No mortgage tightening? Not so fast

Mortgage brokers around the country are breathing a sigh of relief as there were no mortgage rule changes in the budget. From mortgage brokers " Flaherty budget answers mortgage brokers pleas"

PHEW!
Brokers are breathing a sigh of relief after the Finance Minister rejected calls to tinker with mortgage insurance rules, offering a budget that leaves the maximum amortization cap at 30 years and the minimum down payment at 5 per cent.
With today's budget announcement, Flaherty effectively rejected a chorus of banker calls for a 25-year amortization cap, down from the 30 years the government now allows. Some economists also wanted the government to increase down payment requires to a minimum 7- or 10-per cent.
Both suggestions were billed as a way of cutting record levels of household debt and slow down the consumer rush to buy homes.

Yup, no problem, even though we owe more than we make, 'let's keep the party going' say mortgage brokers.

In the last few weeks I did not think Flaherty was going to do anything with any mortgage tightening.  And it looks like he is going to leave that to the OSFI.  From the Financial Post " Ottawa to toughen CMHC legislation"

After earlier voicing concern over the activities of the country’s dominant mortgage insurer the federal government is toughening its oversight of the massive and economically vital organization.
The federal budget took aim at Canada Mortgage and Housing Corp., the Crown corporation that controls about 75% of the mortgage default insurance market. CMHC is backstopped by the federal government but is coming close to breaching its mandated limit of $600-billion because of the red-hot housing market and so-called portfolio insurance for the banks.
“The government will introduce enhancements to the governance and oversight framework of Canada Mortgage and Housing Corp.,” according to the budget.

 You know the OSFI, right?
They are the guys who have poured over the books of Canadian banks and found that "Canadian Housing Market Beginning To Resemble U.S.'s Subprime Mess

Canada’s financial regulator is growing worried that Canadian banks are following their American counterparts into the “subprime” mortgage market that blew up the financial system in 2008.
According to documents obtained by Bloomberg under access to information laws, the Office of the Superintendent of Financial Institutions (OSFI) is concerned Canadian banks are becoming less strict in their issuance of mortgages, handing out house loans to people who can’t prove their income and to recent immigrants.
These loans “have some similarities to non-prime loans in the U.S. retail lending market,” the OSFI reportedly wrote.

“It just speaks to the general easing in lending standards, which has contributed to a booming housing market,” economist David Madani of Capital Economics told Bloomberg.

And this was released just over a week ago.
Financial Post More mortgage transparency needed to combat high household debt: OSFI

OTTAWA – Canada’s banking regulator wants lenders to be more transparent about their mortgage businesses as it seeks to minimize the risk to the economy from record-high levels of household debt.
Draft guidelines from the regulator released on Monday called for increased disclosure by banks on their exposure to certain mortgage products and markets, enhanced risk-management practices and treating home equity lines of credit (HELOCs) the same way as mortgages.
The Office of the Superintendent of Financial Institutions has been reviewing bank’s residential mortgage portfolios for over a year and the draft guidelines reflect some of its findings.

The OSFI knows there is a problem with debt and to believe they will sit idle as debt continues to outpace incomes and GDP growth is foolish.  Their mortgage tightening could be tighter than a reversion to 25 years with 7% down.  I believe this a way that Flaherty can cool the market, but not have to take the blame of a housing bust.

The Runaway Train Of Mortgage Debt

Outstanding mortgage credit over the years.

Here is how mortgage debt to GDP has increased over the years.

Here is the annual change in mortgage debt to GDP. This measures how much more mortgage debt has grown compared to GDP each year.  Mortgage credit growth to GDP has been larger in the last decade compared to the 80's.

Here is mortgage debt to personal disposable income.

Here is the annual change in mortgage debt to personal disposable income. This measures how much more mortgage debt has grown compared to personal disposable incomes each year.  Mortgage debt growth to personal disposable incomes has been larger in the last decade compared to the 80's.

 Here is the growth in mortgage debt compared with GDP and personal disposable incomes

Now you know why mortgage debt is a runaway train.  The fundamentals can not catch it.

Shorter Mortgage Amortizations Coming March 29th?

More rumors are floating around that the Feds will chop the 30 year mortgage down to 25 years when the budget is announced on March 29th. 
From the Financial Post "Shorter terms for mortgages may be in Ottawa’s new budget"

Somebody tells you can have a smaller mortgage payment. How do you say no?
That’s essentially what Canadians were offered three years ago when amortization lengths stretched out to 40 years. The cost is generally tens of thousands dollars in interest over the lifetime of a mortgage.
The government finally stepped in and Ottawa lowered the maximum amortization length of a mortgage back to 35 years before hitting consumers again with a 30-year limit last year.
Now word comes that Ottawa may be looking to cut the length again and all eyes are on the March 29 budget to see whether the limit is reduced to 25 — which is where it was, incidentally, when this latest housing boom began.

If there is any "tightening" of mortgage rules in the budget, it won't be much.    Flaherty has said himself that "The new housing market produces a lot of jobs in Canada, so there's a balance that needs to be addressed. I'd like the market to correct itself, quite frankly, if it can."

The last thing the Feds want is to be blamed for the bursting of the housing bubble in Canada. This could prove to be a huge election issue and the Conservatives know this very well.  We all know that Canada relies on housing related industries now more than ever for GDP growth

and for employment

Heck, everybody knows that household debt is the number one domestic threat to Canada's economy and something needs to be done, but the Feds are hoping they can engineer a soft landing.  So any "tightening" of mortgage rules will be slight ( maybe a reversion to 25 years).  Just think, a reversion to the mean for housing related industries GDP would take away over 400 billion dollars from total GDP and a reversion to the mean in housing related industry employment would put Canada at over 9% unemployment.  I would be very surprised if Flaherty drops a bomb on mortgages come March 29th.

Saskatoon's labor force population is growing faster than employment. What does this mean?

  From about 2009 or so, we see that total population is growing faster than employment.  

Actually employment has not really grown much lately, other than for seasonality.

And of course the labour force is growing faster than employment; this is why we see the employment rate trending down since 2009.  The employment rate (formerly the employment/population ratio) is the number of persons employed expressed as a percentage of the population 15 years of age and over.  The employment rate peaked at 71.8% in 2009.  It is now at 65%.

As has the participation rate. The participation rate is the number of labour force participants expressed as a percentage of the population 15 years of age and over.  The participation rate peaked at 76% in 2009, it is now just over 68%.

The unemployment rate in Saskatoon as of Feb 2012 is 6%.  Note that this is during housing, household spending, resources, City of Saskatoon and Provincial Government spending booms.

So what does this all mean?

To me, it looks like Saskatoon is headed down a path of a higher structural unemployment rate

Structural unemployment is a form of unemployment resulting from a mismatch between demand in the labour market and the skills and locations of the workers seeking employment. Even though the number of vacancies may be equal to, or greater than, the number of the unemployed, the unemployed workers may lack the skills needed for the jobs; or they may not live in the part of the country or world where the jobs are available.

Sound familiar? We have all heard about the "skilled labor shortage" here.  Heck, the Saskatchewan Government spent a pile of money to entice Irish workers to come here.  But it seems that the growth in the labor force population Saskatoon is experiencing is not the type of population that is translating into higher employment. The above graphs of employment and participation rates prove this.  The reason for this is not clear.  But think this is just a Saskatchewan problem?  Think again, as it happened in the US before their housing and credit bubbles burst and melted their economy.
From CNN MONEY in 2007.  Skilled worker shortage hurts the US

The biggest problem with job growth right now isn't too few new jobs. It's too few skilled workers.Some experts say part of the blame for the slowdown in the economy in last year's second half can be laid on labor constraints - companies couldn't expand as fast as they wanted due to a lack of workers with the right skills. The unemployment rate in December stayed at 4.5 percent.

Policy makers in the US failed to realize the economy was in real estate and household spending bubbles which was reflected in GDP and employment. Housing became a bigger part of their economy and they failed to understand the over investment into housing related industries could not continue forever.  Putting too many eggs in one basket does not always turn out well.  The 3rd and 5th charts are from Ben at the economic analyst.

Good thing it's different in Canada and Saskatoon.

Once the housing and credit bubbles in the US burst, there was an excess amount of unemployed workers from housing related industries, not to mention the loss of employment in retail sales, as people were not borrowing from their homes like a ATM anymore.

Believing "endless growth" and the good times will continue forever could be costly to taxpayers down the road if any of the booms end.  Why? Because not only does population stimulus cost taxpayers money, but so will immigrants who move here but do not fare well economically speaking.  International immigration is near 50% of Saskatoon's population growth.

Why this growth could be costly.  From the Frasier Institute Recent Immigrants not faring as well as those who arrived before 1987, costing taxpayers more than $16 billion annually.

“Immigrants arriving in Canada since 1987 are not doing as well economically as immigrants who arrived before 1987,”
“As a result of Canada’s welfare-state policies, our progressive income taxes, and universal social programs, these immigrants impose a huge fiscal burden on Canadian taxpayers of between $16 billion and $23 billion annually.”

If the people growing our population can not fill the "skilled labor shortage", they could be a burden on tax payers.  They will spend an exorbitant amount of their take home pay on housing, which means there is less money going into the local economy.  Which also means they are more likely to use social programs.

Our "jobless boom" and nation leading population growth is leading Saskatoon down the road to a higher rate of structural unemployment unless we turn the corner and employment starts growing.   A housing and/or resource bust would put a damper on household, city of Saskatoon and Saskatchewan Government spending.  A higher rate of unemployment along with lower participation and employment rates would continue.  I believe Saskatoon's economy is diversified enough to turn this around but can Saskatoon do this with less reliance on housing?  It will be tough, especially with the fact that most, if not all business and policy leaders fail to see the housing bubble here.

Saskatchewan is more reliant on the current housing boom to generate GDP and employment growth

Here is GDP from the FIRE and construction sectors in Saskatchewan.

Here is employment in housing related industries in Saskatchewan.

Here is just construction.

Now people may say that with a rising population, we need more homes and if we add in the fact that there has been a tendency to investment more in our homes not in Canada but Saskatchewan, that this is also reflected in housing related industry GDP and employment.

 But the factors of a rising population that put pressure on employment in housing related industries should put pressure on all employment but that is clearly not the case.   Here is how growth in real estate related employment and all other employment looks like.  Graph from Ben at the Economic Analyst.

I should also add as well, we see that with rising home prices

comes rising consumer confidence and the wealth effect, in which people spend more because they feel "wealthier".  And we see how Saskatchewan retail sales have benefited due to increased consumer confidence of rising home values and consumer spending.  * The wealth effect in rising home values is up to 3 times larger than the wealth effect in rising stocks.-source Dallas Fed

But because this increase in "wealth" was made mostly because of a huge increase in home equity and not wage gains, people borrowed more credit. This has had a positive feedback loop in the overall economy as many have embraced credit with open arms.  You don't get double digit growth in retail sales when the average weekly wage increases by 5% ( 23% year over year in retail sales growth in one month in 2008!) unless there is an substantial increase in credit.

While I do note there is an economic job boom in Saskatchewan resources and supporting industries,

we should remember that real estate in Saskatoon boomed well before potash and most other resource prices rose in value.

We can clearly see that Saskatchewan is more reliant on the current housing boom than ever before if we look at housing related GDP and labor growth along with the wealth effect of rising house prices.  Much of this boom is based on credit, so a rising of interest rates, a tightening of credit availability, a change in consumer's attitudes toward credit and/or an exhaustion of credit borrowing will slow this boom down.

* I added these graphs after the post for the anonymous comment that said that oil and uranium boomed well before house prices took off.  So:
Here is the time line of oil prices and the average Saskatoon house price.

Here is uranium and the average house price in Saskatoon.

While the launch of the uranium bubble was earlier than other commodities in the great commodity bubble of 2008, the amount of people working in uranium is a very very small percentage of all workers in Saskatchewan.  Actually there are just over 4 workers out of every 100 in Saskatchewan working in resources (forestry, fishing, mining, oil and gas)
Just so everybody knows, bidding wars started at the end of 2006, beginning of 2007, but the percentage of the labor force working in resources dropped a bit during this time.

 The real boom? Hmmm.. Since house prices have outstripped personal disposable income starting in Q4 of 2006 ( same time as the bidding wars started) Graph from the economic analyst.

 we see that Saskatchewan has lead the nation in mortgage credit growth held by the chartered banks. 

Canada’s mortgage body moves to slow booming housing market

From the Globe and Mail "Canada's mortgage body moves to slow booming housing market "

Canada Mortgage and Housing Corp. has signalled it will dramatically curtail its growth in the mortgage market in the coming years in an effort to cool Canada’s sizzling housing sector.

Documents released by the Crown corporation this week show CMHC expects to increase mortgage insurance over the next few years at only a fraction of the pace seen recently.

The change comes because the federal government has set $600-billion as the limit for the amount of mortgage insurance CMHC can have outstanding. The move is a sign Ottawa is trying to engineer a soft landing for Canada’s $1.1-trillion housing market by restraining the credit available for homebuyers to rack up mortgage debt.

Finance Minister Jim Flaherty has warned that too many consumers are getting in over their heads. And importantly, the government aims to shift more of the onus for bad mortgages away from taxpayers and back to the banks as tensions rise between Ottawa and Bay Street over mortgage rates.

It seems the mainstream media has shifted their attention from a "overvalued housing market" to a " there has been too much debt handed out and something needs to be done".  Why? Mortgage debt is still growing over 7%

And Canadian households are in very vulnerable positions.

Canada is only a few percentage points away from when the US housing market went belly up. Remember that the US housing market peaked in 2005-06 and the debt to income was just 150%, it kept climbing even though house prices fell until 2009.

But one of the reasons they have not tightened mortgage rules sooner is that unemployment is at 7.4%.  They had hoped ( when they kicked the can down the road in 2008) that they heavy lifting households would do for a few years would be alleviated by business hiring, It hasn't.

And Canada relies on housing more than ever in regards to GDP growth

and the labor market

How all this "mortgage tightening" talk plays out remains to be seen.  But it looks more and more that highly leveraged buyers will look very foolish

Can The Government "Gently" Tap The Brakes On The Housing Market, A Look At Housing Related Employment In Canadian Cities Suggests Not

Canada is more reliant on housing related industries for GDP growth than ever before.

To think that it is just a few cities across the country that rely on housing now more than ever, take a look at these next graphs on how housing related employment contibutes to overall employment in each Canadian city.  All cities except Montreal and Ottawa are above the long term average dating back to 1987. * Data for Vancouver only goes back to 1995.

Some may say that population growth is driving the FIRE and construction sector employment to be above the long term trend.  But that same reasoning should then apply to all other employment sectors but it hasn't.  Here we see that housing investment is near all time highs as a percentage of GDP.  * Note that housing bubbles were blown up when housing investment as a percentage of GDP went above the long term average in the early 80's and early 90's.

Now the problem the Government is faced with is that in 2008 they kicked the housing debt bubble problem can down the road in hopes that the households could do the heaving lifting until the economy recovered and something like business investment and hiring could take over, but that has not happened to the extent the Government would like to see.   And because the Feds have kicked the household debt problem can down the road since 2008, we see that:
Credit market debt to income ratio has climbed from 134% in 2008 Q2 to 151% in 2011 Q4.
Household debt to GDP ratio has climbed from 84% in 2008 Q2 to 94% in 2011 Q4.
Household debt to income ratio has climbed from 136% in 2008 Q2 to 153% in 2011 Q4.

And here we see that outstanding mortgage debt is still growing over 7% year over year.  And previous "mortgage tightening" has had little to no effect.  We see that mortgage debt growth was higher in Jan 2012 than any one month in 2010!

Canadians have shown that they cannot reign in their love affair with real estate and mortgage borrowing so the Feds will have to do something as Mark Carney has said " the number one domestic threat to Canada's economy is household debt".  This threat will just get worse if left alone, but the Government is walking a fine line.  Do nothing, the household debt problem can gets kicked down the road and just gets worse or reign in credit growth and crimp employment in housing related sectors.  This would send Canada's unemployment rate of 7.4% even higher.

For example a reversion to the mean in JUST construction employment

would raise the unemployment rate over 0.75% of a percentage point to around 8.3% unemployment.

A reversion JUST to the mean in both FIRE and construction sectors would put Canada over 9% unemployment.  In my opinion, this would be more than a "soft landing" in housing, actually closer to a hard landing. But the choice of more mortgage tightening has already have been made, not by the Government or the OSFI, but by Canadians themselves.  What remains to be seen now, is how this "landing" in housing and employment markets will vary from city to city across the country