, some of the wording in previous comments is used pretty loosely. Sorry. Correct, not all US states are non recourse, however, states like Arizona, California, Florida to name a few have had a very rough go of it. Some mortgages in Alta and Sask are indeed non recourse. Although banks are not obligated to renew your mortgage, it makes no sense for the bank to foreclose on your house if you are underwater, but still willing and able to make regular payments for the foreseeable future (thereby putting plenty of cash in their pockets). Although this may not qualify as predatory lending, it is heading in that direction: http://www.ledmac.com/saffron/contest-2/recent-updates People that can only afford $500/mo (along the lines of a car pmt) shouldn’t even be considering purchasing RE. This is just one example.

  12. The Canadian Housing Market – 70% are homeowners and most have no other significant financial assets. Too big to fail?

  13. i still think the canadian market is a little bit stable than ours…
    i bet they have a better organization

  14. So many people have all their eggs in one basket – their house. People have gone house insane in the last decade. Cheap money and helocs made the ‘wealth effect’ pervasive. How else do you explain the BMW becoming the equivalent of the new Century Beetle?
    The pain will be immense, but I worry that sober savers, and workers, will be dinged to pay off the party people, that have been gorging on cheap debt.
    Try that, and your days in Ottawa will be very short indeed. Look – when you get Flahertry and BOC’s Carney coming out and saying – Dark Days are here, they know that the ‘race to the bottom’ is on.
    Japan going to zero again – has thrown the cat among the pigeons….and watch the flood into short term US paper.
    This is just getting interesting, if it wasn’t so terrifying.

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