Canada's Minister of Finance, Jim Flaherty, implemented policies to effectively curb the excesses of Canada's housing bubble. I am shocked, and today I eat my words to the contrary. Kudos to Mr. Flaherty.
Irvine Home Address … 25 CERRITO Irvine, CA 92612
Resale Home Price …… $459,000
{book1}
Well, when I was younger, I was so full of fear
I hid behind anger, held back the tears
It was me against the world, I was sure that I'd win
But the world fought back, punished me for my sins
And they tried to warn me of my evil ways
But I couldn't hear what they had to say
I was wrong, self destruction's got me again
I was wrong, I realized now that I was wrong
I was wrong Ya!
I was wrong
Social Distortion – I Was Wrong
In December of 2009, I reported that US Exports Housing Bubble to Canada and Canadian Realtors Ignore Housing Bubble — that last one is a shock, right?
In the first article, I was very critical of Canada's Finance Minister because his public pronouncements have the same hubbub as the boobs in charge of the US housing finance markets. I was wrong about Jim Flaherty. I was as wrong as wrong can be, and today I eat crow.
First, let's review the a simple case for a Canadian housing bubble:
The Canadian Housing Bubble
Prior to 2009, there was little talk about a real estate bubble in Canada because there wasn't one. Prices in Canada have stayed relatively close to cashflow value for many years. Despite their over-reliance on adjustable-rate mortgages, their market has been a model of stability — at least it was until the implementation of new interest rate policies of the United States, a policy required by our own housing bubble ("It (expanding FHA) was an effort to keep prices from falling too fast. That’s a policy." — Barney Frank).
When the Federal Reserve in the United States lowered interest rates, it caused affordability to increase about 20%. [which is why prices did not fall much in 2009]
This is what Canada is facing, Canada housing market still ablaze in November:
OTTAWA, Dec 15 (Reuters) – Sales of existing homes in Canada jumped 73 percent in November from a year earlier to just below the record high for the month, the Canadian Real Estate Association said on Tuesday.
The average national price in November rose 19 percent from a year earlier to C$337,231 ($318,142). Year-to-date, the average price was up 4.4 percent from the same period of 2008.
How much more obvious can this situation be? Interest rates create a 20% increase in affordability, and during the depths of a deep recession, Canadians managed to make house prices go up 20%. Hmmm… I think cause and effect would indicate that prices have bubbled to match interest rates, and they will go back down when interest rates go up.
Canada Denies Housing Bubble
Is it the responsibility of politicians everywhere to deny the obvious and foster dreams of Bailouts and False Hopes? They seem to excel in this area, Canada minister sees no housing bubble at present:
"If we see — which we have not seen — but if we see clear evidence of an upward bubble, particularly with respect to insured mortgages, then we have some tools available which we've used before and we can use again," he said in his Ottawa office.
We have tools. LOL! I feel totally secure knowing the government has a tool like this guy in charge of finances.
Flaherty said it was not surprising to see substantial activity in the mortgage and housing markets given low interest rates and the fact that people had held back on big investments during the recession.
He said he was not as concerned about housing prices so much as the ability of Canadians to service their debt.
"I'm more concerned about affordability (of mortgages) and people not being lulled into a false sense of security, taking out relatively low interest-rate mortgages, when we all know that the mortgages rates have only one way to go over time — and that's up," he said.
Sorry to break the news to you Mr. Finance Minister, but you have inflated a housing bubble, and it will cause problems in your country as it did in ours. At least I give you high marks for choosing to do nothing about it. Perhaps the stooges in charge of our housing market can learn from you and do nothing further.
Eating my Words
I was critical of the Canadian Finance minister at the time because he sounded like the pirates captaining our ship, but then Mr. Flaherty did something shocking: he instituted significant policy changes that will stop the Canadian housing bubble from inflating further. In fact, many of his policies are similar to those I advocated in Regulatory Solutions to Prevent the Next Housing Bubble. Flaherty was right, and in my skepticism, I was wrong.
I have become too cynical about the embedded corruption in the United States government. The Canadian Finance Minister has proven that government can work, and that public officials have policy options available to them to prevent or curb housing bubble excess.
So why don't we?
Have we all resigned ourselves to the status quo? Are paper tigers purportedly too-big-to-fail scaring the sheeple into feeding them endless extortion profits while servile taxpayers act as grooms of the stool armed with bailout pooper scoopers to clean up the losses? Have the lobbyists for our lending oligarchs captured our legislature? Or has the Greenspan pathology of zero regulation poisoned our current batch of wouldbe regulators?
While US regulators choose wrongheaded policies designed merely to divert funds to a broken system, Canadians are fixing their problems. I give them credit for having the courage to limit credit.
Canada tightens mortgage lending rules
TORONTO — Canada is tightening mortgage lending rules as historic low rates are raising fears of a potential housing bubble, the country's finance minister said Tuesday.
Finance Minister Jim Flaherty said there is no compelling evidence of a bubble but said the government is taking proactive measures to prevent one.
"We're looking ahead and taking action now before there is a problem," Flaherty said.
Notice the standard bureaucratic denial of a problem, and also notice the proactive measures to combat the denied problem — which by action tells you much more than the denying words.
Marvel at the clear thinking and thoughtful action this man took:
To qualify for a government-insured mortgage, [1] borrowers will have to meet the standards for a five-year fixed-rate mortgage — up from the current standard for three years.
Flaherty also said if Canadians want to purchase a property where they will not be living, [2] they will have to come up with a 20 percent down payment.
And he's imposing tighter restrictions on how much money people can borrow against their houses. [3] Instead of being able to borrow 95 percent of the value of their property, the limit will now be 90 percent. The changes take effect April 19.
Allow me to recap and interpret:
(1) He is forcing qualification at a higher payment rate. If he had stated 30-year fixed rather than a 5-year fixed, It would be better, but it is a step toward stable financing. I wish the statement clarified whether or not interest-only ARMs are permitted there. I believe the qualification standard he is imposing is based on a 30-year amortizing mortgage with only a 5 year fixed rate.
(2) Twenty percent down payments? I would like to see this on all property, but common sense says investment properties and second homes should require a significant down payment — people don't hesitate to walk away from investment properties.
(3) And limiting cash-out refinancing to 90% LTV is identical to the proposal I made. I like this requirement because it provides an equity cushion that stabilizes markets and prevents walkaways.
"We do want to discourage the tendency by some to use their home as an ATM machine, the tendency by some to buy three or four condominiums by way of speculation," Flaherty said. "This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up."
Our government actively encouraged us to borrow, spend and be happy while Canadians are being warned about excessive debt and spending their equity foolishly. The contrast is conspicuous.
Canada's housing recovery has been so rapid that some are worried. There has been no crippling mortgage meltdown or banking crisis in Canada, where there is greater oversight of mortgages, but Canada's central bank has vowed to keep interest rates at a historic low of 0.25 percent until the middle of the year.
A variable-rate mortgage interest rate can be had for as low as 2 percent to 2.25 percent in Canada, while the fixed five-year posted rate at Canada's top five banks is 5.39 percent.
Some are worried that borrowers who are taking out variable-rate mortgage rates will struggle to make payments when interest rates rise. Canada's central bank been warning for months that homeowners should make sure they can absorb an increase in their floating-rate mortgages once rates start rising.
Canada's ARM Problem
I visited my friends at the local Google office last year, and I spoke with one manager there who recently moved from Canada. We talked about the many differences he noted between their market and ours and the two most notable were (1) the absence of a mortgage interest deduction in Canada and (2) the prevalence of adjustable rate mortgages.
I haven't written much recently on The ARM Problem here in the United States because it has since morphed into a Shadow Inventory problem as many ARMs including 75% of option ARMs, have already exploded or gone into default for other reasons, like unemployment, negative equity, or negative cashflow.
We're All Shadow Inventory Now.
In Canada the majority of mortgages are ARMs and many of those are interest-only; the entire Canadian housing market is exposed to interest rate risk, and with most borrowers at their maximum ability to pay at historically low interest rates, they are certainly set up for a fall.
It may be too late for Canada. Their housing bubble is different than ours, it may even be a result of the response to ours — artificially low interest rates — but what makes Canada's housing bubble uniquely Canadian is the housing market foundation they built on the shifting sands of mortgage interest rates. Canada is likely to experience a slow grinding decline similar to ours over the next decade as interest rates rise keeping loan balances small, appreciation minimal, and foreclosures abundant.
Irvine Home Address … 25 CERRITO Irvine, CA 92612 
Resale Home Price … $459,000
Income Requirement ……. $96,452
Down Payment Needed … $16,065
3.5% Down FHA Financing
Home Purchase Price … $262,500
Home Purchase Date …. 2/24/2000
Net Gain (Loss) ………. $168,960
Percent Change ………. 74.9%
Annual Appreciation … 5.6%
Mortgage Interest Rate ………. 5.13%
Monthly Mortgage Payment … $2,413
Monthly Cash Outlays …..….… $3,230
Monthly Cost of Ownership … $2,400
Property Details for 25 CERRITO Irvine, CA 92612
Beds 3
Baths 1 full 1 part baths
Home Size 1,507 sq ft
($305 / sq ft)
Lot Size n/a
Year Built 1975
Days on Market 107
Listing Updated 2/17/2010
MLS Number S595319
Property Type Condominium, Residential
Community Rancho San Joaquin
Tract Jh
Absolutely charming end unit home located at the end of a tree lined cul-de-sac in the prestigious community of Rancho San Joaquin in Irvine! This gorgeous three bedroom (one currently being used as office) home has a most desirable floorplan & features a beautiful European white kitchen that opens to the dining & living areas making this home perfect for entertaining. Upgrades include designer paint, crown moulding, mirrored entry walls, hardwood floors in the kitchen and entryway, tile floors in the baths, & upgraded lighting fixtures. The master bedroom suite features dual sinks, large closets with built in organizers, ceiling fan, & custom draperies. With three spacious outdoor patios, enjoying the fresh outdoors & lush greenery is easily in reach from every part of this immaculate home! Inside laundry. Close to golf course, fabulous shopping, entertainment, So Cal beaches, the University of California Irvine, transportation & easy freeway access. Truly a great home!
I picked this property because the red in the decor. What do you think?
IMO, the red is a bit much in this office. It is a color more appropriate for a harlot's bed chamber.
Ignoring the allure of a interest-only variable rate (which gives you an artifically low payment and probably no longer exists), I don’t understand getting a variable rate mortgage when rates are historically low (as is the case now). If you think rates are going to be higher soon, get a fixed rate mortgage. If you think rates are going to drop, then a variable rate mortgage makes sense. It also might make sense if you plan on only owning a property for a short period of time-but in that case, renting probably makes more sense.
In Canada, fixed loan terms higher than 5 years is nearly non-existent. Unlike the US, a typical mortgage can only be “locked in” for 5 years, which is not much of a lock-in, at least in my opinion.
One of the rationale to always go variable is that, if the rates are 2% now, and will rise to 5% over the course of 5 years, it’s still better to get ARM and pay 2%, 2.5%, 3%, 3.5%, 4%… over the years, than to start paying 5% right off year 1. By refinance time, those taken ARM as well as those on fixed 5-year terms would need to renew at the same rate of, say, 5%, but the ARM guy had paid off a lot more principal (or taken more vacations) than the fixed term guy.
Unless one expects the rate to rise sharply (e.g. from 2% to 8% in 5 years), variable seems to be the better way to go.
No the real problem IS government trying to control free markets. We in the US had little controls going up the bubble, and now have government trying to keep in inflated with bank bailouts and loan mods on the way down. This was strictly done for our Wall St masters and has nothing to do for Main St. It’s too late, we will now have a declining housing market for 5+ years thanks to the fed and government trying to “fix” the problem. The problem is them!
There wasn’t a free market during the bubble and there isn’t one now. During the bubble the government forced prices up. You can controll via no controlls, this is exactly what the US Government did in the oughts-decade.
We have never seen a free market and never will, why is this so hard to understand?
The Gov can’t force prices up any more than they can force you to take out a loan. What they can do is force banks to hold cash (TARP) to prop up the balance sheets for loan losses. This has the (un?)intended consequence of allowing banks to hold on to foreclosed properties thereby keeping home prices artificially high.
But our collective intelligence has dispatched another gang of hooligans to D.C to find new ways to help us. And that is what they are doing – “helping”. Of course the solution that they come up with will never be anything that does not enrich the political donor class along the way which always gets ignored.
But hey, the folks have spoken – they want the District of Columbia to be the nation’s consumer complaint headquarters. They want the commander in chief to come up with new services (paid for by someone else of course) and make jobs for everybody and make sure that homosexuals are not getting married.
All that stuff about upholding the constitution, defending “liberty”, etc Get with the times – nobody cares about all that old kind of stuff. We have bigger problems right now like making sure everybody has a lousy job so everyone can make mortgage payments and shop at malls for stuff we don’t even produce.
The majority of people have spoken – We have gotten exactly what we have asked for.
Keep voting for Republicans and Democrats! We need to keep the fun times going!
Instead of spouting off the typical rhetoric, maybe go visit some other places and see how it “isn’t working” “over there”. Never mind, I forgot, it “we are the best”.
I like the red couches in the living room with the fireplace. But the red office is too much.
We were in Vancouver in August of 2006 (or ’07, I can’t remember). We stayed in a hotel near the water downtown. There was a lot of high rise condo construction going on. A hotel employee told us one development sold out within 1/2 hour.
I am glad that the listing agent clarified the fact that one of the three bedrooms is currently being used as an office. These are details that I am very interested in knowing; how the current seller uses one room for a computer and two others for beds.
If I buy this place and turn the room into a Meth lab will the sales description be sure to indicate that the third bedroom is currently being used as a laboratory? I would certainly hope so.
That’s đ David
I like this place, have had my eye on it for a while. In fact, I’ve been wondering why it’s still on the market. I think the HOA fees over there are really high, though, and I wonder if they include any golf privledges or membership in the racquet club over there.
Off topic for a moment. A Redfin listing today for a $360K short sale condo in San Clemente has this statement by the realtor, “Buyer must agree to a short sale negotiation fee of $3,500 so we can assure a quick process.” This is apparently in addition to any commission paid at the close of escrow. Am baffled as to how this assures a quick process – and why it exists in addition to usual commission. Any one know?
Let’s call this the shadow inventory tax.
I’m still waiting for a bank to break up this lucrative cartel, liquidate shadow inventory properties and declare their insolvency LOL.
It just sounds like a starving realtor( little ‘r’) who is tired of wasting their valuable time of failed short sales. I would assume buyers will pay the fee regardless of the outcome of the negotiation.
I actually don’t have a problem with this at all. What I take exception with is them still trying to claw a commission for themselves on top of the fees.
Get rid of the commission model and just move to an hourly fee of 15.00$ per hour.
I’d be willing to go much higher than $15/hour for a literate realtor.
Invalidate all existing realtor licenses,then require fresh certification under an examination structure which consists solely of the GRE verbal section. Set compensation increments at each score decile. Ban the bottom two deciles from the profession for life. Restrict the next two deciles to making coffee, sharpening pencils, and cleaning the restrooms at the agency. Mandate that the fifth decile earn minimum wage and wear electrodes on the genital to administer a substantial voltage; scale the voltage linearly with the number of grammatical errors found in each listing.
Place the remaining deciles in successively higher pay scales which top out somewhere in the low six figures. I doubt that more than $25 per hour is an appropriate compensation for any one below the top quintile – consider the population we’re dealing with.
There is no conceivable way that my proposal could make the profession any worse than it is.
I like the red decor. What I don’t like is the wet bar in the office; this should not be called a third bedroom, it’s definitely an office or den.
Just haul some fermentation tanks into it and turn the room into a Brewery. Sell pints of freshly brewed Amber Ale with a catchy name like “Irvine Kool Aid” to all the neighbors. You just have to think outside the box.
You know, Rush Limbaugh loves telling unemployed people to just go out and start their own businesses. Here’s your chance! Work from home!
Marijuana soon will be legal in California and small plots will be legal as well.
A small place like this, with a small patch would be nice for some high grade “Irvine Gold”.
The red walled room would make a fantastic smoking room.
Soon, we’ll have to copyright “Irvine Gold” and “Organically grown in Irvine”. Those of us with real yards will soon become tycoons. It sort of changes the kind of grass we grow.
Unfortunately for those of you living in the desert, the weather is too harsh. You might get Arizona Green at best.
Time to dig up the Cheech and Chong records.
“No stems no seeds that you don’t need,
Irvine Gold is bad a$$ weed”… ;-D
The US didn’t have no regulation, just deregulation on the area of need and regulations to keep barriers of entry.
FEDs keeping prices high by lowering interest rates are regulations, GSEs and other loss limits with no profit limit for WS investment bankers are regulations, abide poor regulations to stiff the taxpayers.
Articles on dramatic drop in consumer sentiment after 3 month of improvements. At Tahoe over between Christmas and new years, there were almost no lines for skiing and the condo were asking if you wanted to stay longer instead of reminding you to be out by check out time. Plenty of parking. The media can spin all they want to get BHO plans through and poll numbers up but when you’ve been out of work or see many of your friends out of work, you know the economy isn’t improving for the working man.
BTW, aticle on 17% increase in bonus. Implies the little guy is getting lots more $ in bonus, but not necessary so. Take company X with 10% overall cash bonus (16.5 million salaries, 1.66 million for bonus) and 150 employees. Top 5 in company make 8X over medium salary of $80,000, (average $110,000) and are at 30%-50% and 100% for CEO of salary for bonus. About 60% of the cash bonus is used for the top 5 in the company. The remaining 95% split the remaining 40% or 4%. Very common in many companies. Makes bonus structure look generous, but generous for whom? Very similar to the multi-trillion $ bailout/recovery package, very generous but for whom?
Do you think that could have anything to do with a 10 Month Low Consumer Confidence”?
I am shocked! Shocked I say! Just after seeing all those folks bum rushing Wal Mart for crappy flat screen TVs over the holidays.
FDIC Troubled Banks Increase
The spin is that the “overall” industry made a profit. So if you factor in the bailouts and under the covers Tom Foolery propping things up – all is getting better.
I live in Vancouver, Canada, and since the latest stat shows that it is currently *one of the most unaffordable city* in the world, I do not have much enthusiasm for Flaherty’s solution to the problem he had a huge hand in creating. The current median house price to median income ratio is 9.3!!
Just a couple years ago, Canadians used to be able to buy houses with 0% downpayment, amortized 40 years. This was introduced in 2006 by the same government if I am not mistaken. They realized they screwed up and increased the downpayment requirement to 5% and max amortization to 35 years. Banks are lending to anyone with a pulse because most of the mortgages are insured by the Canadian Mortgage and Housing Corporation (CMHC), backed by the government (read: taxpayers). The CMHC has increased their total guarantees to many hundreds of billions (I can’t remember since they kept upping the number).
I’m not saying the new regulations are not welcoming changes. I just wouldn’t eat crows for them. The biggest issue of CMHC backing all mortgages with under 20% downpayment is still not addressed. :shut:
As a whole, the bubble is not that big in Canada. But in some major cities far from Ottawa, the bubble can’t get any bigger. Saying Canada has a small bubble is like saying the US has a small bubble, except people who live in Irvine or Vancouver don’t feel the same way.
http://www.demographia.com/dhi.pdf
Affordability indices.
Very interesting report.
High rises (dense people packing) doesn’t by itself lend a less energy use because when people don’t pay directly, they tend to waste more. I’ve witnessed this trend all my life. Common heated or AC building have windows open all year round. Heat is also turned up and AC temps down. But once individual metering is in effect, the energy usuage goes down (heat turned down, AC temp goes up with individual metering). Seen “public” apt building have window kept open in sub-zero climate. HOA on N.Korean Towers are $1000 and up. Lots to pay for common utilities.
With “govt” planning, i.e., govt restriction on building, there can be lots of manpulation on the supply and thus the prices. Owners/Masters of the land and factories, then restrict the land supply for pleasants’homes and pleasants’ transportation to boost the value of the masters’ land near the work centers. Sell at a very high price to the pleasants and then move your factory to a new location that gives you the land and tax benefits. Start the cycle over again. A 70 to 100 year plan, but great-grandchildren and grandchildren of those in control during the Great Depression are in control today.
There isn’t a bubble in these major cities. There is huge wealth disparity in our global economy which is only going to get worse as we stay the course with fiscal policies.
Hypothetically let’s assume a bank began unloading shadow inventory.
The FDIC would take over the said insolvent bank and sell it to a Goldman Sachs executive faster than you can say ZIRP.
âThere isnât a bubble in these major cities. There is huge wealth disparity in our global economy which is only going to get worse as we stay the course with fiscal policies.â
Sadly you hit the nail right on the head. Housing market has become a global phenomenon, not local. House prices in place like Vancouver or Irvine have less and less to do with local income, but more to their desirability to non-local buyers.
National governmentsâ effort to re-inflate economy and asset markets around the globe has accelerated the concentration of wealth into smaller group of elite and widened the gap between haves and have-nots. Working poor will gradually replace âmiddle classâ as the largest segment of population for most of the developed world in North America, Japan, and EU in foreseeable future (if it has not already happened). Polarization of income and wealth will be even more severe in BRIC and other developing countries. The beauty of globalization is not just about labor arbitrage or free capital flow, but also about those who came out as winners under the current system will have wider variety of ways to store their wealth.
In a few years I wonât be surprised if a green card is to be attached as part of stipulation for some âforeign investorsâ to snatch up a few residential properties in the US. Locations with more desirable qualities (culture, safety, school, weather, etc) will likely demand increasingly higher premiums over other places. In the end we will probably see a two-tiered housing market system in most of the countries, where the top tier locations attract money and investment from the rich class from all over the world and likely see the price hold up well. The bottom tier markets (>90% of housing units) will see price drop for decades to come as the âmiddle classâ completes its obsolescence.
Exactly.
Look on the bright side.
In many more mature global cities real estate is only affordable to the uber wealthy or attainable through inheritance from a wealthy relative.
If I wanted to live in a place like France I would move there.
I don’t want the US to be like France.
alx,
Thanks for your input and detailed knowledge of the history. It is appreciated.
I must say, that interior in that house is amazing. Person who designed it, had a great sense of house designing. Of course, I didn’t see details of this house, even when we take into consideration how old it is, but from my first sight it is really worth that price.
Take care,
Julie
I hope you are being facetious.
You write … “Canada is likely to experience a slow grinding decline similar to ours over the next decade as interest rates rise keeping loan balances small, appreciation minimal, and foreclosures abundant”.
I expect prices to fall rather RAPIDLY once an economic crisis hits the United States, such as a Treasury Auction Failure and a resultant rise in interest rates, with a continental wide response made to economic disruption under the terms of the Security and Prosperity Agreement, the SPP.
I recommend a read of the complete thoughts on the enclosed link.
Don’t get too optimistic …
‘Volcker Rule’ Stalls in Senate
http://online.wsj.com/article/SB10001424052748703503804575083823511212204.html?mod=WSJ_article_LatestHeadlines
Interesting map – click on California, then mouse over the green $ signs. Yes, Irvine is on there.
http://www.portfolio.com/interactive-features/2010/02/us-wealth-centers/
Just got back from Vancouver and Whistler. An amazing amount of coolaid being consumed right now. All the same things people said here in 2006. (20% year of year increases are normal and sustainable, foreign cash buyers, etc..) You can’t throw a dead cat without hitting brand new 25 story condo buildings. Studios are starting at $300,000. I’m guessing the cost of living is close to the bay area, incomes are not.
Predatory Lending is a major contributor to the economic turmoil we are currently experiencing.
Here is an example of what I am talking about:
Scott Veerkamp / Predatory Lending (Franklin Township School Board Member.)
Please review this information from U.S. Senator Jeff Merkley regarding deceptive lending practices:
“Steering payments were made to brokers who enticed unsuspecting homeowners into deceptive and expensive mortgages. These secret bonus payments, often called Yield Spread Premiums, turned home mortgages into a SCAM.”
The Center for Responsible Lending says YSP “steals equity from struggling families.”
1. Scott collected nearly $10,000 on two separate mortgages using YSP and junk fees. 2. This is an average of $5,000 per loan. 3. The median value of the properties was $135,000. 4. Clearly, this type of lending represents a major ripoff for consumers.
http://merkley.senate.gov/newsroom/press/release/?id=A09C6A80-537A-4EB1-83C5-31925F046B6F