Why this housing Economist has the Canadian Housing Bubble all wrong

In a globe and mail article "As prices doubled in a decade, housing was hard to beat" 

"Barring a massive rate shock or sharp erosion in jobs, I don’t see a large price correction," Mr. Holt said in a research note.

 "A modest one in a soft landing, yes, but the forces of leverage-reversal that amplified the downside risks in the U.S. do not operate in the same manner within Canada. That said, I do view this as a nation-wide problem and not one just confined to a handful of markets, as every province’s house prices have risen by about 80 per cent to 150 per cent over the past decade. Other than gold, the retail investor’s returns on tax-sheltered primary residences have been tough for alternative investments to compete against."

First, Canada does not need to experience a massive rate shock as the US and Japanese experiences prove that a housing bust can happen with extremely low rates.

Secondly, Canada does not need a sharp erosion in jobs for a large correction.  The S&P/Case-Shiller index revealed house price growth was in a steep decline from early 2006… and went negative in the first quarter of 2007.  During that period, the US unemployment rate was around 4.5%. At that time there was no major shock to the economy.  In fact, the first of the big financial firms to collapse – Bear Stearns – didn’t collapse until March 2008.  A full year after house prices had started to fall.

Really, the one thing that will bust this bubble is the same thing that inflated it.  Consumer sentiment.
And there tons of reasons why sentiment is changing right now

Video: A Stunning Look At China's Ghost Cities

Whether China has a soft landing or hard landing, Out of all the provinces, Saskatchewan would be hit the hardest because China is the second largest trading partner after the US in terms of Countries. Remember, commodities are boom/bust.  And commodities fate lies with China.

China's property bubble makes the US housing bubble look like childs play. China property market of today is best compared to Japan's property bubble of the late 80's.  Prices in Japan are not even close to recovering over 20 years later.

From the Conference Board of Canada

Japan accounted for close to 20 per cent of the global economy after its economy recorded average annual growth of between 8-10 per cent in the 1970s and 1980s. At the time, many experts predicted that Japan would eventually overtake the United States as the world’s largest economy within a couple decades (sound familiar?). Few doubted that a collapse in Japanese growth would be a disaster for the global economy. Well, the “unthinkable” happened as the bursting of a real estate bubble and deflation caused the Japanese economy to average growth of less than 1 per cent annually throughout much of the 1990s and 2000s. By 2010, the Japanese economy was less than one-third the size of the US economy!

If China busts, you do not want to holding a bunch of debt.

Is this the HELOC version for the Government of Saskatchewan?

This is not a political blog and it won't be.  But when the Saskatchewan Budget for 2011-2012 came out, I thought it was an okay budget.  Now, I am having second thoughts.  Even though the pamphlet you got in the mail says "Lower debt", it is only half true.  Government Gross Debt is decreasing but Crown Corporation Debt is increasing and so is Total Debt.  Don't believe me.  Check it out here.

Government Gross Debt is forecast to be 3.8 Billion in 2012, down from 4.1 Billion in 2010.  Total Debt is forecast to be 9 Billion in 2012, up from 8.2 Billion in 2010.  Now the Government has said that the Crowns are entities that are able to liquidate over time, so they are treated differently than the General Revenue Fund Debt.  Really?  The fact of the matter is that total debt is not be lowered.  What happens to Government finances when this "boom" ends? Are they going to cut spending or continue to go into more debt?

This is no different than someone who payed down their mortgage by $5,000 in a year, but borrowed against their home for other spending by $10,000.  By every measure total debt is increasing and someone at sometime has to pay for it.  And if you are taxpaying citizen who uses utilities in this province, you are that someone.

House Poor in Saskatoon

What Does House Poor Mean?
A situation that describes a person who spends a large proportion of his or her total income on home ownership, including mortgage payments, property taxes, maintenance and utilities. House poor individuals are short of cash for discretionary items and tend to have trouble meeting other financial obligations like vehicle payments.

I doubt there are many households who bought before 2006 that are house poor in Saskatoon.  But it is a different story for many first time buyers who have bought since.  First time buyers are loaded with debt with the average debt for university graduates now pushing $30,000, while the average for college graduates now pushing $15,000.  There could also be those people who bought many years before 2006 but have leveraged themselves with HELOC's and find themselves house poor.

 And we know that at the end of 2010 Saskatoon had the 6th most expensive average bungalow and two storey homes in the country at $331,000 and $359,000 respectively.  Compare that to 2001 when the the average bungalow was $131,000 and the average two storey was $146,000.

With a down payment of 5%, this is what affordability looks like for an average bungalow in Saskatchewan for average household buyers.  Just over 50% of income!

Now add in the debt that the majority of first time buyers have before they purchase a house and you can see why over 70% of young families NEED to work just to make ends meet. 

And it is not just new homeowners that are house poor.  So are many renters.  According to stats can, 50% of all rental households in Saskatoon paid 30% or more towards monthly rent.( In 2005).  Wages gains for low income since that time total less than 20% while rents have increased about 50% for a 2 bedroom apartment.  And rents for homes, townhouses and other places not surveyed by CMHC are even higher.  There is a reason why the food bank and homeless shelters are experiencing a boom right now as well.

So when people suggest that Saskatoon is the fastest growing metro in Canada tell then to take a look at the type of population growth, understand the people growing the population are not wealthy, then they will understand these people will be house poor.

The Great Canadian Housing Bubble

 Median household income in Canada was 46k in 2000.  In 2010 it is estimated to be 65k. An increase of 41%.
According to the Bank of Canada inflation in Canada from 2000 to 2010 totaled 22%.
Total household debt in Canada was 602 Billion in 2000, in 2010 it surpassed 1.5 trillion. An increase of 149%.
Average house price in Canada was 154k in 2000.  In 2010 it was 330k.  An increase of 126%.

 From the Great US Housing Bubble

"Since 1890 houses have appreciated at 0.7% over the general rate of inflation. Over the long term house values are tied to incomes because most people buy houses with mortgages for which they must qualify based on their income. Inflation keeps pace with wage growth because people will bid up the prices of goods and services with their available income. Therefore, over the long term house prices, wages and inflation all move in concert. There are short-term fluctuations in this relationship due to variations in financing terms, migration patterns, employment, local limits on construction and irrational exuberance, but any such deviations from the mean will be corrected over time by market forces. As an investment, houses serve as a hedge against the corrosive effect of inflation, but over the long term appreciation much in excess of the general rate of inflation is not possible. In this regard, houses are little better than savings accounts as an asset class, and they are inferior to stocks or bonds in the long term."

Home prices can defy gravity for only so long.

Outstanding mortgage credit growth in the US and in Canada mirror each other.

And debt to income in Canada during 2010 has surpassed the US before the bubble burst there.

We all should know by now, that the Americans filled their housing bubble with credit and it looks like Canada has done the same. In both countries wages did not keep up to house prices and savings rates have been low in the 2000's. So unless Canada has magic debt that will allow house prices to defy gravity forever, expect a housing bust to happen here.

Why Australia is Set to Follow US Path of House Price Doom

Australia, along with Canada, China and a handful of other countries are the hold outs of the global housing bubble that have not burst yet.  But they will.  Here is a great article from down under.  It is not different in there either.

Why Australia is Set to Follow US Path of House Price Doom

For starters, the stock market peaked in October 2007.  By the end of September 2008 – before Lehman collapsed – the Aussie stock market had already fallen 27% from the peak:

Of course, the Aussie market fell another 35% before reaching rock bottom in March 2009.
Or take the fall in US house prices.  That didn’t start in September 2008.  In fact, it didn’t begin in October 2007 either.
In August 2005, The Times ran the headline, “US heading for house price crash, Greenspan tells buyers.“
His warning came just a few months before his retirement.  After years of propping up bubbles and keeping interest rates at dangerously low levels, Greenspan was obviously thinking about his legacy… making sure in years to come he could say, “I told you there was a bubble.”

No bubble here, move along
“Thankfully” for the US housing industry, but not for those thinking about taking a plunge into the housing market, future Federal Reserve chairman, Dr. Ben S. Bernanke was on hand.  Two months after Greenspan’s comments, Bernanke downplayed fears of a house price collapse.
In a testimony to the US Congress, Dr. Bernanke said:
“House prices are unlikely to continue rising at current rates… a moderate cooling in the housing market, should one occur, would not be inconsistent with the economy continuing to grow at or near its potential next year.”
In other words, in October 2005, Dr. Bernanke thought the US housing market would [cough] plateeeeeeeeau.  Sound familiar?

Unemployment lags house price falls
Before I go on, back to that US unemployment number.  Take a look at it on the chart below 

In a nutshell, this timeline disproves one of the key arguments made by spruikers – an idea we’ve never believed anyway – that Australian house prices can only fall if there’s a major shock to the economy.
The chart above proves that isn’t the case.
The S&P/Case-Shiller index revealed house price growth was in a steep decline from early 2006… and went negative in the first quarter of 2007.
During that period, what was the US unemployment rate?  That’s right, it was around 4.5%.  That’s lower than the current Australian unemployment rate.  It also tells you the US unemployment rate is just as rigged as the Australian unemployment rate.
At that time there was no major shock to the economy.  In fact, the first of the big financial firms to collapse – Bear Stearns – didn’t collapse until March 2008.  A full year after house prices had started to fall.

“All that’s required for house prices to fall is for people to think that house prices will fall.  Just in the same way that share prices can fall when they reach a peak.  Sellers look to get out first before everyone else gets the same idea.”
This is what’s playing out in Australia right now.

Whether China's economy has a soft or hard landing, the question is which housing bubble busts first.  Australia or Canada?

Why pay rent when you can own?

Scan Kijiji, a billboard, the newspaper and you will see that quote.  Heck, most people will tell you "that you are throwing money away by renting" or "you can build equity by owning".  I'll leave this little clip from Peter Schiff who not only talks about when Governments get involved with housing markets, the market gets distorted, but why renting can be good.



If we take a look at homes bought in 2008, prices have barely moved and when factoring in all the costs associated with owning, it has been a losing investment compared to renting.  The vast majority of people do not realise this yet, but when they do, the game is over.

Saskatchewan Budget 2011, "The Saskatchewan Advantage"

Some highlights in the Saskatchewan Budget for 2011.

Today, we are increasing the basic and spousal personal tax exemptions by another $1000, effective January 1, 2011.
 
And today, we are increasing the exemption for dependent children by $500, also effective January 1, 2011.
 
When you combine these increases with the Low-Income Tax Credit introduced by our government in 2008, a family of four in Saskatchewan will not pay tax on their first $45,550 of combined income.

Today, we are announcing that the small business income tax rate will be reduced by more than half, from 4.5 per cent to 2 per cent, effective July 1, 2011. 

Today, we are paying down the debt by another $325 million.  
This will bring government debt down to $3.81 billion, its lowest level since 1988,...

This budget will also leave a balance of $710 million in the Growth and Financial Security Fund.
 
 This will protect our province against any sudden shocks in world commodity markets,...
And ensure that our government is able to respond quickly and effectively to any unforeseen circumstances,...

Here is some things on housing

We are taking action to provide more affordable housing.  In addition to Head Start on a Home, we will partner with Municipalities on two programs.  The first is a program to provide property tax abatements on designated new home construction.
 
We have allocated $200,000 this year with $1 million available for this program over the next five years.
 
The second is an incentive to support the development of new rental housing. It will provide a grant of up to $5000 per unit with a goal of having 350 new units built each year.
Additional revenue at the end of 2010-11 also allowed the investment of $33.9 million for renovation and construction of new housing.
 
In March, we provided $1.5 million to Habitat for Humanity to help build 30 new homes.
 
We are working closely with the University of Saskatchewan on a major expansion of student housing on campus, to reduce the stress on the local housing supply.

 Some thoughts from others

Canadian TaxPayers Federation " it's a good budget",  they like the tax cuts and debt repayment but are "concerned with the spending increase"

But NDP Leader Dwain Lingenfelter said that for all the money being spent, the budget "lacks vision."

He also criticized growing Crown corporation debt, which according to budget documents will rise by about $800 million in 2011-12, accusing the government of "ripping out" profits from the Crowns to help balance its books.

I'm siding with the Canadian Taxpayers Federation here.  I love the tax cuts and debt repayment, both are needed. But I am concerned with record spending and the growing debt in the Crowns.  They do remember the commodity crash of 2008-09, so that is on the radar but I do not believe there is enough of a buffer to absorb the next commodity crash.  I think they are hoping the good times last long enough for the fall election.

Here is the true Saskatoon Advantage. if anyone is wondering.

Changing of new mortgage rules and affordability for Saskatoon 2005-11

The new mortgage rules are now in play. I thought it would be interesting to see what the change in mortgage rules over the course of the last half decade and affordability would look like.  The following graph shows the average house price and the maximum the median household income can afford in Saskatoon from 2005-2011.  The maximum median household income has factored in $100 a month for heating, $0 in debt and $200 a month in taxes.  Utilities and insurance are not counted.  I used a 5% interest rate for 2005-2008, 3.75% for 2009 and a 5.44% qualifying rate for 2010 and 2011.  The median household income is derived from the City of Saskatoon and the average house price is from SRAR.

Affordability improves if a variable rate is used. $0 in debt is used, but we already know that most first time buyers are loaded with debt. before they buy a house. This is not exact, as different variables will produce different outcomes, but it gives us an idea how things have changed. If Saskatoon had the same affordability now as in 2005, Saskatoon would have an average house price (including condos) of about $215,000.  This takes into account rising incomes for households,and an increase of 25 year mortgage to 30 year mortgage.

2011 Federal budget has nearly zilch for housing, Saskatchewan budget tomorrow

2 years ago, CREA lobbied the Feds to help stimulate the housing market after the financial crisis in the fall of 2008.  And they got their wish at the time.  With today's budget announcement, the only thing that helps home owners is an extension of the ecoEnergy home retrofit program worth $400 million.  This is estimated to create 5,000 jobs throughout Canada.  Which is a basically a drop in the bucket.  If you think CREA was not lobbying the Government this time around, you are wrong.  For the past couple of months, CREA has been silently pressing the Government for NO MORE changes to mortgages or housing ever since the Fed's announced new mortgage rules in January that started March 18th.  I, for one, do not believe the Government is done tightening up the rules in regards to mortgages and/or borrowing against homes.  But this will depend on who is running the country as it looks like there will be an election.

Tomorrow is the Provincial budget for Saskatchewan.  With Saskatchewan's finances in better shape than Canada's and with calls to do something about affordable housing, I expect to see something in the Provincial budget for housing.  I am also expecting tax cuts.  ( It is an election year) We will see how this turns out.

Housing Market: The Seven Deadly Sins

From the Economist in 2003

"One common error is that house prices must continue to rise because of a limited supply of land. For instance, it is argued that “house prices will always rise in London because lots of people want to live here”. But this confuses the level of prices with their rate of change. Home prices are bound to be higher in big cities because of land scarcity, but this does not guarantee that urban house prices will keep rising indefinitely—just look at Tokyo's huge price-drops since 1990

A second flawed argument is that low interest rates make buying a home cheaper, and so push up demand and prices. Lower interest rates may have allowed some people, who otherwise could not have afforded a mortgage, to buy a home. But many borrowers who think mortgages are cheaper are suffering from money illusion.

Fallacy number three is a favourite claim of Alan Greenspan, chairman of America's Federal Reserve. This is that price bubbles are less likely in housing than in the stockmarket because higher transaction costs discourage speculation. In fact, several studies have shown that both in theory and in practice bubbles are more likely in housing than in shares. A study by the IMF finds that a sharp rise in house prices is far more likely to be followed by a bust than is a share-price boom.

Another curiosity is the popular claim that investing in property is safer than buying shares, for bricks and mortar are here forever. But that says nothing about relative value. Buy at the peak of a property bubble and your investment is not “safe”.

This leads to a fifth falsehood: it is always better to buy a house, because “paying rent is money down the drain”. Thanks to a growing glut of rental properties in many cities, from Sydney to London, the cost of renting is currently cheaper than the cost of paying a mortgage. Only if (a big if) prices continue to rise does buying always make sense.

Myth number six is that, even if houses are overvalued, their price is unlikely to fall because interest rates will not rise to the double-digit rates that burst previous housing bubbles. Again, the experience of Japan suggests that prices can fall without a big increase in interest rates. All that is needed is a change in sentiment. First-time buyers may balk at sky-high prices, for example, or if rents fall and prices stop rising investors may sell as their expectation of capital gains disappears.

The seventh fallacy is to believe that, even if prices have overshot, they will not fall, but just level off. When inflation was high, real house prices did indeed adjust in this way. But, if inflation remains at 1-2%, it will take years for real house prices to return to normal levels. So today prices are more likely than ever to fall in nominal, as well as real, terms.

Each of these seven arguments may contain a small grain of truth in certain circumstances, but they should never be the articles of faith they have become. The more often they are invoked, the greater the risk that prices are headed for a crash."

These guys knew what was coming as early as 2003 in regards to the global housing bubble.  If you are wondering why Canada has not busted with the dozens of other countries who have, Canada was a late entry to the party.  So when the Economist said that home prices were over valued as much as 22% in Canada in 2010, you better be paying attention.

Boomers: What will their effect be on Saskatoon's housing market?

What effect will boomers have on the housing market?

From "Pop goes the housing bubble" in the Globe and Mail

It’s a question that Dowell Myers of the University of Southern California has pondered, too. He is among a number of urban planners and demographers predicting another housing crash, this one caused by the massive sell-off by boomers wanting to downsize.

In a 2008 paper co-written with Sung Ho Ryu, Prof. Myers said communities in the United States face a historic tipping point. The ratio of seniors to working-age residents is expected to grow by roughly 30 per cent in each of the next two decades, the pair calculated.

The housing bubble that burst has let air out of the bubble already but with the baby boomers hitting retirement, the US may not recover from their housing bust for decades.  One article from CNN says that prices in Vegas and Phoenix may not recover until after 2032.

Tsur Somerville, an associate professor at the University of British Columbia’s Centre for Urban Economics and Real Estate, isn’t as pessimistic as Prof. Myers. “I know it’s one of those theories where the numbers add up and the underlying fundamentals are correct, but I think in Canada, at least, it’s too early to say how it’s going to play out. I think immigration is the key.”

Immigration did not save the US housing bubble and will not save the Canadian housing bubble.

Canada ranks 15th while the US ranks 22nd in net migration for countries around the world.

In 2009, there were 252,179 immigrants that entered Canada.

For more on why immigration will not save the housing bubble from bursting go here.

Back to the boomers:



                                                        Canada's population pyramid

The baby boomers have just contributed to the biggest bull housing market that Canada has ever seen. The next boom they will have a part in is going to be the retirement boom.   Reading the story Tsk Tsk …. 56% of boomers still have a mortgage from the Globe and Mail under the wealthy boomer makes me wonder how boomers will shape the housing market in Saskatoon for the next decade. 

According to TD
Moving to the United States or otherwise, less than half (44%) of boomers in Manitoba and Saskatchewan will continue to live in their current home during retirement.
Boomers in Manitoba and Saskatchewan are following the national trend and plan to downsize for their next home purchase. According to the TD Canada Trust Boomer Buyers Report, four-in-five Canadian boomers say their next move will be to a smaller home. Almost half say a smaller home will help them save money and 34% are moving somewhere smaller to enjoy more luxurious features. Less than half (45%) of boomer home owners in Manitoba and Saskatchewan are mortgage-free. Fifteen per cent have paid less than a quarter of their mortgage.

Saskatchewan and Manitoba will see the highest exodus of baby boomers out of all the provinces.  The majority that move will be baby boomers will be wealthier than most.  While Saskatchewan may get some wealthy boomers moving back to Saskatchewan, I would hazard a guess and I say that more money will be leaving the province than coming back in from boomers migration.

In 2005, Saskatoon had a population of baby boomers and older that comprised of 44% of the population.  These are the people who are retired or will be retiring in the next 15 years.  This is significant because this will put a strain on resources such as health care.  Boomers have also just passed their peak spending years ( 2008 is the start of the downward trend).  So government revenues will decrease from this huge group of people.

As we already know the majority of net wealth in Canadian households is in real estate and with a retirement crisis at hand, many of the boomers who are house heavy and cash poor will be cashing out of housing for income.  There is always the reverse mortgage, and I guess that some would do that, but people can only borrow up to 40% of their homes value.  2010 saw the reverse mortgage industry have their best year.  And analysts expect more growth in this industry in 2011.  Not only is it tough for first time buyers to get into home ownership, it is tough for the older generation to stay in them as well.

Some boomers will need to cashout and/or downsize from their homes over the next decade to fund their retirement. Some housing markets that have young immigration coming into local economies may off set some huge declines in house prices. This will not be the deciding factor that pushes house prices down but it will just add to the downward projection of the housing market already in place caused by a number of factors such as debt and over valuation to incomes, etc.  In the simplest terms, boomers will not be adding to the housing boom anymore but will be adding to the housing bust for the next couple of decades.  The only questions that remain are how fast and how deep do they add to the housing decline going forward.

Death of 35 yr Mortgage

Today is March 18th and the 35 year mortgage is dead along with other mortgage and borrowing rules that will tighten credit availability.
From CMHC

Effective March 18, 2011:

• Reduce the maximum amortization period from 35 to 30 years for new insured mortgages with loan-to-value ratios of more than 80 per cent.
• Lower the maximum amount Canadians can borrow when refinancing a 1 – 4 unit owner-occupied property from 90 to 85 per cent of the value of their homes.

Effective April 18, 2011:

• Mortgage loan insurance will no longer be available for non-amortizing secured home equity lines of credit, or HELOC.

With CMHC's calculator we see that a median household income of $62,000 ( from the city of Saskatoon housing business plan) the amount this household can borrow drops 7% when the amortization drops from 35 years to 30 years.  This does not mean that house values have dropped 7% overnight, this just affects the first time buyers who were on the fringe and using the 35 year mortgage amortization.   

To what extent 35 year amortizations were being used, is up to debate.  If we look back at the first round of tightening in October 2008, sales were already depressed from the global financial crisis and then interest rates were dropped to all time lows.  So there were other major variables in play at the same time that really distort the outcome of amortizations dropping from 40 years to 35 years. 

With Last years tightening of mortgage rules, sales in Saskatoon peaked in April and fell from there, even though the 5 yr GOV bond fell ( this determines fixed rate mortgages) most of the year.  It could be that since investors had to put down 20% down, they silently left the market.  I believe there has been more speculation than is commonly thought. 

Borrowing against ones home has just gotten tougher since CMHC will not be insuring some HELOC's and the banks are not going to take the risk.  And demand has gotten crimped. I will be monitoring the situation.  But I do see Saskatoon in 2011 challenging 2008's record inventory.  We will see how wrong I will be.

City of Saskatoon Housing Business Plan

On Monday night, I happened by chance, to be channel surfing and on Shaw Cable channel 10 was city council talking about housing and their role they fell they need to play to help out.  They mentioned that house prices have doubled since 2006, but wages have not kept up.  Councillor Clark mentioned that while rents have gone up 60% since 2005, wage increases for those income earners "is about 5%".

There was a slide show that showed some housing facts about Saskatoon.  The one that stuck out was that median household income for 2010 in Saskatoon was $62,000.  Another slide showed that in order to qualify for a house, a household needed $70,000. So of course this is where the city comes into help people.  And it looks like they will be putting forth more initiatives this coming year to "help" people with home ownership.  The more they "help" people the more disastrous this becomes. When the new report comes online, I will have a post on that.  Until then, I will just post some snippets of the March 2010 plan.

The Housing Continuum and the City’s Role in Housing

Housing can be described on a continuum. At one end are those individuals and families experiencing absolute homelessness. At the other end are those individuals and families who are able to meet their housing needs without assistance. In the middle is a range of low and moderate-income households, many of which are living paycheque to paycheque and find it difficult to secure adequate housing.

As the chart above illustrates, Saskatoon experienced a very stable real estate market until the end of 2005. In 2006, average prices began rapidly rising and had almost doubled by 2008. The market levelled off around $280,000 in 2009. CMHC is predicting modest price increases of about 2.1 percent in 2010 to $285,654 for the average Saskatoon home. Household incomes in Saskatoon have seen only modest annual increases averaging about 4 percent in recent years as shown on the bottom line of the chart.

Affordability

The median multiple is the ratio of the average price of a home to the average household income. Traditionally, housing has been considered affordable if this ratio is 3.0 or less. The median multiple for Saskatoon was 2.5 in 2006, was over 4.0 in 2008 and at the end of 2009 is about 3.7.
In August 2006, a gross annual income of $48,000 was needed to purchase an average $160,000 house (25-year mortgage and minimum down payment). In 2008, an annual income of about $75,000 was required to purchase the same home. In 2009, housing was slightly more affordable due to lower interest rates and the same home could be purchased with an annual income of about $68,000.

I have written before about subprime in Saskatoon and the City along with the Government are the enablers.
To get an understanding of what subprime really is in Canada, here is Ben from the great site Financial Insights with a great comment on subprime in Canada:

“(In the US) As a rule of thumb, a subprime mortgage is a home loan to someone with a credit score below 620. But some lenders count loans as subprime even if the borrowers have credit scores of 660 or higher, if the borrower makes a down payment of less than 5 percent or does not document income or assets.“- Source
So does this happen in Canada?  According to CMHC, a borrower needs only a FICO score of 600 to qualify for mortgage insurance of up to 95% of the value of the home if the mortgage is a fixed rate product.  This rises to a whopping 610 if it is a variable product.
Consider also the fact that Canada still has zero down mortgages.  While structured as 5% cash back products, they nevertheless serve the same purpose of allowing homeowners to purchase a home with zero equity as they can borrow the necessary 5% down payment and then pay it off with the cash back when the sale closes, leaving them with zero equity.


We also have stated income mortgages where self-employed individuals don’t have to prove their income.
Taken collectively, these facts certainly cast doubt on the statement that sub prime lending is ‘virtually non-existent’ in Canada.  While perhaps not structured as the ARMs and Alt-As that crashed the US mortgage market, they represent lending standards that are far from conservative.

We're creating... an ownership society in this country, where more Americans than ever will be able to open up their door where they live and say, welcome to my house, welcome to my piece of property. - President George W. Bush, October 2004

With the American Government, Financial authorities and mortgage institutions dismantling barriers in the US and  "helping" people get into home ownership during their bubble period, and the whole world watching the disastrous effects that had, how in the hell is it outcome in Saskatoon going to be any different when the same ideologies and many of the same programs are in place? 

Well, at least Saskatchewan has Potash

With the spring melt forecasted to swamp some farm land in Saskatchewan, resources were hopefully going to fill in the gap that agriculture may leave in 2011.  Now you can count out Uranium.

Uranium market faces rising chaos

The crisis in the uranium market intensified Wednesday as a Canadian acquisition was thrown in doubt and a major producer finally acknowledged that there is a problem.

Adding to the woes was China, which indicated that its aggressive nuclear expansion plans will slow down.

“I think it’s pretty clear than no matter what happens, the demand side of the nuclear equation is going to be less robust than we all thought a week ago,” said Orest Wowkodaw, an analyst at Canaccord Genuity.

The uranium industry is counting heavily on China for future demand — the country has a whopping 77 nuclear reactors either planned or under construction, according to the World Nuclear Association (Russia is second with just 24). While China is almost certain to continue its nuclear growth program, it could move slower, as could the Western world.

Some housing bulls in Saskatoon point to the fact that resources will save our housing market even if the rest of the country has a downturn.  But if you are reading this blog, you know that less than 2% of Saskatoon's working population actually work in mining and commodities have always been boom/bust and always will be.  It is never different this time/here. 

Like I have said before, there is no reason for Saskatoon to have a higher house price to income than 3 times.  The only things keeping the housing bubble alive is consumer sentiment right now which gives them the confidence to load up on debt.  Getting one of our resources kicked in the nuts will affect consumer confidence here.  Until now, consumers were willing to pile head first into loads of debt because of all the sunshine being pumped up our butts from the press.  And the media has done a wonderful job at that.  But once consumers wake up to the idea that Saskatoon is not booming, they will not have the confidence to load up on debt like before and then the housing bubble pops.

Macleans : The Canada Bubble

Macleans has a great article titled "The Canadian economy is booming and investors are flooding in.Is it too good to be true?"

I don't have time to dissect it, but here are some main points to Canada's housing bubble,

Bob Haber and David Madani are foreigners who have spent a lot of time studying Canada. Haber, an American, was chief investment officer at fund giant Fidelity Canada for 12 years and tracked Canadian stocks from his base in Boston. Meanwhile, Madani, a New Zealander, spent a decade with the Bank of Canada as a forecaster and policy analyst. Both are outsiders with an acute understanding of the inner workings of the Canadian economy.That is where the similarity ends.

But the division of opinion has to do mostly with the two particular engines that have driven our success—resources and real estate. Both are cyclical. Prices rise and fall as supply and demand shift. Only that’s no longer seen to be the case in Canada. Never mind that some experts now say the surge in commodities exceeds anything we’ve seen in two centuries, or that by many measures the housing market sits at multi-decade highs. Those who see good times ahead are convinced the phenomenal gains reflect a fundamental shift in the global economy. In short, it requires one to ascribe to the four most dangerous words in the world of investing: this time it’s different.


But the housing boom has also gone hand in hand with Canada’s household debt boom. Over the last decade, Canadians have doubled their consumer and mortgage debt loads, to more than $1.5 trillion. For every dollar of disposable income households earn, they now carry $1.50 of debt, a level higher than in the U.S. That’s a worrying stress point that could undo the high-flying Canadian economy if it hits turbulence—in exactly the same way heavy debt loads left American households exposed. “Canada’s success story is uncomfortably similar to the U.S. success story,” says Robert Shiller, a professor at Yale University who accurately predicted the real estate crash in the U.S. “It might be offensive to Canadians, but we’re like two peas in a pod.”

 Canada’s debt picture is forecast to improve over the next few years, but for that to happen, the commodity and housing markets must stay strong. If resource prices plunge, Canada could be left yet again with structural deficits similar to the 1990s.

Investors would be hit hard, too. The Canadian markets have never been more exposed to the resource sector. The S&P/TSX Composite is four times as resource-intensive as Canada’s overall economy, according to CIBC World Markets. If commodity prices tank, the energy and mining companies that powered returns over the last decade could act like an anchor on investor portfolios.

But it’s Canada’s housing market, and those who have overextended themselves with massive mortgages, that stand to lose the most. The housing sector has become inextricably tied to the broader story of Canada’s elevated standing in the world. It’s a powerful and psychological link, says Shiller, who explored how bubbles form in his book Irrational Exuberance. “Bubbles are mediated by price increases and new-era stories,” he says. Any time you hear talk of a new era—such as Canada becoming the envy of the world, or that soaring commodity prices are here to stay—and it’s used to justify rising prices, it’s a good sign you’re in bubble territory. If a commodity bust does occur, one of the key foundations of the housing bubble would crumble along with it.

Saskatoon Home Listings: the 2.1 tipping point

A great post from America Canada Blogspot from last year that coinsides with a post from last week.

New listings-to-sales ratios
Descriptions of letters as depicted on the chart above:

A: Late 1989 - inventory increases while sales remain strong. New listings-to-sales ratio hits 2.1.  Ratio then explodes to 3.8 in early 1990. Housing takes steep downturn that lasts nearly a decade.

B: Between 1998 and 2002 listings decrease while sales strengthen. New listings-to-sales ratio hits 1.1 signifying the beginning of the longest housing boom in Canadian history.

C: By April, 2008 the new listings-to-sales ratio hits 2.1. The housing boom is declared dead. Prices collapse 11% by October (and the ratio hits 2.6 a few months later).

D: Interest rates are cranked lower in the recession (yes housing was saved by the recession, not caused by it). Listings are reduced while sales rebound. By March 2009, the new listings-to-sales ratio hits 1.4. The average Canadian home price increases by over 20% in the next 9 months.

E: April: new listings-to-sales ratio moves above 2.

Canada's real estate - 1990 versus 2010

1990

• Dollar for dollar homes were less affordable due to higher interest rates and shorter amortizations
• Only 62.6% of Canadians owned their home (ref) 
• Unemployment at 7.8% and rising (ref)
• Issues of CMHC NHS mortgage-backed securities totaled $5.3 billion in the four years between 87-90 (ref) 
• Inflation at 5% (ref)

2010

• Debt levels today are in real terms 2.5 times as high as they were in 1990 (ref)
• Inflation-adjusted national average home price is 55% higher today than in 1990 and 84% higher than in 1999 (ref1) (ref2)
• Home ownership rates are at record highs (est. 70% 2010 as it was 68.4% 2006) (ref)
• CMHC has extended government-backed insurance to anyone wanting to buy, ensuring that the pool of buyers had been maximized (ref)
• Global financial crisis, unemployment at 8.5% and stabilizing (2009) (ref)
• Debt-to-assets ratio in Canada is the world's worst (during a global credit bubble no less) (ref)
• Household formation to slow as household size begins to stabilize (was 3.5 people per household in the mid 70s and is now around 2.46)
• Domestic population growth slows/contracts (completely reliant on immigration now)
• Deflation is king (ref1) (ref2) 
• Huge demographic shift as baby boomers retire; there will be a need to extract cash from real estate equity - I personally doubt there will be enough buyers left to fund the desired level of extraction
• Issues of CMHC NHS mortgage-backed securities in the four years between 2006-2009 totaled over $423 billion. (ref)

Compare the top chart to Saskatoon's

Taking the same idea from America Blogspot.  Sales to new listings from 2006 to early 2008 were mostly under 2 and that is where the prices jumps were found.  In the middle of 2008 to the end of that year, sales to new listings went above 2 and prices did come down.  Since then the ratio of sales to new listings has come down and prices have stayed buoyont at best.  At the start of 2011, sales to new listings could challenge 2008.
*While not exact and there are many variables that can affect the outcome, this is one way of measuring the housing market.

Could Japan default? Global and Uranium stocks take severe beating

This does not have much to do with the Saskatoon real estate bubble directly.  But indirectly, the ramifications of Japan defaulting are mind boggling. 

A major economic power, Japan has the world's third-largest economy by nominal GDP and by purchasing power parity. It is also the world's fourth largest exporter and fifth largest importer.  Japan's debt is now over 200% of it's GDP.  For comparsion, Italy's debt to GDP is 119%, Canada is 38%.

With an aging population, Japan's demographics are the oldest of any industrialized country.  And having not recovered from the asset bubble from over 20 years ago, Japan was already in for a rough ride economically speaking.  Now with what happened on Friday with the earthquake, tsunami and nuclear meltdowns, will this push them over the edge to default?

Not being a tin foil hat type of guy here, just something that I was thinking about today.  Last year Forbes talked about the possibility of Japan defaulting down the road.

Japan, at the moment, looks like it is falling apart. Analysts, for instance, are questioning whether Tokyo will be able to finance its debt this year. Some are even thinking the world's second-largest economy could go bankrupt by 2011.

If Japan were to default or restructure their debt, the last thing I would want to have, is a load of debt.

Japan Crisis slams global markets

The European selloff came after Tokyo’s Nikkei 225 index lost an astounding 10.5 per cent Tuesday, taking the two-day selloff to more than 16 per cent. Tuesday’s fall in Tokyo was the third-biggest drop on record. At one stage the Nikkei was down almost 15 per cent. The plunge triggered waves of selling elsewhere in Asia. In Hong Kong, the Hang Seng index finished down 3.2 per cent.

Then Europe got hit, with nuclear power operators and reinsurers taking more blows. Areva, the French nuclear technology giant, was down almost 9 per cent in morning trading in Paris. Tuesday’s drop takes Areva’s one-week loss to almost 20 per cent.

Uranium shares get hammered

Shares of uranium mining companies plummeted on Monday amid fears that the nuclear disaster unfolding in Japan could deal a major blow to the uranium market.
Shares of industry giant Cameco Corp. were down 15% in early afternoon trading. Uranium One Inc. fell 27%, Denison Mines Corp. fell 24%, and Mega Uranium Ltd. dropped 28%.

Whether you are for nuclear power or against it, the accident in a highly developed nation such as Japan will make Governments around the world rethink nuclear power.

TD Bank: Hard landing in China would deal significant blow to Canada and Saskatchewan

I written before about the possiblility that China could crash and how it could affect Saskatchewan. Today TD has a report "Exploring what a "hard landing" in China would mean for the Canadian  economy.

The main conclusion is that the Canadian economy would be quite vulnerable.Given Canada’s modest exports to China, the direct impact on trade would be limited. However, there would be enormous indirect effects. First, a dramatic slowing in China’s economy would be a blow to the world economy. Indeed, a global recession would be a material risk. Second, China has had an enormous impact in raising commodity prices in recent years. A hard landing in China would spark a substantial commodity correction.

The risk scenario presented is one where China’s economic growth falls to 5% in 2012 and then edges back up to 7% in 2013. Under this scenario, world economic growth would be almost cut in half to 2% and commodity prices could fall by 30-40%. This would shave 1.0 to 1.5 percentage points from Canadian economic growth. It would also impact commodity-rich provincial economies the most. The analysis shows that Canada’s economic fortunes are deeply tied to developments in China.

Pulling it all together, a hard landing in China would deal a significant blow to Canada’s economy. Canadian export volumes would be negatively impacted. However, the second-round effects would quickly accumulate and make matters worse for Canada. A swift decline in commodity prices would dramatically impact Canada’s terms of trade and aggregate income, with these impacts being especially pronounced among resource-based regions of the country.

TD Bank is not the only one saying that China could have a hard landing.  The Conference Board of Canada wrote a report a couple of months ago,What happens to the Global Economy if China Slumps?" In this quote they compare Japan of 1990 to China now.

Japan accounted for close to 20 per cent of the global economy after its economy recorded average annual growth of between 8-10 per cent in the 1970s and 1980s. At the time, many experts predicted that Japan would eventually overtake the United States as the world’s largest economy within a couple decades (sound familiar?). Few doubted that a collapse in Japanese growth would be a disaster for the global economy. Well, the “unthinkable” happened as the bursting of a real estate bubble and deflation caused the Japanese economy to average growth of less than 1 per cent annually throughout much of the 1990s and 2000s. By 2010, the Japanese economy was less than one-third the size of the US economy!
Interestingly enough, the global economy generally experienced solid growth throughout much of the 1990s despite the disintegration of the Japanese economy.

Mish has mentioned that China will have a hard landing 

Eight Problems Facing ChinaHot money inflows
Huge property bubble
Massive increases in money supply, much of it property speculation and building of unneeded capacity
Currency manipulation charges from the US and potential trade wars
Unsterilized trade imbalances fuel inflation
Slowing Europe
Dearth of Jobs for new graduates
Potential social unrest

Many others have said China will crash

James S. Chanos built one of the largest fortunes on Wall Street by foreseeing the collapse of Enron and other highflying companies whose stories were too good to be true. Its surging real estate sector, buoyed by a flood of speculative capital, looks like “Dubai times 1,000 — or worse,” he frets. He even suspects that Beijing is cooking its books, faking, among other things, its eye-popping growth rates of more than 8 percent.

Harvard economics professor Ken Rogoff is throwing some serious bear punches again.

For China not to crash would be an extremely unusual historical precedent,

“Their response to the latest financial crisis clearly raised the risk that they have a debt-fueled bubble in the economy,” said Rogoff, who in 2008 predicted the failure of big American banks.

Over 60% of China's economic growth has been fueled by construction and their real estate bubble will eventually pop.

So how does this affect Saskatchewan?Just over 60% of Saskatchewan's exports go to the US, while the Canadian average is about 80%.  So the slowdown in the US has not affected Saskatchewan as much as the rest of the country.  A slowdown in China would have a big ripple affect that would be felt around the world with these 10 US states in bigger trouble than they already are.  Out of all the provinces, Saskatchewan would be hit the hardest because China is the second largest trading partner after the US in terms of Countries. Just for reference, Saskatchewan GDP in 2009 was 56 Billion.  In the last few years, exports have pretty well doubled to China. 

While jobs would be impacted in the commodity sector, the biggest hit would be in consumer confidence for Saskatchewan residents.  Then people would finally wake up and find that a housing market like Saskatoon that takes over 4 times average income for an average house is just plain nonsense, especially when historically, that ratio has always been under 3.  With a China crash comes the bursting of Saskatoon's real estate bubble.

Saskatoon Real Estate Bubble Analysis

Watch these two excellent videos about economic bubbles throughout history and then look at the graphs about Canada's and Saskatoon's housing bubble.

It is not different here.

Think resources will save Saskatoon's real estate market from collapsing?

A great article from Macleans

The above chart is from this week’s magazine story. It tracks the running 10 year annual returns in overall commodities. Through wars (both hot and cold), easy credit booms and even the U.S. industrial revolution, any time the commodity market has gone through a period like it just has, a nasty spill invariably followed. With the TSX down nearly 680 points or 4.7 per cent this week on softening commodity prices, there’s an argument to be made we’re cresting the peak once again.

Most people I talk to about housing believe that even if Canada has a housing bubble and it busts, Saskatoon will fair better because of Saskatchewan's resources.  What they do not realise is that under 2% of the working population in Saskatoon actually work in mining and energy.  And secondly, what would happen to commodities if China crashed?  China has a huge real estate bubble making the US housing bubble look like child's play relative to GDP.  Throw in millions vacant homes, rising inflation, social unrest ala Middle East and things get interesting for commodities.

Back to the Macleans article,

The real estate sector has benefited in a huge way from strengthening resource prices, thanks to low unemployment and higher incomes, not to mention the  overall sense of invulnerability that’s come to pervade the Canadian mindset. But to truly appreciate the stunning heights Canadian house prices have reached, history is helpful once again. For our story we spoke with Robert Shiller, the Yale professor famous for developing the Case-Shiller House Price Index in the U.S. which tracks prices going back to 1890. In the absence of solid historical Canadian data, Shiller suggested “an exercise” of fusing his index with the Canadian Teranet-National Bank House Price Index, on the assumption that house prices in the two countries behaved relatively similar prior to 1990.

Decide for yourself how much to read into the above charts. I’d just say that we’d all be wise to remember one thing: both resources and real estate are commodities, and rule #1 in commodities is what goes up, eventually comes down.

Saskatchewan boom? Saskatoon boom? Where? Unemployment rate is up

Stats can is out today with there monthly labour report.

Saskatchewan was the only province with a notable decline in employment in February, down 3,300. While this pushed the unemployment rate in the province up 0.3 percentage points to 5.7%, it remained among the lowest in the country. The decline in the number of workers leaves employment in the province at the same level observed in February 2010.

Saskatoon's unemployment rate increased to 5.5% from 5.3%.

One month a trend does not make, but everyday sunshine is being pumped up our butt's about the so called boom.  As far as I can see, there is no wage boom, and that is why this boom based on spending and credit will bust.

In my post last month" Is Saskatoon booming? Mayor says yes, CIBC says no" shows that Saskatoon is in the middle of the pack as an economic driver in the country.

Is your butt hurting yet?

Realtor requires fresh approach

Today's Star Phoenix has an article titled "Housing requires fresh approach" written by a realtor and of course the Star Phoenix won't allow comments.

Let's be sure we understand what really is the problem. The issue is broader than just "affordable" housing. Affordable is a moving target, more of an advocacy term than a useful description. The underlying issue is housing supply.

The number one problem is affordable housing.  And that is for everyone, not just low income.   There is absolutely no reason for the average home costing the average family more than 4 times income, when it is historically under 3 times.  Rents were fairly priced 5 years ago, but rents have increased 50% while low income wages have increased 20% in that same time period.   I do agree on the housing supply issue and it ties into yesterday's post of how land use regulation was one of the reasons to cause the housing bubble here.

It's also about more than the price of a home. House prices are up, but from a very low base. For decades Saskatchewan homes were low-valued, lagging behind housing prices in Manitoba, Alberta, most other provinces and the national average.

For starters, you can only compare a housing market with its past history.  You can not compare a housing market in Saskatchewan with one in Alberta because the fundamentals in each place are different.  Wages, employment, debt, type of economy, inflation, etc. 
Secondly, Saskatchewan was not low valued before 2006, it was priced right.  Affordable housing is 3 times income or 30% of monthly income.  Saskatoon for example, an average house price was 160k in 2006 and average household income was about 60k putting house prices in the affordable range.  In 2006, 50% of all rental households payed 30% or more of their income towards monthly rent.  So based on incomes and rents house prices in 2006 were priced right.
And the thought of being undervalued is truly bunk.  For some funny reason, now we can't say we are undervalued to many other countries who have now experienced their housing bubbles bust.  We used to be able to use that one.

Comparing price, income required to qualify, and percentage of income needed to pay the mortgage and utilities on standard condo, bungalow and two-storey units, Saskatchewan consistently comes in toward the low end or near the middle of a group that includes Ontario, the four western provinces and the national average.

Saskatchewan's affordability is higher than Alberta and Manitoba, but lower than Ontario and the national average by a hair, quite a bit lower than BC.
Here is the RBC Affordability study he talks about.  The study is based on 25% down over a 25 year mortgage at a five year fixed rate which includes principal, interest, taxes and utilities.  In the upcoming graph, you will see what 5% down for a bungalow looks like in Saskatchewan.

As we can see, with 5% down, an average bungalow with an average buyer would consume 50% of income.  Hardly affordable housing.  And if we compare now to the nineties, savings rates have plummeted while debt loads have doubled and this is with interest rates at near all time lows.  No mention of this from this realtor. 

The value of a home is up in this province, but our housing remains very reasonably priced.

Really?  Housing is Saskatchewan is very reasonably priced?  Maybe compared to Hong Kong or Australia, but housing in Saskatchewan is not reasonably priced when measuring incomes and rents.  And incomes and rents are what provide long term growth sustainability for a housing market.

Saskatchewan's major problem is the availability of apartments, suites and other rental units. It suffers from the lowest per-person supply of rentals in Canada, except for Newfoundland and Labrador.

Here I totally agree, but the incentives for building have gone to home ownership building and not rentals.  In the story last night on CTV, Saskatoon's population has increased a total of 5% in the last 5 years, but because of condo conversions, rental supply has decreased 16%.  As I have said before, Saskatoon is building too many units for home ownership and very little for rentals.  Which is totally opposite to what is needed when looking at the type of population growth happening here.  It is fine now with house prices stable, but when the housing bust hits here, we will find out who should not have been 'home owners".

I do agree with most of what is left of the article and I especially agree that there should not be rent controls.  The less the Government is involved with markets, the less damage will be done.  I usually do not harp on realtors, but this guy really has no clue on affordability, or is just spinning things to make them look good to keep the game of buying and selling homes going on.  Either way, I felt I should write about it. Oh, he is the vice president of Saskatchewan Realtors.