The ownership society, are we putting too many people into home ownership?

This was a post from Ben Rabidoux of the economic analyst last February when Saskatoon doled out free down payments so people could get into home ownership.  I had to revisit this post because I see that Saskatchewan is back at it with a program that aims to help with a downpayment First you need to read Ben's post and then I will comment on the new program.

Ownership society and the American/Canadian dream
''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.
Sometimes it's worth remembering that humans have exceptionally short memories....and we are terrible students of history. It bears noting that the current love affair with real estate (and associated stigma with renting) is a new phenomenon within the context of even the last half century. It hasn't always been this way. One need only look at our record high home ownership rate in Canada to see this.

Somewhere along the line we stopped looking at a house as a place to live, separate from our savings and wealth, and instead we embraced the house as the new source of wealth at the expense of what used to be considered savings. Simultaneously, we developed a collective notion that every person ought to own their home...that it is a fundamental human right.
Even more significantly, some western nations (particularly in the English speaking world) made it a matter of public policy to encourage home ownership. Here in Canada, CMHC was created for this very purpose. The benefits of high home ownership rates to a society are often purported to include social stability, higher educational achievement, increased civil participation, and lower crime rates. And yet even these arguments are questionable once we start comparing them to the actual experience of other countries with notably lower home ownership rates: France, Denmark, Netherlands, Germany (all around 50%).

The negative economic impacts of the home ownership society
In fairness I actually believe that there are social benefits to home ownership. My concern is that government involvement in promoting home ownership has potentially negative economic impacts. Several papers, most notably by the OECD, have linked high home ownership rates with lower labour mobility. The natural repercussion is higher and more persistent unemployment during recessions in countries with higher home ownership rates. But the economic dangers don't stop there.
It's worth noting that it's widely accepted among those who study the US housing meltdown that one of the precipitating factors to the fiasco was government involvement in encouraging home ownership in the years leading up to the crisis. Government sponsored entities like Fannie Mae, Freddie Mac, and the Federal Home Loan Banks all funded or guaranteed trillions in mortgages. Tax policy was aimed at promoting home ownership via interest deductability (in Canada we have tax free capital gains on primary residences which serves a similar purpose). But arguably the greatest policy blunder was the Community Reinvestment Act which had the following purpose:
"The Community Reinvestment Act is intended to encourage depository institutions to help meet the credit needs of the communities in which they operate, including low- and moderate-income neighborhoods"

Much has been written both defending and attacking the CRA for its (potential) role in the housing crisis. It's well worth reading some of it. But is it relevant to us in Canada?
For that let's turn back the clock a little and revisit a speech given by Laurence H. Meyer who at the time was a governor of the US Federal Reserve. The speech was given at the 1998 Community Reinvestment Act Conference of Consumer Bankers and was titled 'Community Reinvestment in an Era of Bank Consolidation and Deregulation'. Some snippets:
"The Community Reinvestment Act has contributed to this increase in the availability and affordability of credit. At a minimum, CRA has helped spur the development of new tools and techniques to help serve credit needs that in the past banks were either unable or unwilling to serve. At its best, CRA also has stimulated competition for loans and banking services in low- and moderate-income communities"
"One quite interesting development is use of these technologies by banks to develop and market new credit programs that are specifically targeted toward low- and moderate-income consumers. New mortgage products, for example, that employ low or no down payments and up to 100 percent loan-to-value ratios..."
We know how that ended.

The issue for me is that we know that negative equity is the primary motivator for mortgage default, be it in a recourse or non-recourse jurisdiction. If banks want to take risks by giving no money down mortgages to customers, ultimately that's their decision. Of course the banks understand the risk and would never do it without explicit government guarantees on the mortgages.
But what has me shaking my head is similar boneheaded government initiatives in our own country.

As the Star Phoenix is reporting today, there is a program that aims to help with down payment

A new housing program is targeting would-be homebuyers who need a hand putting together a down payment.
"We're aware that the single biggest barrier to entry-level housing in our province tends to be the down payment. People can typically afford the rent that's required and may make ends meet if you will, but accumulation of the down payment tends to be one of the reasons that prohibits families, in particular young families, from becoming homeowners," said Mark Lane, chief operating officer of Affinity Credit Union.

Down payment loans will be provided to a maximum of five per cent of the purchase price of a HeadStart home, repayable over five years at the prime rate.

The target price for the homes is to be at or below the average MLS for similar homes in the respective municipalities, which is expected to range between $180,000 and $300,000.

There can be a host of problems as Ben has already mentioned. I ask:
If these people can not save for a down payment, how in the world can they pay for any repairs, or any unexpected expenses? New home usually means new furniture, where do they get the funds for this? Credit cards? If they just make ends meet with these all time low interest rates, what happens when interest rates go up? They can not save for a rainy day, retirement, kids education or whatever and we are going to saddle them with a huge debt load and this is responsible from both ends? What happens if there is a job loss,or the boom ends? If they are living cheque to cheque, they only way they get ahead is if house prices increase.  If house prices plop, these people are screwed as this puts them into negative equity nevermind the additional costs of selling the property if this becomes an albratross around the neck. You can see how this could lead to more unsustainable debt in the form of credit cards and loans. Other similar programs in Saskatoon have house price to income ratios between 4.3 and 5.1.  This is unaffordable and simply irresponsible as these people are very vulnerable.

In reality people who can not save money each month, most likely have no business owing a home.  Heck, there is a reason the federal government got rid of 0 down payments a couple of years ago because there are a number of risks with 0 down payments.( yeah, the banks still give 0 down and cash back mortgage through the loop hole, but that is another story)

If the banks and credit unions think this is such a sweet program, why don't they give out these loans with no CMHC insurance.  Let the banks and credit unions hold these mortgages on their books.  But then you would see this program shut down pretty darn fast.

Desjardins: More mortgage credit curbs "likely, and perhaps even desirable"

Desjardins wrote an article last week "Canadian real estate market: Some regions could slow or even contract"

The real estate market’s movement is clearly a leading issue for Canada’s economy. As we said earlier, the government has already made three attempts to curb the real estate market’s advance by tightening mortgage lending conditions. The goal is of course to find the right mix to slow the market without making it collapse. However, the third series of measures was announced nearly a year ago now, and we must conclude that the tightening introduced to date has not slowed the market enough. Under these conditions, it is likely, and perhaps even desirable, that the federal government will shortly announce a fourth series of measures to further limit mortgage credit. Among other things, the government could be tempted to once again raise the minimum down payment on new loans (it went from 0% to 5% in October 2008).

No $&*%  Sherlock!  Total Canadian household debt will hit $1.6 trillion in Jan 2012 with consumers such as ones in Saskatchewan spending credit like drunken sailors.

This is how year over year mortgage credit looks like over the last 36 months in Canada.

1/1/2009	9.70%	1/1/2010	6.60%	1/1/2011	7.50%
2/1/2009	9.10%	2/1/2010	6.80%	2/1/2011	7.30%
3/1/2009	8.10%	3/1/2010	7.10%	3/1/2011	7.90%
4/1/2009	8%	4/1/2010	6.70%	4/1/2011	8%
5/1/2009	7.40%	5/1/2010	7.30%	5/1/2011	7.60%
6/1/2009	7.30%	6/1/2010	7.30%	6/1/2011	7.30%
7/1/2009	7.10%	7/1/2010	7.10%	7/1/2011	7.20%
8/1/2009	6.80%	8/1/2010	7.30%	8/1/2011	7.30%
9/1/2009	6.70%	9/1/2010	7.20%	9/1/2011	7.20%
10/1/2009	6.90%	10/1/2010	6.90%	10/1/2011	7.50%
11/1/2009	7.20%	11/1/2010	7.20%	11/1/2011	7.70%
12/1/2009	6.50%	12/1/2010	7.10%	12/1/2011	7.40%

Notice that year over year mortgage credit is strongest in 2011.  More mortgage credit curbs are definitely, "likely, and perhaps even desirable.

Here is how the mortgage rule changes and the average Saskatoon house price looks like over the last decade.

While the loosening of mortgage rules over the years has helped inflate house prices, it is not the only reason. Irrational exuberance is one main reason why prices launched and it the main reason why prices have not crashed as the long term fundamentals of house price growth are not why house prices are so high in Saskatoon . But easier lending has helped inflate the bubble to a higher level than if mortgage rules were never changed starting in 2003.  The reason for this is when affordability is stretched and consumers see an asset rising in value, they will do whatever it takes to get it that asset.  As Mark Carney has mentioned before, the typical first time buyers puts down 5%.  And many of these buyers get mortgages at or close to their maximum affordability.

As we can see here, a bigger percentage of the population was willing to buy a house in 2011, when the average house price was over $300,000, compared to 2006, when the average price was almost half the cost. 
 

Lenders increasingly liberal on mortgages, credit lines, Canada regulator warns

An article from Bloomberg Canada’s Subprime Crisis Seen With U.S.-Styled Loans: Mortgages
is showing what I have been saying all along that Canadian lending system is not as prudent as the media and politicians have led us to believe. While I believe that Canada will not a have US type disaster, a Canadian type disaster is "baked in".

Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the country’s banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.
“It just speaks to the general easing in lending standards, which has contributed to a booming housing market,” said David Madani, an economist in Toronto with Capital Economics, which estimates that Canadian housing prices may fall 25 percent over the next few years. “The problem is sort of baked in now, so I’m not sure there’s a way to prevent a weakening of the housing market.”
Canada’s housing market has surged since the 2009 recession as near-record low mortgage rates fueled prices and home purchases, unlike the U.S., where sales and values have fallen since 2007. Bank of Canada Governor Mark Carney has said record consumer debts are the greatest domestic threat to the country’s financial institutions, even as the central bank has held the benchmark rate at 1 percent since September 2010.

Most Vulnerable

While there are differences with U.S. mortgage practices, the Canadian housing market is displaying classic signs of a bubble, with a run-up in prices, high ownership rates and overbuilding, said Madani of Capital Economics.
“The biggest concern is taking extreme levels of debt for those who are most vulnerable,” Carney told reporters Jan. 18. The bank estimates the proportion of Canadian households “highly vulnerable” to an economic shock - those with a debt service ratio of 40 percent or more - remains above the average of the past decade. Canadians’ debt reached a record 153 percent of disposable income in the third quarter, according to Statistics Canada data.
Most mortgages in Canada are funded through deposits, followed by mortgage-backed securities and bonds guaranteed by Canada Mortgage and Housing Corp., a federal agency known as CMHC.
CMHC had an outstanding balance as of Sept. 30 of C$132 billion ($132 billion) in mortgage-backed securities and C$202 billion in Canada Mortgage Bonds. The agency’s financing arm issued C$41.3 billion in debt last year, up from C$6.5 billion in 2001.

No Documentation

U.S. nonprime mortgages - which include both subprime and “alt-A mortgages” - accounted for slightly more than a third of originations at the peak of the market in 2006, according to Inside Mortgage Finance, a Bethesda, Maryland-based company that tracks residential mortgages. Loans that required little or no documentation of income accounted for 46 percent of all U.S. subprime mortgages that year, according to a Credit Suisse Group AG report at the time.
While there is no common definition of subprime mortgages in Canada, the proportion of such loans has probably fallen from about 5 percent of the market since the financial crisis, said Benjamin Tal, deputy chief economist at CIBC World Markets in Toronto.
“If you look at the overall story and marginal borrowers, it’s a very small segment of the market,” said Tal.

Stress Testing

OSFI head Julie Dickson said in a Sept. 26 speech the agency is “very focused” on mortgages and home-equity lines of credit, which allow individuals to borrow against the equity in their homes.
In a Nov. 2 letter to Canadian financial institutions, the agency encouraged them to follow mortgage underwriting principles recommended by the Financial Stability Board, including limits on the ratio of loans to property values and regular stress testing of mortgage portfolios. OSFI regulates Canada’s biggest banks, as well as smaller loan providers and credit unions.
Home buyers usually qualify for “non-income-qualified” mortgages because they make a large downpayment, according to the August 2011 analysis by OSFI. Lenders typically waive the requirement that buyers prove their income, OSFI says, which identified such loans on a list of issues to be considered by its “emerging-risk committee.”

Slackening Standards

Home-equity credit lines without income verification have become “an increasingly popular option,” OSFI says in the analysis, adding that they “pose greater risk” than mortgages because the credit lines are offered at floating interest rates.
Slackening lending standards were one of the early warning signs of the subprime crisis in the U.S., said Joshua Rosner, managing director at research firm Graham Fisher & Co. in New York. “U.S. history should be a guide to the irrationality of that practice,” he said by phone, referring to granting mortgages to borrowers without verifying their income.
By definition, such mortgages should be considered “nonprime,” added Rosner, who warned of the risks of a U.S. housing crash as early as 2001.
“As part of OSFI’s regular supervisory process, OSFI identifies areas that may require an increased level of monitoring,” OSFI spokesman Brock Kruger said in an e-mail, adding that regulators in many other countries have stepped up monitoring and oversight of residential mortgages and home- equity lines of credit.

Read more of this article here Canada’s Subprime Crisis Seen With U.S.-Styled Loans: Mortgages

And if you do not believe that subprime is alive and well here in Saskatoon and Canada
Subprime is alive and well in Saskatoon Part 1  Part 2, Part 3 
Subprime competition heats up among Canadian lenders
And from Mortgage Brokers

Equitable Trust is pushing into Saskatchewan, a move brokers hope will lower interest rates for their subprime clients at the same time encourage other alternative lenders to loosen up qualifying terms.We’re in a good market here and everybody knows that, but overall, there is a demand for subprime from people who just need a break....

We’ve chosen Saskatoon and Regina as our next ports of call following successes we’ve had in the last couple of years in B.C., Alberta and Manitoba in the single family business.

Yep, people just need a break!  I believe the stage is being setup for more mortgage tightening.
And I definitely echo Madani's comments.
More from Madani: How bad could it get in Canada's housing market?
Capital Economics: 25% drop in Canadian house prices

A look at CMHC Mortgage Rule Changes Along With Saskatoon's Real Estate Market Over The Years

Let's take a quick look at how CMHC mortgage rule changes and the average house price in Saskatoon have fared over the last decade.

Here is a quick list of CMHC down payment requirements and max amortizations over the years.
1954- In 1954, the federal government expanded the National Housing Act to allow chartered banks to enter the NHA lending field. CMHC introduced Mortgage Loan Insurance, taking on mortgage risks with a 25% down payment
1954-1990- Somewhere along this time, 10% became minimum down payment.
1992- 5% was introduced as a trial run, then officially accepted in 1999.
2001 – Genworth (GE Capital) enters the Canadian mortgage insurance market
2001 – CIBC offered below-prime mortgages.
Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down
Sep 2003 – CMHC: 5% down, 25 yr amortizations, removed all price ceiling limitations. Now any mortgage would be insured regardless of the cost.
Mar 2004 – CMHC: Flex-Down product allows 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured)
Mar 2006 – AIG enters the Canadian mortgage insurance market
Mar 2006 – CMHC: 0% down, 30 yr amortizations (Genworth announces 35 yr amortizations)
Jun 2006 – CMHC: 0% down, 35 yr amortizations, interest only payments allowed for 10 years
Nov 2006 – CMHC: 0% down, 40 yr amortizations, interest only payments allowed for 10 years
Oct 2008 – CMHC: 5% down, 35 yr amortizations, investors need 5% down.
April 2010- CMHC did some minor tightening of their guidelines, investors need 20% down.
March 2011- CMHC only allows 30 yr amortizations, restrictions on pulling equity out

This is how mortgage rule changes and Saskatoon home sales looks like over the last few years

Here is how home sales per 10,000 people looks like over the last decade. 

Here is how the mortgage rule changes and the average Saskatoon house price looks like.

While lax lending is just one of many reasons why there is a housing bubble, and lax lending is a fairly large component of the bubble, I believe even if mortgage rules were never expanded from 5% over 25 years with a price ceiling to what we have today, Canada and Saskatoon would still have a housing bubble. Not as big mind you, but what we need to understand, is what lax lending did, was amplify the housing bubble from a smaller bubble into a bigger bubble. Max amortizations of 30 years is not much more than 25 years, but I believe the biggest increase of "lax lending" was by removing the price ceiling.  Add it all up and lax lending allowed marginal buyers to borrow more money and many of these buyers bought at or close to their maximum affordability and this helped push up house prices.  Because of global real estate fever, it would not have mattered if it was 25 years or 40 years, buyers would still have been after "the prize" and would have borrowed to their max.  The result of this is now in plain sight as almost daily we hear that " household debt in Canada is the number one domestic problem" in regards to the Canadian economy.  Household debt is near $1.6 trillion dollars, leaving Canadians with a household debt to income ratio of 153%, a household debt to GDP ratio of 94% and which both are growing.  These ratios are too high for many reasons and the growth is unsustainable as many Canadians will find out the hard way.  I will touch upon this in a post " why a soft landing in the Canadian housing market is highly unlikely."

While I believe more mortgage tightening is definitely needed in the Canadian housing market, to pin the problem of the housing bubble solely on CMHC is wrong.  There are many other variables ( buyer psychology, low rates, the positive feedback loop with house prices, risk aversion from other asset classes, and other government policies, stimulus and subsidies) as to why the housing bubble was blown up in the first place and they are still alive and well today.  But because people do not buy homes, people with mortgage buy homes, CMHC does have the power to make the housing market sustainable and affordable once again.  Instituting a price ceiling like there was in 2003 would do this.  Will they?

Total Canadian Household Credit Hits $1.595 Trillion, Sask. Consumers Spending Like Drunken Sailors

As I have said before, total Canadian household credit most likely passed the $1.6 trillion dollar mark by about the 20th of January 2012.  Today we have confirmation of debt numbers as of the end of Dec 2011 from the Bank of Canada.

Total household debt was at $1.595 trillion
Consumer debt was at $488 billion
Mortgage debt was at $1.107 trillion

Consumer debt growth growing at 3% year over year, is not really the problem, ( unless you are living in Saskatchewan, where consumers are "spending like drunken sailors" with retail sales up 12%, year over year, while the average wage is up 5% year over year) the problem is overall mortgage debt growth in Canada as it is still running over 7% year over year at 7.4%.

This is how year over year mortgage debt growth looks like over the last 3 years. 

1/1/2009	9.70%	1/1/2010	6.60%	1/1/2011	7.50%
2/1/2009	9.10%	2/1/2010	6.80%	2/1/2011	7.30%
3/1/2009	8.10%	3/1/2010	7.10%	3/1/2011	7.90%
4/1/2009	8%	4/1/2010	6.70%	4/1/2011	8%
5/1/2009	7.40%	5/1/2010	7.30%	5/1/2011	7.60%
6/1/2009	7.30%	6/1/2010	7.30%	6/1/2011	7.30%
7/1/2009	7.10%	7/1/2010	7.10%	7/1/2011	7.20%
8/1/2009	6.80%	8/1/2010	7.30%	8/1/2011	7.30%
9/1/2009	6.70%	9/1/2010	7.20%	9/1/2011	7.20%
10/1/2009	6.90%	10/1/2010	6.90%	10/1/2011	7.50%
11/1/2009	7.20%	11/1/2010	7.20%	11/1/2011	7.70%
12/1/2009	6.50%	12/1/2010	7.10%	12/1/2011	7.40%

Notice that mortgage debt growth was highest in 2011.  Like I have said before, those mortgage rules over the last few years have had little bite. With fixed mortgage rates hitting all time lows in January, and some places across the country reporting "busier activity" in regards to real estate, I am expecting mortgage debt growth to hit over 8% in January.  Unless a "Lehman type" event like a Greece default happens, I would not bet against more mortgage tightening if mortgage debt keeps growing faster than the Feds want.

Macleans: What happens when Canada’s housing bubble pops?

Macleans has a "soft landing" scenario in their housing bubble piece  What happens when Canada’s housing bubble pops?

A few days ago, Bank of Canada governor Mark Carney released another alarming, albeit muted, warning shot about the state of the Canadian real estate market. Some properties in Canada are “probably overvalued,” the central banker said during an interview with CTV. Last week Finance Minister Jim Flaherty hinted he is also worried about housing: “We watch the housing market carefully and we are prepared to intervene if necessary,” he said.
So, are we literally living in a bubble? And when it bursts, will it get as ugly as it did south of the border? Here’s where the most recent speculation is pointing:
Yes, we’re in a bubble, and it will probably pop soon.

The signs of a bubble are unequivocal. At 13 years and counting, Canada’s current housing boom is one of the longest-lasting in the world, the Bank of Nova Scotia noted in a recent report. The real price of Canadian homes has increased by 85 per cent on average since 1998. Prices stagnated in 2008, at the height of the financial crisis, but they were back on the rise again as soon as 2009, when they grew by nearly 20 per cent, according to the Canadian Real Estate Association.
Meanwhile, Canadian household debt set a new record last year. On average, the debt burden of Canadian families stands at 153 per cent of their disposable income, according to Statistics Canada. That’s almost as much debt as American households had at the peak of their bubble.
The ratio of home prices to rents reflects returns that people can expect from homeownership–in terms of either rents earned by landlords or saved by owner-occupiers. Based on this measure, The Economist figures the Canadian market is overvalued by over 70 per cent. Last month, Merrill Lynch wrote in a report that our housing market is afflicted by “overvaluation, speculation and over supply.” No wonder a recent international survey of housing affordability found Vancouver to be the second-least affordable city in the world!
The scary part is that, by most accounts, 2012 is going to be the year when housing prices start heading south. The housing market is already showing signs of weakness. Despite a rebound in December, housing starts fell in the last quarter of 2011. And in some smaller markets on the west coast, condo prices have already declined 15 per cent, according to Merrill Lynch. The bank predicts that prices nationwide will slip by five per cent this year in the best-case scenario. A spike in unemployment could trigger a 10 per cent price drop.
Meantime, the economy is slowing, unemployment has been on the rise since September and it will probably continue to climb as Ottawa reins in public spending. CIBC noted this week that job creation hasvirtually stalled in the second half of 2011, and a growing number of Canadians are resorting to self-employment, where they’re likely to earn 10-15 per cent less than full-time employees. “The job market is currently weaker than any non- recessionary period,” the bank noted. The reason this is frightening is that, even if uncertainty about the global economy forces the Bank of Canada to keep rates at current lows, Canadian households have no room to take on additional debt. Many will probably struggle to keep up with what they already owe.

If it’s any consolation, we won’t be going down by ourselves. Canada’s pop will be part of a much bigger deflation of Western housing markets. The U.S., and Ireland were merely the beginning, says the Economist. The U.K. is getting there, and the next victims could include Australia, Belgium, France, New Zealand, Spain, Sweden–and, of course, us.



No, it won’t be “housemageddon.”
The good news is that, in all likelihood, our bubble won’t go KABOOM! Instead, we seem to be in for a painful but not devastating pop. That’s because only certain parts of Canada are in a bubble. Overcrowded markets in B.C. and Ontario may be close to busting, but many other areas of the country remain very affordable. The very same survey that ranked Vancouver most-unaffordable-city after Hong Kong rates Canada the third most affordable country, after the U.S. and Ireland.
Secondly, even in areas where there is a bubble, not all sectors of the market are equally inflated. Concerns about overvaluation and oversupply mostly regard the condo market, which has been the main engine driving the boom. Construction of single-family homes, on the other hand, “has already landed softly below its long-run average,” Merrill Lynch notes.
Most importantly, however, Canada’s pop won’t bring down the entire financial system, as it did in the U.S. That’s primarily because subprime mortgages are virtually non-existent in Canada, and government guarantees on mortgage insurance act as a buffer protecting the banking sector from housing market downturns. A whopping 75 per cent of mortgages in Canada are fully insured by Ottawa, according to the Financial Stability Board. Also, at the height of the crisis, the U.S. was grappling with severe unemployment, which kept fuelling the housing bust as more and more households became unable to afford mortgage payments. Though job creation is softening in Canada, there’s little reason to believe joblessness will rise to America’s level. Even economist Nouriel Roubini–famously dubbed Dr. Doom for accurately predicting the great recession–doesn’t think Canada is headed for disaster. He predicts a 10-per cent correction, but not a U.S. style meltdown.
Besides, Ottawa is keeping a close eye on the market. The government already cut the maximum length on federally insured mortgages from 35 to 30 years in early 2011, and Flaherty may have more of the same in mind–along with other cooling measures that aren’t tied to interest rates.
Most likely, then, the Canadian market will let the air out gradually. As inelegant as that sounds, it’s good news.

My thoughts about the piece are exactly as VREAA says

Note ‘Maclean’s’ is calling for a soft landing. All those predicting a slow gradual reconciliation of prices and the fundamentals (which are currently far, far below prices) have to answer one big question:
Who do they imagine these buyers will be, who will step in and buy, in an orderly fashion, all the way down?
Who will, essentially, step in and bail out current owners, with promises to pay banks a stream of money for the rest of their lives, at these still very elevated prices?
And, while they’re pondering that, ask them for historic examples of speculative manias that have resolved with a soft landing. (There aren’t any.)
- vreaa

Housing bubbles have infected pretty much every city in Canada to different degrees and at different times.
With these cities have experienced a huge run up in house prices compared to incomes and other long term growth fundamentals, it would be foolish to think " it is different here" for x reason, cause it isn't.

Pending housing bubble spells trouble for Canada, experts say

Housing bubble articles keep piling up, almost as much as household debt.
From the Financial Post

OTTAWA — Never mind Europe or the United States, Canada’s got a number of its own economic problems, according a panel of experts who gathered Thursday in Ottawa.
An inflated housing market, an under-utilization of the country’s human resources and growing gaps between rich and poor were just a few of the issues brought up in a discussion that took place on Parliament Hill, organized by the Canadian Centre for Policy Alternatives.
Patti Croft, recently retired from being chief economist for RBC Global Asset Management, cited the risk of a housing bubble as among Canada’s biggest issues. Part of the problem, she said, is exceptionally low mortgage rates, due to the Bank of Canada’s low interest rate of one per cent — a level intended to support the economy.
“Historically, after a long period of low interest rates, what lies ahead is some kind of speculative excess,” she said.
The central bank’s rate has not been more than one per cent in more than three years, going as low as 0.25% for more than a year as it fought off the effects of a recession.
There was some concern expressed about the economic effects of the federal government’s coming spending cuts, but Ms. Croft said “the greater concern is the looming housing bubble that we see, particularly in cities like Toronto and Vancouver, because I think that is where the speculative excesses lie.”
Jim Stanford, economist with the Canadian Auto Worker union, cited a failure to make use of Canada’s labour market as the biggest issue facing the economy.
“Our GDP is at least $100-billion below what its potential should be, just on the basis of pre-recession trends in per-capita GDP,” he said.
“Remember, if we were to close that output gap and actually produce what we’re capable of, over a third of that flows directly to government in the form of revenue of various kinds, which is the real way to bring the deficit down and pay off our debts.”
Alice Nakamura, a professor of finance with the University of Alberta, agreed the economy would benefit if more use were made of the country’s available labour.
“We’ve got aging populations, we’ve got a shortage of people to provide all sorts of care, but we don’t have the dollars to pay for that,” she said.
“There’s still a lot of things that need to be done that could use the talents of people who can’t necessarily do a lot of math or handle computers, but we don’t have the buying power out there to request those things.”
In terms of how to deal with such issues, Ms. Nakamura said: “I don’t think it will just fix it to have government spend more money. I actually don’t know what the solutions are to those problems.”
There was some disagreement on how effective it would be to use taxation to more fairly distribute income in Canada. Mr. Stanford was in support of higher taxes on the wealthiest Canadians.
“It’s shocking that (U.S. Republican leadership candidate) Mitt Romney pays 15% tax, and frankly, if rich investors in Canada were forced to disclose their income-tax returns for political reasons, like he was, it wouldn’t be very much different in Canada,” Mr. Stanford said.
Ms. Croft, on the other hand, rejected the notion of raising taxes directly on wealthy individuals or corporations, arguing it would lead to much of both leaving the country. She did, however, express support for higher consumption taxes, which she said in effect would get more money out of rich people.
She also called for better access to education, training that more closely matches the economy’s needs and more child care as things that would help Canada’s low- and middle-income earners.

Boomers 'Punch Drunk' On Household Debt ; A Rise In House Prices Is Mostly A Transfer Of Wealth;

Another household debt article.  Like I have been saying lately, they keep coming faster than I can post them.
The Globe and Mail is reporting from a CIBC survey that Boomers 'Punch Drunk' On Household Debt

People over the age of 45 and already-heavy borrowers are driving virtually all of the increase in Canada's household debt load, a new study has found.
The report, to be released Thursday, crunched numbers at the micro-level to shed light on what's going on behind the national averages, which soared to record highs last year.

Ballooning household debt has made headlines in recent months, and Bank of Canada Governor Mark Carney has warned it is the No. 1 domestic risk to Canada's economy. 

From the CIBC report, House price gains are mostly a transfer of wealth

True, debt is only one side of the household’s balance sheet; the asset side also counts, and both total assets and household net worth have been climbing until the last couple of quarters. But much of the gain in total assets has been associated with rising market values for housing and land. If both mortgage debt and house price climbs are part of an unsustainable market overvaluation of housing fueled by unsustainably low mortgage rates, then the asset values could stall or even deteriorate, without a compensating change in debt outstanding.
And housing price gains do not really add to national well-being to the same extent as gains in other asset prices. As Bank of England Governor Mervyn King once pointed out, leaving aside foreign purchasers, a rise in house prices is mostly a transfer of wealth to those who own a house (i.e. the older generation) from those who will be buying one ahead. The former could sell their house and live off the proceeds, implying less need to save, but the latter have to save more to make their first house purchase.
Net financial assets are therefore a better measure of household wealth, and on that score, results have been disappointing, with no growth since 2006

Yikes, the average house price in Canada has increased from about 250k in Jan 2006 to about 360k in Nov 2011, a increase of 44%, but since the increase in house prices was from the result of an increase of mortgage debt, and any increase in income growth was more than likely offset by the increase of people borrowing against their homes, there has been no net financial gain.  And when the increase of house prices stop, the increase of mortgage and consumer credit will continue.  The reason for this is because house prices are so high compared to incomes, that Canadians have to throw so much debt at houses just to keep the prices afloat.  That is why most people are mistaken in the "soft landing" theory of flat house prices and rising wages will correct the market over the next while.  Wages need to catch up to debt loads. And man Oh man, are wages far behind.

Here is how household household debt looks like since Jan 2006

Consumer credit has increased by 53% from Jan 2006 to Nov 2011( from $317 million to $485 million).
Mortgage credit has increased by 66% from Jan 2006 to Nov 2011 ( from $662 million to $1.1 trillion).
Total household debt has increased by 62% from Jan 2006 to Nov 2011 ( from $980 million to $1.59 trillion)
The average Canadian house price has increased by about 44% from Jan 2006  to Nov 2011.
The increase of the average Canadian weekly wage from 2006 to 2011, was about a robust 17%.
The increase of personal disposable income for all Canadians was 18% from 2006 to 2010.
The increase of labour income for all Canadians was 14% from 2006 to 2010.

Looks like the "wealth" created by the increase of house prices has been an illusion.

Canadian Business: Prediction: The Canadian housing market will crash

Sorry, I just can not keep up.  Here is another Canadian housing bubble article making it's rounds Canadian Business: Prediction: The Canadian housing market will crash

Is this the year the housing market finally crashes? So far, it sure doesn’t look like it. Sales activity over the past 12 months has been strong, and prices have continued their unstoppable march upward—despite a tepid domestic economy and turmoil around the world. The average price for Canadian homes sold in November stood at $360,396, according to the Canadian Real Estate Association. Meaning that in just 10 years, prices have doubled.
Optimists may find comfort in the market’s resilience. In fact, a December press release from Re/Max boasts of a residential real estate market that “defied conventional logic and exceeded expectations in 2011.” But why should we take comfort in a market that defies logic? That is one of the key elements of a financial bubble.
Keep in mind the market’s strength hasn’t just surprised conservative economists. It has even defied the perpetually sunny logic of the real estate industry itself. There is little argument among economists that houses in most major Canadian markets are, at the very least, overvalued. By some metrics, houses are less affordable now than at any point over the past 30 years. Rising prices draw people to the market in part because they’re afraid they will eventually be shut out. But what many fail to consider is that when ordinary Canadians are unable to afford real estate—even when borrowing at unusually low interest rates—the market will adjust. Unless our incomes go up, house prices have to come down. And there is a very good chance this will happen in 2012.
Over the past decade or so, many developed nations experienced a real estate boom. Canada’s happens to be among the longest running, according to Scotia Capital Economics. But in the wake of the global recession, prices in most other countries have fallen back to earth. Canada was one of only three developed nations tracked by Scotia to post gains in the third quarter of the year. Both the U.S. and the U.K. have already suffered crashes north of 20%. While different factors underlie their real estate markets, it nevertheless stretches credibility to believe that Canada will remain an anomaly. 
The heads of three of the country’s major banks (CIBC, RBC and BMO) expressed concern about the housing market at an investor conference this month. All agreed that increasing housing supply and growing debt means the market is reaching its peak. While they don’t foresee a crash, they acknowledged prices are likely to drift downward. Bank of America Merrill Lynch, meanwhile, predicts prices could fall between 5% and 10% this year. There is also a possibility prices will drop much farther over the next few years, perhaps as far as 25%. The scary part is that the direction of the economy ultimately might not even matter. If interest rates rise and the monthly cost of carrying a mortgage edges up, there’s little doubt that prices will fall, as rising rates make homes less affordable. But interest rates don’t have to rise for the boom to come to an end.
To see why, it helps to understand how we got here. For decades, interest rates in Canada were either sky high or fluctuated wildly, making it risky to take on hefty mortgages. But when the Bank of Canada started managing inflation in the early 1990s, rates fell, ultimately leading to a surge in home ownership. In 2006, the federal government made it even easier for citizens to buy homes by permitting the Canada Mortgage and Housing Corp. to insure 40-year-long mortgages with no down payment required. (The government eliminated this option in 2008.) Interest rates have remained at unprecedented lows since the financial crisis in 2008, providing more incentive for Canadians to jump into the housing market.
All of this buying activity has pushed prices up faster than wages. Median home prices are currently at 4.6 times our gross median household income, but Demographia, an urban planning research firm and consultancy in the U.S., argues that prices become unaffordable when they exceed three times income. How did Canadians manage to keep paying more? By borrowing: the country’s household debt to personal disposable income ratio has climbed to a record high of 152.98%, according to Statistics Canada.
This puts the housing market in a precarious position: a large gap between prices and incomes, worsening affordability, and an indebted nation of homeowners less able to withstand economic shocks. None of these conditions has improved over the past 12 months. “The bubble has become worse,” says George Athanassakos, a finance professor at the Richard Ivey School of Business. Athanassakos argues the market is headed for a severe correction. Like many, he thought it would be showing more signs of strain by now. Instead, “house prices continue to go up, and debt continues to go up.”
David Madani, an economist with Capital Economics, says that the reason prices keep rising, despite fundamentals that indicate they should be moderating, is because a bubble mentality is driving the Canadian market. “It’s this belief that prices are going to continue to go up, which becomes a self-perpetuating force,” he says. He explains that in good times, rising prices create a sense of urgency among home buyers who don’t want to miss out on the chance to benefit from soaring prices. So people pile in, pushing prices higher. This creates the appearance that housing is an asset that can only rise in value, and even more pile in.
But this line of thinking can reverse, and people can overreact to a declining market too. The greed that previously drove buying behaviour turns into fear that prices will fall indefinitely. This can be a self-perpetuating force. The result is that prices can dip farther than where economic fundamentals suggest they should be. 
If psychology is indeed driving the market, then any event that destroys confidence can touch off the fall. There are plenty of risks globally that could shock the Canadian economy, such as a renewed flare-up in the European Union debt crisis, or a slowdown in China's rampant growth, which is showing signs of overheating. For risks on the domestic front, look no further than the country’s condominium market, where oversupply is fast becoming a concern. New condo construction accounts for roughly two-thirds of all housing starts, which is high from a historical perspective. The Bank of Canada, in its December economic review, noted “signs of disequillibrium” in this segment of the market. “The supply of completed but unoccupied condominiums is elevated, which suggests a heightened risk of a correction in this market,” the review stated.
The Vancouver and Toronto condo markets are the most vulnerable, as new construction continues at a breakneck pace. A recent report from Toronto’s economic development committee showed 132 highrise buildings were under construction in September, far more than the 88 buildings in Mexico City, or the 86 in New York City. Chicago is similar in size to Toronto, yet it only has 17 condos in development.
In fact, Toronto boasts the most oversupplied condo market in the country, according to Sheryl King, an economist with Bank of America Merrill Lynch. Back in October, she calculated just how many units are set to hit the market. If builders in Toronto stopped developing entirely and merely completed projects that are already scheduled and underway, there would be enough units to supply the market for five years. “We have data going back to the early 1980s, and we’ve never seen that big of a building wave before,” King says. The rate at which the condos are being sold is running at about twice the pace of natural household formation, which indicates investors are scooping up a sizable portion of them. King estimates investors hold anywhere between 40% and 60% of pre-construction units. “Investors are not recognizing that there is this glut of inventory coming on the market,” she says.
With so much stock becoming available, developers could find that units take longer to sell, and they may be forced to start cutting prices. Investors holding pre-built units will start to sweat. Unlike home buyers, they’re only in the market to turn a profit, and won’t hold on to a declining asset for long. They’ll try to flip their units when they can to get out before prices fall any further. Supply will increase when investors start dumping their units, further pushing down prices, and the cycle continues. King estimates Toronto condo prices could fall as much as 15%.
If wages were rising fast, consumer confidence could dampen the downward spiral. Unfortunately, wage growth has been lousy in the wake of the recession. Economists are optimistic that income growth will just barely outpace the cost of living this year. Rock-bottom interest rates have lowered mortgage carrying costs, but affordability nevertheless decreases, the faster prices rise out of line with income. Eventually, the gap just becomes too large. Furthermore, many economists forecast inflation will remain low, so debt will be harder to pay off, creating a bleak picture for housing affordability down the road. For all of these reasons, Madani at Capital Economic projects that home prices in Canada will fall 25% over the next few years.
The breaking point for affordability is impossible to determine, but Canada is looking stretched. Demographia rated six Canadian markets as “severely” unaffordable, including Vancouver, Toronto and Montreal, in a report on housing prices released last year. Of the 35 Canadian cities examined, three were ranked “seriously” unaffordable and 17 as “moderately” unaffordable.
The firm argues that median house prices should be no more than three times larger than gross median household incomes to remain affordable, and to prevent housing bubbles. Right now, prices in Canada are 4.6 times the median income. That means valuations in Canada are approaching the level the U.K. hit just before its market tanked. And we’re already far past the level the U.S. peaked at, which was 3.7 in late 2006.
An argument sometimes used to defend the strength of the housing market is that foreign investors, predominantly wealthy Chinese citizens, are buying property here because Canada is a safe haven in a turbulent global economy. There are no actual data to support this claim, however. Even assuming it’s true, the presence of financially motivated buyers helping to prop up the market doesn't inspire confidence. “They’ll just liquidate their positions,” Madani says. “They’re a much greater flight risk.” Any listings they dump on the market will only serve to drive prices down further. 
When prices do start to fall, don’t expect a quick rebound like we saw three years ago. The average home price fell by 8.5% between August 2008 and March 2009, according to the Teranet-National Bank House Price Index, in a decline sparked by the financial crisis. By November, the market had already recovered. Part of the reason for the quick rebound was massive government intervention.
The Bank of Canada moved fast to slash interest rates to unprecedented lows, allowing banks to continue lending to businesses and consumers. The federal government also established a $125-billion program to buy mortgages it had already insured from banks and financial institutions, providing even more liquidity. The government ultimately bought mortgages worth a stunning $69.4 billion. The Bank of Canada has less room to manoeuvre today. The overnight rate is now 1% compared to 3% in August 2008. Cutting rates to stimulate the market is hardly an option this time. Banks have less flexibility, too. A five-year fixed rate mortgage is roughly 3.8% today, down from 5.7% in late 2008.
All of the scenarios thus far have discounted the possibility that the global economy actually starts to improve. But even if that happens, there will be consequences for the housing market. In a growing economy, the Bank of Canada will have to start raising rates to temper inflation, in effect shutting off the credit spigot that has allowed so many Canadians to buy homes. Sales activity will slow down, and prices will plateau. It could also provide the psychological shock that drives the market down even further.
That doesn’t mean that those considering buying a house today should necessarily let the prospect of a correction deter them. A house is firstly a place to live, not an investment. Bubbles occur, in part, because we forget that distinction. So buyers need to be comfortable knowing their houses might not increase in value over the next few years—and also that they could be worth much less.

Star Phoenix: Incomes Lag Sask. Housing Prices

Astute followers of this blog have seen these graphs many times.

But what do these graphs really mean? House prices have risen over 110% and the weekly wage has risen by about 30% since Jan 2006, but does that really mean we are in a housing bubble?

Demographia seems to think so. Here the Star Phoenix is out with an excellent report on Demographia's housing affordability survey  that shows that house prices in Saskatchewan have severely outpaced incomes and demographia clearly states that Saskatoon is at the upper end of "moderately unaffordable" just below      "seriously unaffordable".  "Housing bubble" is also another name for "wide spread unaffordable housing."

It looks like the media is more aware of the housing problem as there has been a housing bubble or household debt article in the national media almost everyday this year.

From the Star Phoenix: Incomes Lag Sask. Housing Prices

The latest worldwide numbers back up what many residents of Saskatchewan's largest cities have been experiencing in recent years - incomes aren't keeping up with increases in the costs of housing.

"What we see both in Regina, but to a much greater extent in Saskatoon, is that housing affordability has deteriorated over the years of the survey," Wendell Cox, the Illinoisbased co-author of the eighth annual Demographia International Housing Affordability Study, said Tuesday. "Saskatoon is actually worse than Edmonton this year."
For the survey and its previous seven editions, Cox and his colleagues calculate a measure of affordability by dividing the median house price in a community by the median household income. Data is available for Canada, the United States, Australia, New Zealand, Hong Kong, the United Kingdom and Ireland.
Saskatoon and Regina were first part of the survey five years ago, with numbers from the third quarter of 2006. Then, the "median multiple" measures were 2.6 and 2.0, respectively. The last survey, based on third quarter 2011 numbers, shows Saskatoon at 4.0 and Regina at 3.3.
"There has been a huge escalation in prices," Cox said, noting those are increases of more than 50 per cent in the cost of houses relative to incomes.
"There's no excuse for housing to be costing more than the international historic norm of 3.0 in Saskatoon or Regina," he said.
"Obviously, the supply did not keep up with the demand, as is evidenced by the prices," he said. "If you climb to the tallest building in Saskatoon or Regina, you're not going to see a hill or an ocean - the kind of things that could suggest a shortage of land. When you think about how much land you have available, there's no reason why house building shouldn't be allowed to the extent necessary to meet the demand.
"Identifying urban sprawl as a cardinal sin is a real mistake," Cox added.
"Sprawl began when Cain moved next door rather than build on top of Adam's house. Anybody who thinks you can accommodate large population increases without expanding the urban footprint is fooling themselves."
Cox said he suspects prices in Saskatoon and Regina are overinflated and more supply could improve affordability. Ensuring housing is affordable is essential for a province looking to capitalize on a boom, he noted, adding the state of economies in the U.S. and Europe means maintaining cost of living is important for all places.
Saskatoon's measure on the Demographia scale this year has actually decreased from 4.3, though Regina's is up from 3.1. June Draude, Sask. Party government minister of social services, noted that on a provincial basis, RBC Economics data shows improvements in affordability in Saskatchewan.
"I know that there's more work to be done, but I think it shows we're working on the problem," she said Tuesday, noting the province is spending more than $300 million on programs to encourage construction of homes, while also improving options for those who require government help.
"We're addressing the fact that we need more units and that we need people to have more money in their pockets," Draude said, noting while an increased population puts more pressure on the market, efforts are being made to keep up - last year's 7,000 housing starts was the highest number in decades.
But Danielle Chartier, provincial NDP critic for social services, said Tuesday the government isn't doing enough to address the problem - which she and fellow NDP MLAs hear about from constituents often, she added.
"People are struggling with housing," she said. "It's a huge issue. It's crazy to think that we're more expensive than places like Edmonton, Winnipeg and Calgary to live in. Years ago, we would never have thought that would happen.
"The government needs to do something about it now," Chartier added.
"Encouraging more development is important, but in the short term, I think the market hasn't kept up, so it's up to the government to think about how they can step in and do something about it."

I don't necessarily agree with demographia's assessment that restrictive land use has been the main cause of the huge run up in house prices but I do agree that the medium multiple is a good measurement of housing affordability. And I do not agree that the "government needs to do something" as governments are partially to blame here with CMHC and other government policies. Anymore meddling by the government like more subsidies could exasperate the problem.   But this was a good article from the Star Phoenix as it showed the affordability problem is wide spread in Saskatchewan.  Good article Joe.

Bloodbath to hit Australian real estate, analyst Jordan Wirsz says

2nd post on the Australian theme today,
From the Herald Sun in the land down under Bloodbath to hit Australian real estate, analyst Jordan Wirsz says

AUSTRALIA'S love affair with property is about to be tested amid predictions prices will plummet by as much as 60 per cent, with capital cities hardest hit.
That’s the Armageddon-esque warning from leading US real estate analyst Jordan Wirsz, who believes Australia is heading towards a property bloodbath as the global economic downturn spreads to China and eventually here.
Mr Wirsz advises Fortune 500 CEOs and fund managers on investing in real estate.
He predicts that a flood of properties will begin to hit the market in Australia from next year as investors scramble to bail out, leading to a property crash of magnitude the country has not seen before.
“Right now is not a time to be buying real estate in Australia," Mr Wirsz said.
"The market has slowed substantially but residential prices are likely to fall up to 60 per cent, possibly even more, within five years."

The outlook is even grimmer for land investments, which Mr Wirsz said are more speculative and will plummet by as much as 80 and 90 per cent in value.
Commercial property will also take a hit in line with the residential sector shedding at least 50 per cent of its value. 
Mr Wirsz pointed to artificially low interest rates, high loan-to-value lending practices, overinflated property prices, unrealistic vendor expectations and Australia's large number of second mortgages.
“I’m bearish about world real estate but I couldn’t be more bearish about the Australian market," he said.
"There have been corrections but they don’t hold up to the scale of what is coming.
"The paradigm is that nobody ever believes house prices can go down but those who have bought at the top of the market are going to be sorely disappointed."
He predicts property prices will be on a slippery slope next year when interest rates begin to rise, commodity prices peak and China's demand for Australian exports slows.
A sluggish recovery will begin in 2016.
“If you are homeowner, be cautious, get rid of your debt, consider selling if you don’t plan to be in your house for more than seven years and downsize or become a tenant," he said.
The only winners will be real estate agents cashing in on bank-owned properties, he added. 
Adding to the glum outlook, properties in capital city would be hardest hit “because Australian cities are some of the most overvalued in the world and more speculative than regional areas", Mr Wirsz said.
Mr Wirsz joins other international naysayers including visiting US economist Harry Dent who recently said Australian house prices were 50 per cent overvalued.
With few exceptions, local experts disagree with their predictions.
HSBC’s chief economist Paul Bloxham said for property values to crash there would need to be sharp rises in interest rates, unemployment and housing stocks.
That combination is not on the cards, he said.
"I am not of the view that there is a looming housing bubble in Australia as it seems many doom and gloomsters are," Mr Bloxham said.
"Surely if the market was going to collapse it would have happened in 2009 after the Lehman's collapse when we had the biggest aversion to housing assets that you’ve seen.
"All we saw was a 3 per cent fall in house prices and then they rose."
Mr Bloxham believes an undersupply of housing, more rate cuts, low dwelling price to income ratios and strong overseas demand for Australian assets will act as buffer from global instability
"Some commentators aren’t doing the calculations correctly, they typically look at detached houses in the capital cities, they don’t incorporate apartments and regional areas, and they overstate the level of house prices to income."
Sydney real estate agent Charlie Bailey of Ray White Inner West believes there will not be a burst because there is no bubble.
"People have been predicting house prices to fall every year and every year we have an increase in prices," Mr Bailey said.
"In Sydney, we have 20,000 people a week looking for accommodation and not enough supply.
"I can't see the city's housing infrastructure changing any time soon so a prediction of a 60 per cent fall in property prices is a big call."

Australia: 5 per cent of homes nationwide are in negative equity. Commodity countries housing bubbles CAN bust

Resources will save a country from an impending housing bubble popping. Right? Wrong.  Australia's housing bubble is popping now.  When there is too much debt, there is just too much debt and the whole masquerade implodes.  That is what happened in Australia, and is starting to happen in some places in Canada.  And to think, Australia's housing market is slowing down when commodities are relatively strong.  Just think what a commodity down turn would do to confidence and housing in Australia. 


From Perthnow, Local owners looking at negative equity

PROPERTY owners in WA's southern regions are suffering with market analyst RP Data suggesting many homes "down south" were currently worth less than their purchase price.
The latest RP Data National Equity Report indicated that almost the entire area located to the east and south of Perth, effectively from Perth down to Albany and across to Esperance, was experiencing some of the nation’s highest levels of negative equity.
Report authors and RP Data researchers Tim Lawless and Cameron Kusher said that almost 5 per cent of homes nationwide were in negative equity.
“4.9 per cent of all Australian homes are currently valued at less than purchase price,” the report said.
“The negative equity figure has risen from 3.7 per cent at the end of the last quarter.”
The report cited far north Queensland, the Gold Coast and the Sunshine Coast as having the highest instances of negative equity at 20.2 per cent, 14.0 per cent and 13.5 per cent respectively.
“Western Australia’s Lower Great Southern and South West and South Eastern Western Australia are showing high levels of negative equity,” the report added.
"On a state-by-state basis, Queensland has the greatest percentage of properties in negative equity at 9.2 per cent, up from 6.3 per cent last quarter.
"Western Australia also has a relatively high instance at 6.3 per cent up from 4.9 per cent of properties last quarter."
The Lower Great Southern region has the greatest occurrence of negative equity with 12.3 per cent of homes worth less than the purchase price, up from 9.8 per cent last quarter.
The South Western region also has a high level of negative equity (11.3 per cent up from 9.8 per cent last quarter) as does South Eastern (10.5 per cent down from 11.2 per cent).
But all is not lost, with the report also highlighting that the strong growth in home values over the recent growth cycle is why most regions have seen significant levels of equity accumulation.
“Over the five years to September 2011, capital city home values increased by around 28 per cent,” the report stated.
“Approximately 43 per cent of homes are worth more than twice the original purchase price. Down from close to 45 per cent last quarter.”

This graph is from last year, but it gives us an idea of how the US, Canada and Australia compare house price wise.  Click on the picture for a sharper image

Just a couple of months ago the Economist wrote a report that The bursting of the global housing bubble is only halfway through. Canada was 71% overvalued when comparing house prices to rents and 29% overvalued when comparing  house prices to incomes.  Australia was 53% overvalued when comparing house prices to rents and 38% overvalued when comparing house prices to incomes.

2 commodity producing nations.  2 huge housing bubbles. 1 is crashing and the other is on deck.

More Mortgage Tightening Talk

The housing bubble, household debt and mortgage tightening hits keep coming, so much that I can not keep up. I could mention Mark Carney's talk yesterday where he said that some markets in Canada are probably overvalued

It was the second time in recent days that Bank of Canada Governor Mark Carney voiced concern about property prices, which surged after the financial crisis as borrowing costs tumbled.

or
Stalled on the road to recovery

Take last Wednesday’s Globe and Mail. Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney are all over the Report on Business section, fretting that a mortgage price war is duping Canadians into buying homes they can’t afford.

Turn the page, and there’s a survey of 2,300 corporate executives in Canada and 21 other countries. Their big complaint: a lack of capital to grow and innovate.
Cash is pouring into housing, while businesses are starved for capital. Financial markets seem to be turned upside down, creating dangerously skewed incentives that threaten to knock the economy off stride.
In a perfect world, consumers spend prudently, avoid excess debt and save for retirement.

And this piece from the Financial Post, Mortgages Tough new rules planned if market gets too hot

A new round of mortgage rules from Ottawa could include tough new measures for calculating how the self-employed qualify for loans and tighten regulations for condominium buyers, according to two separate sources.
Ottawa remains concerned about the possibility of an inflated housing market and wants to crack down on the practice where consumers self-disclose what they make when applying for a loan. In the case of the condominium buyer, the government continues to consider a proposal that would have 100% of condo fees count when assessing how much debt a consumer could afford.
“None of this is happening just yet. The housing market has slowed down and the government wants to see what will happen next,” said one source. “If the spring market picks up, then we will see more changes to the rules.”
Bank of Canada Governor Mark Carney said Sunday that some parts of the Canadian real estate market are “probably overvalued” and policymakers are monitoring to see if further steps are needed to cool it.
“We see that in a number of real estate markets in Canada, valuations are at a minimum, firm; in others, they’re probably overvalued. So there are risks there. We’re watching it closely. We’re working with our partners, the federal government, the superintendent of financial institutions,” he said in an interview broadcast on Sunday on CTV.
” Measures have been taken. They’ve been effective. We’ll keep up that vigilance. If more needs to be done, I’m sure the appropriate authorities will take those measures.”
Stated-income products have become very popular during this housing boom, allowing more banks to get involved in loaning to the selfemployed.
“These are individuals that are self-employed, have great credit and won’t be able to validate their ability to pay if they are not showing their income on their notice of assessment,” said one source.
He says those people with stated income could have to make an even higher down payment than the normal 20% that exempts consumers from buying expensive mortgage default insurance.
The source said some self-employed are qualifying for loans based on the assumption they have a lot of write offs, like car payments and housing costs associated with home office costs.
“They get to include that based on the assumption that self-employed people have an advantage from a tax perspective,” said the source. “The government is trying to figure how they would present this.”
A source with one of the banks said the government is trying “zoom in” on marginal borrowers so it doesn’t get into a U.S. type of situation where they were not verifying income.
“What banks are doing usually when it comes with self-employment is not dealing with declared income because nobody believes it. What they do is look at their behaviour and put more weight on it,” said the source, referring to how those consumers handle their debt. “With an employer, you can call and verify their income.”
The labour market is roughly about 13% self-employed so new rules could have a major impact but the source indicated it does not mean those people would be shut out of the loan market. “It will be just more difficult for them. You are going to have to prove income in a more precise way,” he said.
The suggestion the government might crack down on condo buyers is not new, having been scrapped last year in favour of tougher new rules on amortization lengths and refinancings. Most people in the real estate sector now believe amortizations will be reduced to 25 years after having been as long as 40 just three years ago.
Brad Lamb, a Toronto real estate broker and condo developer, has heard the government is again considering including 100% of condo fees in calculating debt levels but doesn’t think it will happen.
“The 25 year amortization is a no brainer, they should do it,” said Mr. Lamb. “It’s not smart to have loose lending rules. But the condo market is hot because of investors not speculators. These investors are coming [from around the globe]. This silly [condo fee] change will do nothing. These people are buying with cash.”

My bet is that something will HAVE to happen sooner than later.  Incomes, wages and GDP growth are not growing faster than household credit growth and it is getting to the point that credit growth will at some time NEED to grow slower than the 3 former. I'll be expanding on this in the next  post about why a "soft landing" in the Canadian housing market is highly unlikely.  But for now some graphs.