Focusing on real estate

Looking at many aspects of the market

Canadians are pretty much on the edge

We keep seeing more articles about Canadians pretty much on the edge financially. Here is another article discussing just how serious it is: Nearly Half Of Canadian Homeowners Aren’t Prepared For Emergency Expenses: Manulife Bank Survey.It seems that relatively small changes in interest rates will put many Canadians over the edge.

There are a number of serious issues that need to be considered here.

First of all, what are the implications for the banking system? You’ll note of late that Canadian bank stocks have been hitting new highs on the Toronto Stock Exchange. It would seem that investors are oblivious to the risk that are in the residential mortgage portfolios of banks and mortgage lending concerns. As to why this is the case is more than a little difficult to figure out. Perhaps investors are thinking that the CMHC and or the federal government will bail them out no matter what happens. This is likely true. There is a history of the government of Canada managing the financial system players quietly and behind the scenes. This happened in 1987 when the Canadian investment banks were floundering and the Canadian government arranged a number of shotgun weddings in the name of financial market stability.

Secondly, what are the implications for real estate prices if Canadians are so stretched? Well, it would seem that once again the banks are there shoring up the lending binge through home equity lines of credit. These financial products are, I believe, the reason why Canadians can continue to stay afloat even though incomes are stagnant and housing prices continue to rise.

What’s the answer?

There is no way out of this seemingly never-ending issue that will not be painful. But the time to think about it is now. There are a number of steps that individual Canadians can take to whether the storm when and not if it arrives:

  1. Canadians should budget NOW. Looking at budgeting as the tool to help you weather the storm. At least a budget or cash flow forecast will give you some idea as to what your exposure is. How much pain will you have when interest rates rise. Don’t be fooled by the pronouncements by the Bank of Canada that they will keep interest rates low. This is their paly on short-term interest rates. Mortgage rates have already started to inch up;
  2. Understand the terms and conditions of your mortgage. If you need help because of financial distress, approach your lender early rather than late. If you try to negotiate with them when you on or over the edge, it’ll be pretty difficult;
  3. There are many of us who are reluctant to talk to financial institutions. Seek out the assistance you need. That party may be able to help you renegotiate the terms and conditions of mortgage or HELOC. Perhaps it’s missing a payment , changing the amortization period of your debt or something more creative. If you need assistance, make sure that you have someone available to you when you are in need.

Make the plan to deal with problems before they become problems. When you’re into it, it may be too late. Lenders will appreciate an organized approach as it protects them as well. Financial institutions are not in the business of selling residential real estate. They are in the business of lending money and getting paid back. Anything that demonstrates your willingness to protects the lenders’ interests and not just your own, will have a significant payback.

Do it now

I can’t overemphasize the need for a plan. Do it now! It will save you a lot of headaches and sleepless nights and money!


Canada’s job growth


Canadian job numbers were reported last week, and the numbers show that the growth is not exactly what we would wish for. But of course, there is always a positive spin to be put on this by the Bay Street spin doctors:

While we could quibble about the quality of the jobs gains, the reality is that the country just knocked down three solid monthly gains in a row for overall employment, and that’s much better than anyone could have expected,” noted Douglas Porter, chief economist at BMO Capital Markets.

Doug Porter, whom I used to respect, has just blown the doors off of that one. How this long-standing BMO economist could make such a stupid comment is beyond belief. A part-time job is not equal to a full-time job. Fewer hours, employment benefits and little if no severance if you get fired.

The problem

This is the problem in Canada. Doug Porter has no clue what it means to have a part-time job. It’s just blah, blah, blah. He has no idea what it means to get a shift of 5 hours, three days a week at minimum wage. He has no idea what it takes to earn sufficient income when you are getting paid $15 an hour for twenty hours a week. He has no clue.

Until this changes, the rich will get richer and the poor will have children. It’s people like this who are so disconnected from reality that they have no clue and lower middle-class people live.

That’s why all the talk about house prices by the pundits isn’t worth reading. Get a few “real people” to write and see how that comes out.

This spins back….

In my mind, this spins back to my view on real estate. How can this be sustainable without having been propped up by the Government of Canada through CMHC. Now with the pending changes in the risk sharing formula and underwriting rules, it may be too little, too late. With this kind of shift in the economy and jobs, it’s not exactly a recipe for a robust economy.

Canada’s housing bubble makes America’s look tiny

Here is an interesting analysis in Maclean’s magazine discussing the Canadian housing situation with respect to the continual call for a bubble-namely that housing prices will drop precipitously at some point or another.

The problem with all these analyses

There is, however, a problem with many of these analyses. Case in point that there are some institutional differences between Canada and the United Sates. Most importantly that the Government of Canada stands behind a large proportion of these mortgages. The risk here is that lenders loaded up with mortgages that when push comes to shove are of dubious quality. There are many stories of poorly documented mortgages (fake employments letters, deposits that are made for one day to cover off the cash on deposit required by the lender) and others. Who knows what other time bombs are ticking out there and how many of these mortgages will ultimately end up in CMHC’s hands.

The other unknown is how much financial stress the mortgage borrowers can handle in the event that there is an increase in mortgage rates. Most writers seem to feel that there is not much room out there. Only time will tell. But to the extent that it causes many to sell, housing prices can drop pretty quickly if a group of sellers comes to the market at the same time. Doesn’t take much.

Another factor is the “herd mentality” that exists in Canadian residential real estate markets. “I don’t want to miss the boat” is the cry of many buyers. If I wait, house prices will be 20% higher next month. This too will fuel the flames, even if there is nothing else going on. But that sentiment can reverse itself in an instant.

Real estate markets are illiquid

Selling a house is not like selling a hundred shares of the Royal Bank. Each house is a unique property and will attract different buyers at different prices. Although median and mean prices may reflect the overall market situation, it does not necessarily reflect the value on the market of YOUR house. You just never know.


Statistical analysis is not a substitute for common sense. There aren’t a whole lot of Canadians who can afford million dollar houses under any circumstances. They just don’t have the incomes to carry the debt.

The correction will come when everyone least expects it.

Looking at the press on the “tweaking” of the mortgage rules you have once again the Canadian spin on the world. Everything will be fine. Don’t worry. Be happy. Years ago a friend of mine told me that Canada is a plantation with kind masters taking care of the people that need taking care of. How true it is.

“If you’re worried that housing prices are too high, the single rate that the Bank of Canada targets is too blunt an instrument,” says University of British Columbia economist Tom Davidoff.

Great to see this commentary from Professor Davidoff. This is commonly referred to as a meaningless statement. Interest rates have historically been used to adjust the economic temperature. There is nothing new here and it has now become a blunt instrument. These guys prefer the incessant tweaking that has gotten the Canadian economy absolutely nowhere.

The Canadian government has gotten us into this conundrum. The economy stubbornly refuses to grow. And the Bank of Canada has a great talent for finding excuses for it. Whether it’s the fires in Northern Alberta, Donald Trump and whatever excuse they can create. Where is the Prime Minister on all this? Nowhere to be seen.

Of course, Poloz was speaking before last night’s presidential debate, but in his Monetary Policy Report, the bank governor drew a dotted line from poorer-than-expected Canadian exports to low business investment in the U.S. to uncertainty over American politics.

Wow. Can Poloz never take responsibility for anything? Dump it on the Americans, dump it on Trump. Meanwhile, the US stock markets are stable and from time to time bumping into new high, Canada languishes.

These guys are great at passing the buck.

As to real estate, it is overpriced. It is too expensive, it is out of control because of the wrong-headed policies of the Government of Canada.

When will they ever learn, when will they ever learn. Sounds like an old song.

Good luck to us Canadians, we are going to need it with this lame government and even lamer central bank.