Canada's Housing Bubble

Dec 21, 2010 theautomaticearth.blogspot.com

Ilargi: Wonder what reactions will come in to this one. Max was getting somewhat tired from all the mails he got from Canada whenever he said anything negative about the country. “Hey, I’m just the guy in the middle"... And so he called us in, the Canadians, so the complaints can now come our way. "Don’t you understand, we're different!" Yeah, right. Well, you can now explain that to a couple of fellow Canadians. Stoneleigh comes in about halfway through the episode.

Stoneleigh:

Oh, Canada!

When Ilargi and I were in Paris recently, I did a couple of interviews with Max Keiser. The first you have already seen, and the second is being released today. The topic is Canada, and its enormous property bubble. Human beings are notorious for not being able to recognize a bubble when they are in one, and Canadians are no exception. We are a rationalizing species, not a rational one, and there are always rationalizations for why it's different this time - for why this time those outrageous valuations are justified. Well, its never different this time.

Bubbles create virtual wealth through speculation. People simply agree that something should be worth more (and more, and more) than it was before, although the underlying value has not changed at all. They will part with any sum in chasing momentum, because they think there will always be a Greater Fool who will pay more. Often they do this with borrowed money, leveraging their exposure to risk.

Eventually, the Greatest Fool, Biggest Sucker or Most Aggressive Speculator has been found and fleeced. Then there is nothing to support prices at anywhere near the stratospheric levels they have reached on the back of easy credit. People will then simply agree that the asset which has been the focus of speculation should be worth less (and less, and less) than it was before, as the asset bubble bursts. The virtual wealth component will eventually be more than wiped out, as all asset bubbles undershoot when they implode. For those who had been speculating with borrowed money, and for those who had been carrying the risk of that lending, the result is being wiped out. The leverage that seems to magically defy gravity on the way up will magnify the losses on the way down.

Canada is on the cusp of the shift from an extreme of complacency born of easy money to the fear of a sudden realization of being desperately over-stretched ("like butter spread over too much bread", as Bilbo said in The Lord of the Rings). Canadians carry a higher debt load than Americans, as well as using more energy per capita than anyone else in the world (with the worst structural dependency on cheap energy as a result), yet we feel special - insulated from the rest of the world, as if bad things only happen to others. Our bubble is set to implode, as all bubbles eventually do.

We have warned Canadians before at The Automatic Earth that they are living in financial fantasy world:

Bubble Case Studies: Ireland and Canada

In Canada, where I am currently, there is still a sense of invulnerability. We haven't got as far as denial yet. That's hardly surprising when you can't tell a crack-shack from a mansion in places like Vancouver.

Others have agreed with us that bubbles are not only identifiable in hindsight, but are actually clearly identifiable while in progress, if one knows what pattern to look for. When there is ample evidence of the same dynamic unfolding at different rates in so many other places, there really is no excuse for believing oneself immune to the force of financial gravity. 

As Mish points out:

Canadian Borrowing Gone Mad

Porter's statements are exactly the same kind of silliness we heard in the US regarding the central belief "massive debt is OK because it's supported by rising asset prices".

It was bad enough that anyone believed such nonsense a few years ago before the US property bubble blew sky high. That such beliefs still have proponents at the highest level of Canadian banks now seems rather amazing.

It just goes to show just how firm the belief "It's different here" is in Canada.

As always, a bubble is a society-wide phenomenon involving a toxic mix of predators, prey and a complete abdication of regulatory responsibility. Despite a warning from Mark Carney (Govenor of the Bank of Canada) that "Risk reversals when they happen can be fierce: the greater the complacency, the more brutal the reckoning.", no serious attempt is being made by regulators to take the punch bowl away from the party and reign in the debt binge. 

The banks are well aware that trouble is brewing, but are too busy profiting from a public determined to claim their role as the designated empty bag holders to prevent the situation getting even further out of hand.

Banks won't lead way on fixing debt problem

Mr. Clark said that no bank wants to be the first to impose stricter requirements on borrowers out of fear that it will suffer a major loss of customers to rivals. Personal banking "is a highly competitive industry," Mr. Clark said....

....Mr. Clark said it is impossible to expect any bank to crack the whip on borrowers because "market share loss is perceived as a strategic loss, not just a numerical or dollar loss."

This position is a bit rich coming from the CEO of TD Bank, given that TD is quietly giving its borrowers enough rope to hang themselves by offering ever more credit, but with requirements that pile all the risk on to borrowers in ways that people are unlikely to understand. See this gem from Garth Turner:

[TD bank] is registering all its new home loans as collateral mortgages, rather than conventional ones. If you have no idea what that means, you’re normal. A collateral mortgage is a loan which is backed by a promissory note which is in turned backed by security. A conventional mortgage, as you know, is just a loan secured by a house. Normally the only people who are asked to sign collateral mortgages are folks who use their houses to arrange lines of credit with balances that can balloon, not a regular mortgage with a fixed amount owing and a standardized payment.

With a conventional mortgage there are strict rules about how much you can borrow determined by the value of the property when you take the loan. Not so with a collateral mortgage, because it’s actually a loan which is backed by your promissory note. That means you can borrow more than your house is worth.

Yes, just like those old fast-talking Ditech.com TV commercials offering American homeowners mortgages worth 125% of their home’s value – the ones we used to snicker at. Well, giggle no longer. TD is now shopping 125% collateral mortgages.

In fact, bank customers (I’m told) are being encouraged to 'register' for 125% mortgages when they sign up, even if they don’t need all that money. It’s just there, the pitch goes, if you ever need it. Kinda like a built-in line of credit you don’t need to reapply for. (Of course, it should be lost on nobody that the bank just found a way around guidelines on loan-to-value ratios.)

OK, so much for the conservative Canadian bankers part. But it gets better. For the bank.

With a conventional mortgage it’s your house backing the loan, which means transferring a mortgage is simple, and can be done for a couple of hundred bucks. But collateral mortgages cannot be transferred, since they’re more akin to personal loans. That means one must be discharged and a new mortgage arranged elsewhere if you want to move. Since that can cost thousands, not hundreds, it pretty much ensures you won’t.

Stoneleigh: I strongly suggest people read the entire article in order to understand how deep a hole real estate purchasers are unwittingly, yet enthusiastically, digging themselves into in Canada. As always, the public is being set up to take the fall. Yes they are being greedy, but they are also being led up the garden path by those who should know better, and those who should know better are being far greedier in doing so.

Understanding bubble dynamics is vital, and seeing a bubble for what it is while still inside it is even more so. Canadians need to wake up.

Stoneleigh and Max Keiser Flatten the Canadian Economy

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