Mark Carney = Alan Greenspan?

You know Alan Greenspan who helped create the biggest bubble in the world and failed to see or do anything about it, right?  Is Mark Carney following in his footsteps?

From the Globe and Mail "Carney’s debt warnings at odds with monetary policy"

It’s hard to imagine life could get any better for Mark Carney.
The Bank of Canada governor is everyone’s favourite central banker these days, his star as lofty as the loonie.
He already chairs the Financial Stability Board, tasked with reforming global financial institutions. He’s whispered as a candidate to head the Bank of England. Wherever he goes, people laud him for saving the country from the worst of the global financial crisis. On Tuesday, the Canadian Club honours him as “Canadian of the Year.”
Another central banker once enjoyed this kind of halo.
Remember Alan Greenspan? The Maestro. There was a time when he, too, could do no wrong.
When Mr. Greenspan retired from the U.S. Federal Reserve in 2006, he looked like a genius. He had steered the world’s largest economy through the dot-com bust, 9/11 and a recession. Life was good as the economy roared ahead.
Two years later, with the U.S. housing bubble bursting and the financial crisis raging, Mr. Greenspan’s reputation was substantially diminished. His failure to see the mortgage lending bubble – and do anything about it – is now etched in his legacy. A rattled Mr. Greenspan later admitted his faith in the financial system was shaken.
Events, and time, can alter perceptions.
What would we all think of Mr. Carney if Canada’s housing market crashed, rattling financial institutions and consumers?
It’s an interesting proposition. Mr. Carney has kept the pedal to the metal for years now with ultra-low interest rates, flooding the financial system with easy money. That has kept Canadians buying homes while markets elsewhere in the world faltered.
Conventional wisdom is that low rates are a risk worth taking, given the weakness in the non-housing side of the economy.
It’s also possible that Canada’s housing crash wasn’t avoided, but merely postponed.
Finance Minister Jim Flaherty has repeatedly tried to cool Canadians’ appetite for debt – by tightening mortgage rules (three times) and by regularly scolding Canadians for dipping too deeply into their inflated home equity to borrow more. Mr. Carney, too, has sounded the alarm about the overheated condo market and rising debt levels.
“Canadian households as a whole are being overstretched, which creates risk for the economy,” the governor warned earlier this month, as he again left the bank’s key interest rate unchanged.
There are worrying signs of speculation and overheating, particularly in Toronto and Vancouver. The average price of a home in Canada’s largest city hit a record $504,000 in March, and prices are still climbing. In Vancouver, frenzied activity has at least temporarily paused, but at an average price-point most Canadians could not afford – $761,000 – according to Canadian Real Estate Association figures.
These lofty prices influence values everywhere because Toronto and Vancouver are such a large part of the national economy.
Fading affordability should make people cringe. The average house price in Canada is now nearly five times average income – well above the historical norm.
Canadians have never been as indebted as they are now. The Bank of Canada expects debt levels to eventually reach near 160 per cent of disposable income – the same level reached by Americans just prior to the crash.
These debt warnings have been a constant in Mr. Carney’s public pronouncements over the past few years – just not in his actions.
And nothing speaks louder than easy money. Low mortgage rates make larger and pricier homes accessible to more people, pushing home prices higher in a vicious cycle that may not end well.
Of course, it’s not all about the intensely image-conscious Mr. Carney.
Mr. Flaherty and the Conservative government share responsibility for the borrowing binge. Last week, the government tabled a bill to put federal bank regulators in charge of Canada Mortgage and Housing Corp. and its fast-growing mortgage insurance business. But the move comes after allowing a near-doubling of the agency’s insurance cap to its current level of $600-billion since 2007. CMHC is now on the hook for half of the $1.1-trillion worth of home mortgages in the country.
And there are the banks. Lending standards are arguably looser than they’ve ever been, allowing more people to reach further on borrowed money.
If the bubble bursts, Canadians will surely want to know why Mr. Carney and Mr. Flaherty didn’t do more, sooner.
Saying “I told you so” might not cut it.

(Emphasis in bold by me)

Anytime there has been a recession, whether in the US or Canada, the way to maneuver out of it was for Central Bankers to lower interest rates.  The unintended consequence for the US after the 2001 recession was a housing bubble.  Canada has done the same.  Next recession, lower interest rates some more? Ha!

Canadians have lived beyond their means by using low interest rates and easy credit just like the Americans.

And now Canadian households are more indebted than ever.

Will know in a few years how Mark Carney's legacy will really look like.  My guess is that he will be near the boat of Greenspans.

Congrats Canadian Households: Over $1.6 Trillion In Debt

The Bank of Canada is out with household debt numbers for March 2012.  Canadian household debt stands at $1.602 trillion.  Residential mortgage debt stands at $1.116 trillion, while consumer credit stands at $486 trillion.

Flaherty can breath a little easier as mortgage debt growth has "softened" a tad over the last few months, but it is still growing faster than labor income, wages, GDP, inflation....that would make the housing market sustainable over the long term but continually fails to do so.

The next question is what happens to a credit induced housing market when the credit punch bowl is slowly taken away?

RBC: Biggest loss in historical RE prices was Vancouver at 44%, Calgary 2nd at 41%

RBC has an interesting report tabling housing bubbles and busts in Canada's major centers here.

While they mostly talk about Vancouver, there are three charts that are quite interesting.
The biggest loss in real estate in real terms ( inflation adjusted) was Vancouver in the 80's at a 44.4% loss.  Calgary came in second at a 40.9% loss.

House Price To Income 35% Higher Than The Norm

From the Financial Post " House price to income outstrips norm by 35%"

With housing prices to income levels running 35% above historic norms, Mark Carney, governor of the Bank of Canada, had some words of advice to heavily indebted households, telling them Tuesday to use “prudence and caution” because borrowing costs can only go up.
Speaking to the House of Commons finance committee one week after the central bank again held its key interest rate at a near-record low of 1%, Mr. Carney said “mortgage rates are extremely attractive and that accounts for some of the move-up in [housing] valuation.”
But he added that consumers cannot rely on lending costs “staying there forever.”

Mr. Carney said when it comes to household debt “the message is one of prudence and caution,” adding that the average home price in Canada is about 4.75 times people’s income, while the historic average is closer to 3.5.
Household debt to disposable income is running at about 152.9 .

Everyday, the bubble articles keep getting churned out.

US and Canada household debt, GDP and income comparisions

Here are a bunch of charts.  No need for commentary.  Enjoy.

Yep, no need for worry here.

What is bigger, the consumer credit bubble or mortgage credit bubble?

We all know that household debt in Canada has followed the US path as both have had an explosive expansion of growth compared to incomes and GDP over the last 30 years.

But what is bigger in Canada, the consumer credit bubble, or the mortgage credit bubble?

First, we all know that mortgage debt takes up 70% of all household debt.

And mortgage debt takes up a bigger percentage of incomes and GDP

compared to how consumer credit stacks up with GDP and incomes.

But what has grown faster over the years?

 

1982 is fine, let's go back even further to 1969.

Currently, consumer credit is growing at about 2% year over year, about the same pace as inflation.  Mortgage credit is growing at just under 8%.

Looks like the mortgage credit bubble wins.

Chart of the day, US and Canada household debt, GDP and income graph

Looks like it is different in Canada.  Debt has grown higher in Canada than the US while GDP and personal disposable incomes have grown slower since 1982.

Household debt in Canada in 1982 was $147 billion, in 2011 it was $1.59 trillion.
Household debt in the US in 1982 was $1.5 trillion, in 2011 it was $13 trillion.

We have done the same as the Americans as we have both lived beyond our means for over 30 years.

Mortgage Market Tiptoes Toward Subprime

From the Huffington Post "Mortgage Market Tiptoes Toward Subprime"

As the big banks get choosier about who they'll lend money to in this hot housing market, people with questionable credit are benefiting from Canada's once-small but now booming subprime mortgage industry.

The Canadian Real Estate Association released figures Monday showing Canadian home sales rose 2.5 per cent in March, and the average Canadian home sold for $369,677 last month.

That was actually a slight decline from the level of a year ago, but it comes on the heels of almost uninterrupted strong gains over the previous two years.

Fuelling that boom is a growing pile of mortgage debt, an increasing amount of which isn’t coming from Canada’s major lenders. That’s largely because of recent developments at the Canada Mortgage and Housing Corporation.

The CMHC is the Crown corporation mandated to oversee Canada’s housing industry. The vast majority of Canadian mortgages show up on its books, because CMHC insures the mortgages approved by banks.

In 2010 and again in 2011, hoping to slow down a red-hot housing market, the Department of Finance tinkered with the rules surrounding who can qualify for CMHC-insured mortgages. Moves to shorten the maximum length of the mortgage and raise the minimum percentage a borrower must have as a down payment combined to make CMHC insurance harder to come by.

“The banks don’t want to take on anything that’s not insured by CMHC," Toronto mortgage broker Marcus Tzaferis of Morcan Direct says. “So that’s pushing borrowers farther and farther out of the mainstream to find financing.”

Industry experts suggest the big banks are currently rejecting as much as 20 per cent of mortgage applications because they don’t qualify for CMHC insurance.

Proportionately, Canada’s subprime market is about the size today as the U.S. market was in roughly 2004 or so, Tal notes. After 20 years on the fringe of the housing market, by 2007, about a third of U.S. mortgages were subprime.

No subprime here and we don't have mortgage credit growth outpacing GDP and disposable incomes like those reckless Americans did. Phew, good thing it's different here.

Over 5000 jobs created in Saskatoon over the last 6 months. A bigger boom coming?

Stats Canada's numbers for March 2012 show that Saskatoon had over 800 more people working in March 2012 compared to a month earlier and over 5000 more people working compared to 6 months earlier.  So should we strap in and get ready for an even bigger boom?  Well,  let's dig a little deeper at the numbers.

First, let's look at full time employment.

*Note this graph should say ( in thousands)
Full time employment has improved by just over a couple thousands jobs in the last half year.  It looks like the majority of employment growth has been part time.  This could partly explain why Saskatoon is lacking in average wage growth compared to Regina and the province as a whole.

Next, let's take a look at some of Saskatoon's labor force indicators. 

The unemployment rate is at 5.9%, quite high compared to November 2009 when it was at 3.9% .  But on the other hand, Saskatoon is relatively better than the national average of 7.2%.  As of March 2012 the participation rate (The participation rate is the number of labor force participants expressed as a percentage of the population 15 years of age and over) is at 69.8%, still down from the August 2009 peak of 76.3%.  And the employment rate (The employment rate is the number of persons employed expressed as a percentage of the population 15 years of age and over) is at 65.6%, down from the August 2009 peak of 72.5%.
 

So I don't think we should get ready to strap for in an even bigger boom, as the unemployment, participation and employment rates are not exactly blowing my skirt up at the moment.  With that said, I believe this year, Saskatoon will set a record high for total employment, which is a great thing, but it will not be able to touch participation and employment rate highs and the unemployment rate low.

What will make the housing boom go bust? ‘Greed’

An excellent article in the Globe and Mail.  "What will make the housing boom go bust? ‘Greed’"

Speculation in Canadian cities such as Vancouver and Toronto is wildly out of control, and the real-estate bubble in this country is overdue for a correction painfully similar to the one south of the border in 2008. As well, Canadian investors who are buying in the depressed U.S. market today are taking much bigger risks than they think.

That’s the forecast according to Ben Jones, at least. Don’t believe him? People have made that mistake before.
When the Arizona-based accountant launched the Housing Bubble Blog in December, 2004, he was a lone voice crying wolf about the vulnerability of the U.S. housing market.
Undeterred by naysayers – you try convincing folks back then that not only were home prices going to plummet, but the fall would bring with it a tsunami of financial pain – Mr. Jones kept posting daily roundups of news stories culled from every corner of the U.S., as well as Canada, Japan, Europe, Australia and China, with readers from around the world adding comments about what was happening in their local housing markets.
Almost eight years later, Mr. Jones is still uncovering signs that the real-estate mania is far from over, and news reports from Canada are making on to his blog with unsettling regularity. A self-styled professional skeptic, he maintains that the fallout from the housing bubble is far from over.
China probably has the largest bubble in the world, he says, “and when it blows, it’s going to shake the globe. There have been housing bubbles before, but never all over the world. Every time I hear people talk about the housing bubble in the past tense, I cringe.”

You’ve been posting a lot of stories recently about the Toronto and Vancouver real-estate markets. When you look at Canada right now, what parallels do you see between where we’re at and where the U.S. was when its housing bubble burst?
From what I can tell, the condo markets in Toronto and Vancouver are even crazier. Prices are still going up and the participation of so many foreign investors is indicative of a more vulnerable market than in, for example, Miami in 2004. And that was a complete disaster.
Speculation isn’t a sign of strength – it’s a sign of weakness. I’ve read that in Toronto there are Chinese investors buying entire floors of condos. That’s clearly speculative, and those people will be the first to walk when things fall apart.

Canadians like to think of themselves as cautious people. Why do we want to believe the same fallacies that inflated the American bubble: “it can’t happen here,” “all real estate is local,” “they’re not making any more land,” “home prices always go up” … ?
The short answer is, it’s greed. People want to make money. And they are making money – there’s always a tonne of cash floating around financial manias, whether they’re a stock bubble or a housing bubble.

Is that why Canadians have been so eager to buy properties south of the border?
No one foresaw that Canadians would be crawling all over Arizona and, to a larger extent, California. I went down last summer to Maricopa County in Phoenix to watch a foreclosure sale on the courthouse steps. They had four auctioneers going at the same time, selling houses one after the other for six hours in 116-degree heat. There were 80 people there, buying houses, sight unseen, left and right.
Most of the buyers were professional bidders, talking on their cellphones to the people doing the buying. I could hear the conversations: “Oh, we can fix this up, we can rent it out, I think you’ll get 7 per cent on resale.” It was gambling on a mass scale, right in front of everybody.

Read the 2nd and 3rd part here

How long will it take to pay off a mortgage for a highly leveraged buyer?

I used the average hourly wage in Canada and the average house price.  Of course this does not take into account that we don't buy a home with gross income but net income.  And because people get a mortgage, there are interest rate costs throughout the life of the mortgage.  So I used a 25 year amortization at a fixed rate of 6.3%.  6.3% is the average posted fixed rate over the last 15 years. 

Now some people will say that interest rates are lower at the moment so the hours and years to actually pay off a mortgage will not be as high as the last two graphs show.  True, but it is not out of the question for interest rates to rise and a interest rate of 6.3% is definitely in the "normal" range. And on the other hand, I did not include maintenance, property taxes, insurance which runs the monthly cost of an average house at least $600 a month in most jurisdictions in Canada.  So the true cost of a home over 25 years for today's highly leveraged buyers ( using average wage and average house price) could be in the neighborhood of 50,000 hours of work.  Somebody who works 40 hours a week from age 18 to age 65 will work 97760 hours.  So for a highly leveraged buyer of today,  you better love your house and your job for many hours and years to come.

Canadians continued to heap on debt in first quarter

From the Globe and Mail Canadians continued to heap on debt in first quarter

Canadians are continuing to heap on non-mortgage debt, despite warnings about the perils of cheap borrowing from top officials, according to a consumer credit study released Thursday.
Equifax Canada’s quarterly consumer credit trends report found that consumer indebtedness, excluding mortgage debt, grew 3.4 per cent year over year in the first-quarter.
With household debt at an all-time high above 150 per cent of income, the Bank of Canada has declared it the number one domestic risk to the economy.
In a recent interview, bank governor Mark Carney lamented the comfort level of Canadians with high debt, attributing it to the illusion of affordability at a time of sky-high home values and floor-low interest rates.
If house prices fall, however, Canadians could find themselves in a situation where their net assets decline as interest rates and hence their mortgage payments rise. Even a return to normalized rates would render 10 per cent of households financially vulnerable.

For those keeping score, 10 per cent of households in Canada works out to nearly 1.5 million households that would be vulnerable to normal interest rates.  Yep, no credit bubble here.  Move along.

Year over year consumer credit growth has fallen to levels not seen since the early 90's.

Consumer credit has grown from  $200 billion in Jan 2001 to just under $500 billion in Jan 2012.

And compared to incomes and GDP, consumer credit growth has been on another planet.

 While it is true that interest rates have come down over the last thirty years,

Canada has painted itself into a corner as interest rates have nowhere to go but up.  And as we see in the next graph, debt payments ( principal and interest costs) are at near all time highs with all time low interest rates.

Why first time buyers will have to save ( not borrow) money each month for home maintenance and expenses

Maintenance costs of a home are usually an afterthought when buying.  Anybody buying a resale home may "notice" the roof needs replacing, windows need changing, or appliances are on their last legs.  But they fail to calculate the cost of maintenance and the changing out of these components when buying a home.

Something that bugs me when calculating the total cost of monthly payments are that calculators say the annual maintenance of a home is between 1% and 4% of the value of the home.  In reality, there are so many variables with this broad calculation that we need to look at more in depth.

So how do we do this?  First, we need to determine what components of a house that will cause maintenance costs.  So lets start from the top, move down and then outside.

• roof
• eavestroughs
• windows
• flooring
• lights
• furnace
• water heater
• air conditioner
• stove
• fridge
• dishwasher
• freezer
• washer
• dryer
• fence
• deck
• lawnmower
• snowblower
• fuel for outdoor equipment

Next, we need to establish the age of the house and these components.
Then, we need to determine life expectancy and replacement costs of these components.

So let's say the house in our example is an average bungalow in Saskatoon that was built in 1990 and it has some upgrades. It would look something like this: ( Results will differ with age, type of house and if you are a DIYer)

Now this is not exact.  But it does give a person an idea of what to budget for.  Looking at this example shows that the annual maintenance of a home is $3236.  Throw in lights, fuel for equipment, garden tools, estimates probably being on the low side and the annual maintenance of a home is around $3600 a year or $300 a month.  I also made some of these calculations for a DIY person.  As well, older houses could have structural costs that could run into the tens of thousands of dollars.  You will also see I did not include stuff such as plumbing or electrical changes and upgrades which would also add to monthly costs.  And this does not include cosmetic changes such as painting or reno's such as kitchens and bathrooms.   We can see here how much Canadians have embraced home renovations over the last decade.

Why will first time buyers have to save money to pay for home expenses?
Regardless of rising house prices, ( in most jurisdictions in Canada, house prices will go down) there is a big possibility that homeowners will soon only be able to borrow up to 65% of the worth of a home  (page 13 and 14).  This is down from the 80% as of now ( 85% if you insure the mortgage from default).  For the average home in Canada, home owners will only be able to borrow up to about 235k of the homes equity (on a 360k house). So many first time home owners will need to save money to pay for home expenses as they will not be able to borrow against their homes like in past years.  Using the home as a ATM will be a thing of the past. 

We are definitely seeing the affects of consumers tapping out and the new mortgage rules of 2011 ( which has made it harder to borrow against ones home) as the brakes are slammed on credit growth.  Notice the little peak in 2009?  That is the home reno tax credit! 

So if you are buying a resale home, make sure you do your homework from top to bottom and if you plan and save for huge maintenance costs ahead of time, you will be ready for unexpected costs associated with home ownership.  Like I said before, hoping for rising house prices and using the house as a ATM will be a thing of the past.