“Some are now wondering if Canadian policymakers and bankers might not be too sanguine about the housing strength in Canada, specifically in Toronto and Vancouver. While the Canadian situation is far different from the U.S. of 2006, the continued surge in condo construction and overall home prices to levels that are not consistent with the growth in domestic income is certainly raising questions about its sustainability and the fallout if it were to unwind.” ..
“…mortgage rates have nowhere to go but up… eventually. Investment activity and foreign purchases in the condo market are not fully understood or predictable. Corrections in housing do occur and they can occur suddenly, so while this is not a red alert, we are not flashing green, either.”
- excerpts from ‘The Bubble Debate in Canadian Housing’, a note to BMO clients from Dr. Sherry Cooper, Executive Vice President and Chief Economist, BMO Financial Group, Jan 2012 (Cooper is rumoured to have her $3M Toronto ‘mansion’ on the market). [hat-tip ZRH2YVR]
“Bank of Montreal, Canada’s fourth-biggest bank, dropped the rate for a five-year fixed-rate mortgage by 50 basis points, or 0.5 percentage points, to 2.99 percent on Jan. 12, the lowest in its 195-year history. Toronto-Dominion and Royal Bank, Canada’s two-biggest lenders, followed suit the next day with the same rate on a fixed four-year loan.”
- from ‘Canada Bubble Seen as IMF Risk With Record Low Rates’, San Francisco Chronicle, 17 Jan 2012
Further from the same article:
“Kevin Lau, a Toronto-based technology consultant, says he can’t wait to take advantage of the lowest mortgage rates in Canadian history to buy a second condominium and rent his current home.
Lau, 28, plans to get another mortgage and refinance his C$160,000 ($157,000) home loan after Bank of Montreal, Toronto- Dominion Bank and Royal Bank of Canada cut borrowing costs last week.
“It’s always tempting when the credit is available at much lower rates than they ever have been,” said Lau. “The fact that house prices have been going up and continue to go up much faster, you need to really take advantage of it.”
—
Perhaps Lau can “take advantage” of BMO record low rates to go all out and buy Dr Cooper’s ‘mansion’.
It won’t happen literally, but in principle, it is happening: those in the know selling to what may be the last wave of ignorant buyers.
- vreaa
What’s the quote, a drug dealer never sold me drugs I didn’t want.
and don’t forget you always have to wait
In a few years time, perhaps sooner, we’ll be hearing about all the tax credits, subsidies, and perhaps outright relief being offered to guys like Kevin Lau, all paid for by the taxpayers. I was somewhat uplifted by the story about the 40 year old cashing out his home. Now this story has made me grouchy again. Ah well, I’m just a ‘toopid renter. I deserve to watch my taxes used to subsidize Kevin and his ilk so they can continue to live the lives of free-wheeling cowboy capitalists.
Anyone who thinks this unlikely need only look at the US right now. Also consider this: the rate of home ownership in Canada is at an all time high. Many of those will soon be underwater. They could soon represent a massive voting bloc that no party can afford to ignore. Indeed, if things get bad enough, it is this bloc that could very well determine the outcome of the next election. Excuse me while I go puke.
just be right, not righteous. let go, luke
Can’t I be both?
you can be both but righteousness leads to the dark side. personal experience.
The mantra that Canada is different is wearing thin. Sure our mortgages are recourse unlike many US states- however if you cannot pay because you lose your job or interest rates rise or some other crisis occurs while the market is softening- the result is the same- you cannot pay and you are foreclosed!
The only difference is we have a system of foreclosure by which a judge can determine if a buyer’s offer is fair or not and he/she can toss out low balls, even if the lender agrees to it. Set up to protect the borrower it will actually slow the process of correction down.
Recourse/No Recourse, doesn’t matter. The buyers most likely to default are those that purchased over the last couple years at the end of the bubble and with zero or 5% down, I highly doubt these guys have any assets to go after other than the house.
No RSP, No Savings, No Equity, No Problem….walk away.
Recourse/No Recourse matters.. it’s just that Recourse just makes the bubble bigger, last longer, and packs more explosive potential.
Who exactly will be buying these foreclosed properties at “judge determined” pricing? By what mechanism will people be evicted and removed from their homes? In the case of securitized mortgages who has the right to make a foreclosure claim against the home owner?
These are issues that I don’t think our court and legal system are fully prepared to deal with on a large scale. We have weak property law in Canada. Weaker than the USA.
“While the Canadian situation is far different from the U.S. of 2006…”
I’m not sure where that statement comes from either. The biggest material difference is that it is common for Canadians to take out 5 year mortgages, rather than the 30-year US standard. If anything that makes Canada ripe for much MORE pain than the US once things go bad.
Of course, US borrowers took out a lot of shady types of loans during the bubble, but a large share still took out 20-year and 30-year loans and only own one house. The ones who took out short-term adjustable mortgages anywhere near the top were among the first to default.
Occam’s razor says to me that high prices relative to supporting cash flows is the elephant. Comparing and contrasting the US situation cannot bypass this basic tenet.
are van list to sales really getting sort of wacky? i’m pretty sure sales are well below norm. so that would be significant despite this being low season. less clear on listings situation.
As of this week we are now at all-time historical record lows in major bank mortgage rates in Canada, 2.99% from the Bank of Montreal. I keep hearing from this person and that how they can afford their payments “easily” as long as interest rates are so low. These are happy homeowners who are living in their homes and have no intention of selling as long as they can make the payments. The people I talked to are not owners of 5 properties, just one high priced home.
I know there are differing opinions and I would love to be wrong on this, I pray I am wrong, but all I see is a flattening or maybe brief 15% off sale at some point in the next few years after another 25% gain, I just don’t see a massive collapse of housing aka much more than 50% (which we need) until the Bank of Canada gets off its ass and raises interest rates significantly higher than the current target 1.00%. But they just won’t do it. They are a puppet that follows the US Federal Reserve and the latter has promised low interest rates essentially forever. I know housing in the US tanked but that was after a short but sharp spike in rates. I think we NEED that here, people we need to call for an end to this free money, WE NEED A NEW BANK OF CANADA. It should cost something to borrow, and a savings account should pay something. The BOC complains that we borrow too much and save too little, yet at the same time they leave interest rates at all time lows indefinitely!? That is senseless. Raise rates and we will start to save more, pay off some debt, maybe not even be able to pay a million and a half for that East Van dump, take away the free heroine and maybe we’ll get clean. But with free money, why should we bother?
Brief econ lesson:
- all other things being equal, if the BoC cranks rates up, foreign investors buy Canada bonds, causing our dollar to go up, causing our imports to rise and our exports to fall. Exporters go bust, unemployment rises…
- The BoC only sets short rates. Long rates (and thus mortgage rates) are set in the bond market — currently by scared “savers” like you who’d rather park their money in safe government bonds paying nothing (because “savers” have bid up the price/bid down the yield) than in riskier assets like preferred shares, dividend paying common shares, etc. Bank common are paying 3-4.8%, preferred 5%, Sun Life common 7%. Wanna get paid for the use of your cash, you have to risk it. Everybody complains that, with CMHC backing, banks are in a “heads I win, tails you lose” situation. So stop complaining and become a shareholder already. Winning!
“currently by scared “savers” like you who’d rather park their money in safe government bonds paying nothing”
Typical snide response, and typically off the mark. Actually I’m 95% stocks, 5% cash right now. It is the BOC that bithces people aren’t saving. I’m bitching that that causes house prices to skyrocket. Stocks are a good deal/good long term investment from here, houses in Vancouver are not, Winning!
P.s. According to various sources including
http://www.cbc.ca/news/business/story/2012/01/17/bank-of-canada-rate-decision.html
“Changes to the target influence other rates, such as consumer loans, mortgages and the value of the Canadian dollar.”
Also when the US raised rates briefly a few years ago, mortgage rates spiked there, and guess what the housing bubble in the US popped. So yes, if the BOC raises rates, mortgage rates WILL rise. You don’t need the target rate to remain at 1.00% indefinitely to avoid economic meltdown.
“Quit whining and become part of the problem already!” There, that’s better.
We should embrace a distorted financial system that encourages debt and leverage, cuz, like, some preferred shares pay us 6%, which is just so awesome. Never mind that the real economy is experiencing an enormous misallocation of resources caused by cheap credit. The real economy doens’t count. Only financial markets count.
As for your claim that higher rates would increase the C$, punish exports and cause unemployment, you are exactly right. Which should indicate just how severe the problem has become. We cannot withstand even a 1% or 2% increase in interest rates, andt his doesn’t bother you? In my opinion, and economy that would collapse into recession due to a modest 2% increase is an economy that is already beyond saving. Pop it now or pop it later.
Have you seen how thinly capitalized Canadian banks are? Getting 5-7% in this environment is probably telling you something. You could also buy Greek 1yr at 408%.
Look, the BoC only has one knob to twirl, and a mandate to adjust it such that unemployment and core inflation remain low. Core inflation is right around the 2% target, and unemployment is way above NAIRU. Thus, raising rates would run counter to the Bank’s explicit mandate.
Yes, Carney would desperately like consumers to consume less and invest more. He’d like businesses to save less/borrow more, and invest in productivity improvements. He’s said this ’till he’s blue in the face. But he has no levers to accomplish this, save the bully pulpit, which hasn’t been working.
The BoC has no means of allocating WHO borrows money — that’s the job of the Finance Department, which can use tax policy and financial institution regulations to influence borrowing. Blame Flaherty. Nor does the BoC have any influence on whether savers invest in stocks and corporate bonds, thus expanding non-residential investment, or put it all in Canadas/GICs/savings accounts, thus expanding residential and personal consumption. And businesses are unlikely to invest in new plant as long as they’re running significantly below capacity with what they’ve got.
Suggesting that Carney should crank up rates to pop a bubble, which arguably is only affecting two or three markets (albeit the largest), in one sector of the economy, to the detriment of every other sector and region, just sounds wrong. Remember, when Greenspan was soaking up the accolades and ignoring his second bubble, the US economy was firing on all cylinders and unemployment was way below what economists had previously thought was the NAIRU floor. Blame Flaherty.
Without beating this to death, John Crowe proved in the early 1990s that the BoC certainly could pursue an interest rate policy that was anathema to short-to-medium term growth and employment, for the benefit of longer term economic prospects. It was painful, but it set the stage for a decade of economic stability and low-inflation growth.
How about leaving interest rates alone until the world economy gets back on its feet. If your target is housing, then tighten up martgage rules, increase down-payments, etc.
Saying they can afford their payments easily and not caring about losing equity are easy to say when you are up. The rational side that truly just want “a home” may decide to cash out on the way down so they can buy “more home” at the bottom.
As someone mentioned earlier, paper or real, we are not rational when it comes to gains and losses and react differently to equivalent numbers depending on whether they are to the upside or down.
It sounds at least possible. As I said, I would love to be wrong on this one. Let the house of cards fall.
Positive real rates are the exception, not the norm. Consider it a tax, not a theft, and it doesn’t seem so bad. Or something.
Today, that is true.
sorry to bring in Europe again, but you are 100% correct. THIS is what’s happened in Europe, and the logic goes like this:
1. Yes, house prices are mad – they go down 15-20%, as you say
2. People start to worry, rein in, stop compulsive spending – economy teeters
3. Central Bank (BoC, Bank of England, Fed, etc) does all it can to boost economy – in case of US/UK, prints money. in Canada, for as long as China is motoring, it will probably just be ultra-low interest rates continuing. In UK, there won’t be an increase in interest rates this side of 2016
4. ALL OF WHICH MEANS – if, like 80% of Canadians, you can expect to stay in your job or find another one, sure, you won’t go mad, but you’ll continue to remain over-extended and, if you’re smart, pay down your debts and pay off your mortgage.
Result – what I predict for Canada: 15-20% off – cut the froth – then stagnation as you say, maybe with 2-3% off a year (4-5% factoring in inflation) for a very long time.
and as to a new bank of Canada? BoC are some of the best there is. Check out the Fed, Bank of England, European Central bank – and rejoice that you are a Canuck and the Loonie is strong…
Basement Suite you are right. Ralph Cramdown is wrong
http://fishyre.blogspot.com/2012/01/putting-couple-of-myths-to-rest.html
Thank you Fish10, of course we needn’t leave target rate at 1.00% to “protect” the dollar from rising too much. It’s an absurd target rate that leads to absurd mortgage rates that lead to absurd house prices. Sadly, no end in sight because fools are in charge.
It should be noted that Dr. Cooper suffered a home invasion last year, so she might be selling for reasons other than purely economic. Nonetheless…
http://www.realtor.ca/propertyDetails.aspx?propertyId=11434529
MLS C2259432
50 Old Yonge St, Toronto
(Bridle Path-Sunnybrook-York Mills area)
Asking price: $3.25MM
relax basement. i found you something:
http://www.chrismartenson.com/blog/david-stockman-blame-fed/62981
never mind boc/cmhc. even all the fed’s and president’s men cannot put humpty together again. this is great, great interview, btw. must hear.
Oh excellent, thanks Chubster!! This will make an awesome listen, the snippets in the text are just what the doctor ordered, some common sense:
“everything that the Fed has done with QE1, QE2, zero interest rates, Operation Twist – all the rest of this insanity”
“the debt is more or less free”
“We have totally destroyed any incentive for thrift, for deferred gratification.”
And much more from a very smart guy who’s been around the block to say the least based on that bio. Bit busy today and tomorrow, but I’m slating listening to this interview Thursday morning with my early morning coffee
.
Operation Twist was QE3:
1. Announce overnight rate will be almost zero for at least 2 years.
2. Bond market treats short term paper the same as cash
3. Fed exchanges said short term paper (i.e. cash) for longer term paper
QE4 is looking likely to be pre-announced in the summer.
The bid under US Treasuries and equities might lead one to believe that we have stealth QE currently underway. Unless you believe risk assets are benefiting from organic demand (ie. economic recovery) and not just liquidity.
If so, any future QE announcements could be a sell the news event.
Thank you Chubster, finally had a listen to that David Stockman interview. Great stuff, up until he told me to sell all my stocks
Seriously, nice to hear so much common sense about all this, dude is bang on.
“mortgage rates have nowhere to go but up… eventually”
I remember hearing this statement when a 5 year fixed was 4.5%, then 3.99, then 3.5, etc.
If the economy doesn’t gain any steam then mortgage rates have nowhere to go but down.
I thought mortgage rates were a free lunch until managed to transpose high pass filters into concepts in the economic domain. Then I sat up straight.
To be fair to BMO,
This new 2.99% rate is for a “Closed Closed Mortgage” meaning the only way the client can break the 5 year term is a bona fide sale to a non relative. So flippers/speculators won’t jump at this low rate, and fluctuations in prime won’t affect the payments of the homeowner for 5 year as it’s fixed. The popularity of Variable Rate Mortgages and HELOC overstretching over the last few years is far more threatening to the housing market than a low fixed rate that will largely tie up people’s equity for five years.
Anybody who overextends to buy (eg almost any buyer) is speculating on future price strength and is adding air to the bubble… regardless of whether they are ‘pure’ flippers or not.
Even with theses low rates, Van is toast. Why? Because prices have reached a point where interest rates are irrelevant. These low rates will slow the correction unless there are more threats, prices could tumble. The bubble is leaking air. There’s nothing that could be done now because many Canadians are in so much debt. Dont get sucked into big debt because of low rates. It’s better to take on higher interest rates with a smaller debt than higher debt with low interest.
We’d tend to agree.
It’s not at all necessary for interest rates to go up for the bubble to implode.
The psychology of low rate announcements impacts buyers – it feeds a little more panic buying.
Here is a refreshing article about foreign ownership in Vancouver…
http://www.vancourier.com/Opinion/Chinese+ownership+helps+drive+Vancouver+dysfunctional+housing+market/6004546/story.html
sigh. they miss the pt. in the list of culprits: boc 1st, cmhc 2nd, all others a very distant 3rd.
eg. look at chart of cmhc insurance+guarantees in force on p.17 of this doc
http://www.imf.org/external/pubs/ft/scr/2011/cr11365.pdf
has grown from ~25%gdp in 2001 to >50%gdp today. check out the hockey stick since about 2006, when the us bubble was peaking.
Chubster, I agree with you that foreign money is not the major factor behind RE speculation in Canada, but I’m convinced that foreign money has been a pretty efficient catalyst in the Vancouver market, which explains why Vancouver prices have been so out of whack compared to the other major Canadian cities, such as Calgary, Edmonton, etc.
I just had a look at the IMF document you referred to.
What I’m referring to when I say “out of whack compared to other cities” is clearly shown in Figure 3 (left), page 7. Without a powerful catalyst, Vancouver prices would have moved along the other cities, maybe with a slight premium. I think we, on this blog, have underestimated the effect of foreign money on our market.
@m. yes, i see what you are saying. but 2 things. 1, the article makes zero mention of boc/cmhc. so, they are completely missing the pt, imo. 2, even if you address one catalyst, the potential remains and another can easily be found. policy must address root cause first. fwiw, my own view on the external investment angle is that it represents a convenient goat. a visible target with little voice, an easy mark to distract the public from where blame truly belongs. it’s not unlike geithner/hilary calling china a currency manipulator. olympics dumped a lot into local pockets too. there was a big infrastructure build. if you lever up all that, it likely has as much to do with vanRE greater valuations, but no one talks about it. this goat won’t fly.
“the list of culprits: boc 1st, cmhc 2nd”
True that.
Makaya, agree that foreign money has played a role. Stats on this are lacking, but one needs only look around. HAM is everywhere, not just on the west side. The modest East Van special we rent was purchased by a Chinese woman who triggered a bidding war that took the price up to 850K. That’s not to say that native Vancouverites haven’t been every bit as eager to jump on the speculation/debt bandwagon, or that they aren’t in fact the driving force, but outside money has clearly played a role.
But maybe there’s another reason why Vancouver real estate has gotten out of whack relative to the rest of the country. Maybe people here ARE different. Unlike Toronto and Montreal, say, Vancouver has always had a commodities-based, boom and bust, economy. Maybe this has contributed to a “gold rush” mentality. Certainly there are fewer ways to get rich, which might explain why real estate plays an outsize role. Plus, we’re the land of penny stocks, grow-ups, and the leisure life. I wonder if all these characteristics haven’t permeated Vancouver’s collective psyche…
concur. vanRE mentality bears much resemblance to the penny stock casino that was the VSE. perhaps fitting if this casinofication episode terminated in an equivalent illiquid no bid airpocket knockdown.
probably in bad taste but couldn’t resist
http://tinyurl.com/7oa4xsb
Yet another distressed home owner I do not feel sorry for.
Makaya, the powerful catalyst is a rapidly appreciating market and that is what ultimately draws foreign money. The foreigners buying here are momentum chasers through and through. The momentum and rapid appreciation has created a speculative mania is being enabled by cheap money and interventionist government policy. Foreign money is only buying a small part of the overall market. Locals are playing along only because they have been given the capacity by BoC and CMHC.
The chasing momentum analogy applies for highly liquid markets. But is it true for real estate with such high transaction costs and illiquidity once markets start to cool? I’m sure there are a few flippers playing momentum, but IMHO foreign buyers seem to be motivated by Canada’s safety, healthcare system, maybe schools, and large existing Asian community. That all adds up to a nice safetynet if China goes to hell-in-a-hand-basket.
Fair point: we personally suspect that many market participants will step back when prices drop (that they are indeed momentum players).
This debate has gone back and forth. It’ll be tested the next time we have
a fair size pullback… 10% or 15%… do we bounce as ‘value players’ step in? or does fearful supply pour in and overwhelm demand?
HAM may not matter this year anyway…
As the Economist pointed out, most of the money fleeing China goes through Macau.
And according to “the Humble Student of the Market” blog, the rate of money escaping China seems to be decreasing.
If HAM is indeed not coming this year, especially during CNY, it will indeed be very interesting to see how our local RE market behaves…
Here is the link to the Humble blog:
http://humblestudentofthemarkets.blogspot.com/2012/01/unofficial-money-fleeing-china.html
Here is another reason why HAM may not be coming this season…
RE prices have been declining for 3 months on the major cities… Since when is the activity in Macau declining? And since when have we noticed a decrease in transactions in Vancouver? I can’t be sure those events are related, but the parallel is… amusing!
http://tinyurl.com/6lpn75t
Adding to this…
“China data shows cooling economy, as curbs take effect“
“Foreign investment in China fell as the global downturn and financial volatility dampened investor appetite for spending.
Overseas investment dipped 12.7% to $12.24bn in December from a year earlier, the Ministry of commerce said.
It fell 9.8% in November, its first decline since 2009.
On 30 December the commerce ministry said the outlook for foreign investment this year was “not optimistic”
http://www.bbc.co.uk/news/business-16606127
Someone should offer Sherry Cooper $1.5 million USD for her ‘mansion’.
@vanguy
Agreed… BoE base rate over here in the UK is at a record low and has been since March 2009. Interest rates on offer from high-street banks remain attractive. Initially, this proved to be very popular with ‘investors’ though this is having little or no effect on current sales volumes. Banks no longer want to introduce high risk/toxic investments onto their asset sheets and so have gone back to more traditional lending policies (3.5 x single income, 10% deposit, scrapped interest only mortgages). This has strangled money supply and has had more of an effect on transaction levels that any rate drop ever could.
Unlike Canada, inflation has and is ripping through the economy, thanks to QE. However, the BoE doesn’t care however as its primary objective is no longer about maintaining 2% inflation but is now all to do with debasing the economy and devalue sovereign/personal debt! net result… prudent savers are being screwed to satisfy the feckless … which in turn makes the government happy as it maintains the feeling of wealth with homeowners who make up the majority of the voting population!
Very disappointing news to read the recent decision your major banks have made. I am currently waiting for my immigration papers to return so my girlfriend & I can move back to Canada (she is Canadian). I am aiming for Vancouver, though this may change due to the stratospheric house prices and impact it has had on an already limited software industry.
Hopefully, this drop in rates will only cause a blip in the stats for the next quarter… beyond that, once mainstream media pick up on the realities of reality and the final govt. fiscal props fail will the crash commence… IMHO, of course!!
more qe will now have the usual consequences. the great untapped low cost labor pool is pretty much dry now as asia wages are rising now. so, asian CBs can no longer print to absorb western debt issuance without the usual inflationary consequences. ham is a credit phenomenon. b of china purchases of us treasury and gse paper is like the fed’s version of ham. the fundamentals for this arrangement have changed now and more ham won’t come.
Makaya, thanks for posting the great article in the courier – he tells it like it is! It is too bad for the young generation – they have been sold/bought out by their gov’t and by foreign investment.