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.

6 comments:

david said...

It really is tough to decide who is at fault for this bubble. Every homeowner who bought more house than they could afford is partially to blame. Every speculator flipping presales is partially to blame. Realtors and mortgage brokers telling people that they can afford a 700K house with a 100K household income and 40K down are partially to blame. The government intervention to save the bubble that worked way better than they expected is to partially blame. The CMHC is obviously up there too.

What I am saying is that it is no one person or groups fault. The thing that gets me the most is almost all of these people look at what happened in the US and say "it’s different here". We were given a great window into what could happen when housing gains outstrip incomes for several years. The same thing happened here (with differences, but also lots of similarities) and no one seems the slightest bit concerned.

A sad fact is that our mortgages are not as easy to get out of as the ones in the US. The only way out of paying off the loan is bankruptcy. This could lead to a few of us unable to get any type of credit for 7 years. What affect will that have on our economy that lives off buying things with money we don’t have? I am also wondering what will happen if things get as bad as the US (or worse). Will there be huge rule changes to help these people who got "suckered"?

I mean, lets face it, most people bought because they expected to make money. If they did, we (tax payers) don’t see any of that cash as long as they live there. Why should we get screwed if their "investments" didn’t work out?

It seems like everyone likes the government to stand back when things are going well and then cry out for help when it all falls to crap. Had there been absolutely no rules I think this bubble would have gotten even bigger. If banks were allowed to issue 60yr mortgages I’m sure a few would give it a shot.

Who do I blame? All those people I listed above. Who will get stung when this whole thing falls apart? Over-extended owners will have the biggest hit to their lives, and then followed by all of us responsible people in the form of higher taxes.

Seems fair to me...

ValueMonkey said...

Interestingly if you run some numbers on a 60-yr vs 35-yr mortgage, the monthly payment difference isn't that much. By my calculations on a $300K mortgage with a 3% interest rate, there's a $266 delta in monthly payments.

If you bother to chart it, you'll see the deltas flatline around a 35-40 year amortization period. So as amortization period increases the deltas follow the law of diminishing returns.

So even if they add longer amortizations, I don't see it adding much momentum to the current market.

patriotz said...

What I am saying is that it is no one person or groups fault.

That's true, but there is only one player in this fiasco which has the responsibility of looking after everyone's well-being. And as well it's the only player that can control the actions of the others. It's, of course, the government

That's why I'm saying "J'accuse", Harper and Flaherty, for failing in your duty to look after the general welfare of Canadians. No claim of ignorance can be made in the face of the debacle in the US and elsewhere.

david said...

I guess I would agree it is mostly the government's fault. After all most people dont put much thought into how much they can really afford. They go to the bank, the bank gives them a number, they find a house they like around that number. It still boggles my mind that people dont think twice when a very average 1 bedroom condo in Vancouver costs well over the 5X the average single persons salary.


First thing I did after saving up a few dozen grand when i got my current job (first decent paying job I have ever had) was start looking at places to buy. I figured buying was better because in the end of it all you own something. Pretty much everyone thinks this initially because historically buying has been a good idea if you know you want to live somewhere long term.

So I look around and find some places I like for around 300-350K. Head to the bank and ask what I can get with my 10% and above average salary. She tells me with a 30yr mortgage I can get a 200K mortgage, plus my 30K gives me a place worth 230K, and I would have to come up with closing costs somehow. I looked at 230K places and they were all crap anywhere I wanted to live. 30yr old 2 bedrooms and 20yr old 1 bedrooms.

I talk to my parents who bought their house in burnaby for 130K in 85 when my dad alone was making almost 40K.

So I jump on the internet and look for some explanation and find all the bubble sites like this one and educate myself of what has been going on.

I just dont understand how people think it is normal to have to severly downgrade in order to own in this city.

Blame the government for letting it get this crazy, but the people buying at these prices still make me scratch my head.

ManfredSteyn said...

david,

You sound like a very intelligent young man. Be patient for two years. For the kind of price point you are interested in, there will be a ton of desirable properties available to you throughout Vancouver. Keep saving for that downpayment!

david said...

Manfred,

Thanks, I am in no hurry to buy. At the very least my lease goes until september 2010 so there isnt much of an option for me to buy now anyway.

I am also not even sure which area I would like to live in or even if I will stay in Vancouver long term as I may want to try living somewhere else for a year or two.

While I do like talking about RE, I really dont have any plans to buy it in the near future.