Canada's Housing Bubble

Jun 28, 2010 Garth Turner greaterfool.ca

Readers of The Washington Post found this in their morning paper:

Toronto -- When he bought a home last week with a 40 percent down payment, lawyer Kevin Fritz didn’t see the transaction as particularly relevant to the debate over global financial stability.

But consider: With U.S. home sales and prices still shaky, Fritz bought in a Canadian market that already has rebounded beyond pre-crisis levels. Without the key tax advantages available to U.S. home buyers, he amassed as much as possible for the down payment, and he expects to pay off his 15-year mortgage with the same bank that gave him the loan — a rarity by U.S. standards, where finance companies typically resell mortgages.

“Canadians are debt-averse,” said Fritz, an attitude that’s part cultural and part shaped by banking practices and regulations designed to keep people out of homes unless they can clearly afford them. “People here don’t leverage.”

Don’t you love all these planted stories in the US media in advance of the billion-dollar government shindig called the G8-G20?

My, my. Where to begin…

• In reality, the average downpayment in Canada has sunk to the lowest level ever. It’s now just 6%,  – after being 15% a decade ago.
• That means the average house with a mortgage is leveraged 94%.
• It also means lawyer Kevin Fritz (who may make $200,000 a year) is hardly the guy to use to illustrate a story about how Canadians buy houses.
• In fact, could this be the same Kevin – to Washington Post readers is just an average Tim’s-swilling, puck-hogging Canuck grunt – who’s a partner in Wildeboer Dellelce? His bio states: “Kevin’s practice is focused on tax law, including corporate and personal tax planning, with a particular emphasis on corporate finance, mergers and acquisitions and business restructurings. Kevin also has experience in the tax structuring of mutual funds, income trusts and other investment products.  He has acted for a diverse array of clients, both domestic and international, including individuals, governments, Crown corporations, financial institutions and businesses of all sizes, from start-up owner managed firms to the largest multinational corporations.”
• Whatever… Kev now stands for all Canadians. It’s in the paper, so it’s true. A nation of M&A solicitors.
• In fact, anyone putting 40% down on a home and taking out a mortgage with a 15-year amortization is a complete anomaly.
• The vast majority of new mortgage originations in 2009 and 2010 were 5/35 loans – where buyers eked out  just and took loans with 35-year payback periods, on which interest accounted for 100% of early payments. Very conservative.
• As for there being no ‘tax advantages’ encouraging home ownership in Canada, whaddya call the ability to buy a house with 90%-plus leverage, flip it in a few weeks, and keep all of the gain tax-free?
• And I particularly like the part about “banking practices and regulations designed to keep people out of homes unless they can clearly afford them.” That would include offering mortgages at prime minus three-quarters to new buyers despite a 100% certainty these folks would be renewing in five years at triple the rate (unlike in the States where rates last 30 years). It would also include making high-risk, high-ratio mortgages to anyone who could fog a mirror since Ottawa absorbed the risk through CMHC. And let’s not forget giving newbies a gift of cash when they borrow so they can cough up the down payment. Or letting self-employed folks fabricate their own incomes. Go Canada!

Worth noting, this article appeared on the same day the economic news was grim on both sides of the border. Canadian retail sales slid, and car sales crashed. In the States, purchases of new houses cratered in May – falling by a third to the lowest point in recorded history. As I said here yesterday, asset deflation is gnawing out the heart of America right now, while it scratches at our door.

Put as much Maybelline on the beast as you want, but it’s one. Each day that passes, the inevitable draws closer.

Inaccurate, stereotypical, shallow and ignorant media reporting helped propel the real estate rocket higher in both countries – quoting industry insiders and house-pumpers as wise and guiding experts. Naive and greedy investors were led by the nose into highly-leveraged deals when asset values were extreme. This was supported by governments keen to have new consumer debt paper over their own inability to run the economy. Now, there is no lack of blame to spread.

As weather moves in, and helicopters darken the Toronto sky over highways traced with motorcades, wise people move to higher ground.

The goal’s liquidity. The enemy is debt.

And Kevin.