Wednesday, December 23, 2009

Globe and Mail: no need to slow down housing market

I think this one ought to be preserved for posterity. From an editorial in today's G&M:
Housing is undoubtedly still in demand and interest rates are at historical lows, but there is no agreement that there is a bubble in the market. Canada was spared massive exposure to subprime mortgages, and the American experience is helping inform bank prudence north of the border. Meanwhile, Canadians are largely succeeding at keeping up with standard mortgages, despite the economic downturn; their capacity to meet future obligations will only increase once the downturn ends.

Moreover, Canada's regulatory regime is already doing well at keeping Canadians solvent and in their homes. Unlike in the United States, homeowners do not get tax deductions on their mortgage interest payments. The era of the no-money-down mortgage has faded in Canada.

It is certainly true that free-money fueled housing bubbles don't create problems for banks until they pop. But what may be less true is the contention that this one won't pop.

And BTW, why should banks be prudent when they unload the sucker mortgages on the taxpayer through CMHC?

It is stunning that so many people are blind to what is going on--when we have right in front of us in the US a giant example of what happens when you give free money to people to spend on houses. Hint--it doesn't end well.

Monday, December 21, 2009

Finance Minister to Move on Housing?

Think of Canada’s housing market as a ticking time bomb. Think of Finance Minister Jim Flaherty as the unlucky bomb disposal expert called in to deal with the problem.
Flaherty is moving slowly — oh, so slowly — to snip a wire here and there in an attempt to defuse the mess.
Problem is, the ticking is getting louder by the minute.If the bomb explodes, home prices could plunge. In the worst case, plunging prices could bring on an economic downfall such as the United States, Ireland and Spain suffered after their real estate markets collapsed.
But to make Flaherty’s challenge even more difficult, he still has to convince most people the bomb even exists. At the moment, he’s being cautious in how he describes the problem. He’s being even more cautious in how he deals with it. Perhaps too cautious.
Flaherty told Canwest News Service last week that he’s monitoring the real estate market and is ready to intervene if it reaches “irrational” levels. The Finance Minister says he may require homebuyers to put down higher down payments. He may also force them to amortize their mortgages over shorter periods.No doubt these are excellent ideas. But Flaherty has already tried them.In July 2008, he made his first tentative move to defuse the housing sector by requiring homebuyers to put down at least 5% of the purchase price of a home.
At the same time, Flaherty reduced the maximum amortization period on home mortgages to 35 years from the previous limit of 40 years.
His cautious strategy accomplished absolutely nothing. The Canadian Real Estate Association reported the resale price of an average Canadian home hit $337,231 in November, up a stunning 19% from a year earlier.
If a red-hot real estate market during the brutal recession of the past year doesn’t meet Flaherty’s definition of an “irrational” market, it’s difficult to know what would.
Yes, interest rates are historically low, but any rational homebuyer has to realize interest rates will inevitably rise. When that happens, many homeowners will face much larger mortgage payments.Canadians appear unshaken by the risk of higher rates, perhaps because home prices have doubled over the past decade and many buyers assume more gains lie ahead.It is difficult, though, to come up with a rational explanation of why home prices should climb from here.
Canada’s population growth has been nothing extraordinary. Wage increases have crawled. The supply of new homes has surged and the level of home ownership stands at a four-decade high. Meanwhile, Canadians are aging, which suggests the pace of household formation should be slowing down.
So why are homes still being bid higher? It seems to come down to the widespread conviction that a house is a great investment.
History suggests this is true only sporadically. Robert Shiller, the Yale economist who warned of both the dot-com bubble and the U.S. housing bubble, has accumulated a mountain of data to demonstrate that the price of a home in the United States over the past century has barely beaten the rate of inflation.
Piet Eichholtz, a professor of real estate finance at Maastricht University in the Netherlands, came to a similar conclusion when he studied real estate prices in an Amsterdam neighbourhood from 1628 to 1973. He found that home prices required 350 years to double in real terms.
If you assume home prices should rise in line with inflation, you come to a dire outlook for Canadian real estate. Taking figures from 1990, 1995 and 2000, and boosting them by inflation during the intervening years, suggests the national average home price should check in around $200,000 — a third less than the current figure.
More sophisticated calculations arrive at similar estimates. David Rosenberg, chief economist at the money manager Gluskin Sheff in Toronto, examined home prices in relation to personal incomes and residential rents. He concluded that prices are between 15% and 35% above levels that are consistent with fundamentals.“If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing,” he writes.
So what can Flaherty do? He’s already missed the opportunity to defuse the real estate bomb at an early stage. He’s understandably reluctant to raise interest rates when the recovery is still tentative.
He should follow through on his vows to increase down payment requirements and shorten amortization periods. Most important, though, he should loudly caution Canadians on the dangers of taking on more mortgage debt when home prices seem unsustainably high. After all, when a bomb disposal expert can’t do anything else, he can at least warn people to run for cover.
Financial PostIan McGugan is a freelance business journalist who writes for the Financial Post.

Tuesday, December 15, 2009

The Confidence Game

con·fi·dence n.

  • Trust or faith in a person or thing.
  • A trusting relationship: I took them into my confidence.
  • That which is confided; a secret: A friend does not betray confidences.
  • A feeling of assurance that a confidant will keep a secret: I am telling you this in strict confidence.
  • A feeling of assurance, especially of self-assurance.
  • The state or quality of being certain: I have every confidence in your ability to succeed.
  • adj. Of, relating to, or involving a swindle or fraud: a confidence scheme; a confidence trickster

Consumer Confidence
Business Confidence
Builder Confidence

It all seems like all anyone really has these days is Confidence. We wouldn't want real profits or growth, or sustainable behaviours; would we?

Every day that goes by, I get more of the distinct impression that big chunks of the economy are part of a confidence game that resembles at best, blind faith and at worst, a giant swindle.

In relation to our local real estate market, to me, it resembles the giant swindle, with realtors and mortgage brokers taking advantage of the uninformed masses who place great 'faith' in the value of real estate ownership. They are blindly pursuing ownership at all costs with little or no thought to the immense risks they are taking on by putting themselves into massive amounts of debt. with little or no money down. We shouldn't come down too hard on the realtors and mortgage brokers though, since they are providing a service to willing consumers and they are just do their darndest to get that eager debtor the right amount of financing and the house they they just 'have to have'.

I actually put the blame squarely on the government and inappropriate rules that fail to guard the CMHC and hence taxpayers from massive losses in the future. After all, requiring a 10% downpayment is so 1999. Perhaps a speculator tax and extended ownership requirements for principle residence capital gains tax exemption (currently 12 months) would be appropriate rule changes too. After all, in countries with these sorts of rules, home ownership isn't a confidence game based on ever increasing home values and massive debt burdens but rather an appropriate personal and financial choice based on financial sustainability and lifestyle preferences.

Friday, December 11, 2009

Rosenberg: Is the Canadian Housing Market in a Bubble?

In today’s Breakfast with Dave, Rosie discusses the Canadian housing market:

It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.

While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).

In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Source: Breakfast with Dave, Gluskin Sheff, December 10, 2009