Tuesday, August 13, 2013

Ottawa desperately trying to kill the housing Frankenstein

Remember that literary classic, Frankenstein?  Scientist Victor creates a monster, then realizing the mistake he has made tries desperately to kill the beast.  Seems an apt description for Canada's housing market and Ottawa's so far futile efforts to cool it off.  

This more modern story takes us back to the early days of the great financial crisis, when Canada seemed to be teetering on the brink of the worst economic crisis since the great depression. Back in 2006 and before, the housing market was pretty simple,you saved up some money for a down  payment and then applied for a mortgage with the bank.  Valuations increased in a nice slow and steady fashion, for twenty plus years a house was pretty much a rock solid investment, very maple syrupy, slow and steady.  

But with a minority government in Ottawa faced with the possibility of  being forced to go to the electorate with the country's finances in tatters a solution was needed.  The economy needed some steroids. And so the monster was born, sub-prime lending, Canadian style.

It had worked wonders in the US, inflating real estate values to astronomical values, making Donald Trumps of Joe Sixpacks and Sally Housecoats from coast to coast.  

Haven't saved up a down payment, and family not willing or unable to gift you the money?  No problem, zero down works.  Still can't afford to carry the mortgage, hell we'll stretch the payments out over 40 years, call it renting debt.  Afraid the bank still won't want to take on the risk?  Pfffffffffft, taxpayers have your back with CMHC insurance, we'll build the premiums into your monthly.

And it worked, boy howdy.

How much is that house, $200,000?  Is it worth it?  Who the Flaherty cares?!?!  It ain't our money!!!  Wait, are other people interested in buying it????  To hell with that, we'll outbid them.  We all know what happened, houses the size of bus shelters were seeing bidding wars in places like Toronto.

Which basically brings us to today.  Forty year mortgages have been dialed all the way back to twenty five. Down payments are again needed, with lenders no longer able to "rebate" the required amount.  No more tapping your HELOC for that kitchen reno if it eats away all your equity.

But still the monster won't die, and why would it, monsters don't die easily, ask Victor.  Go to Garth Turner's blog, Greaterfool.ca.  He's been calling the top since 2008.  One day of course, he'll be right.  

An American style crash?  I suspect, for some.  For amateur landlords mortgaged to the hilt I can see it getting ugly.  Likewise for those forced to sell for reasons of relocation or similar situations, if they bought near the top.  

But this isn't the United States, and you can't just drop your keys in the mail and stick the bank with a property that's declined in value.  The banks backside is covered.  If they're forced to sell your home for less than you owed on the mortgage, they'll stick you with the bill.  If that causes bankruptcy, insurance kicks in.

For owners of a single house, who can ride out an increase in mortgage payments and the ensuing buyers market, I think they'll be fine.

For those wanting or needing to sell, I think it could get ugly.  Higher rates brought on by a tightening money supply and tighter qualification standards mean decreased demand and lower prices for a number of years to come.  

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