I have read a great economics article at Seeking Alpha and the Unconventional Economist. It presents some great points on a number of recent reports and I'm going to present a personal summary of these arguments in my own words. According to this article, and commentary by the Author, Canada's real estate markets are definitely not at their peak bubble, and still have a ways to go because of this spread in disposable income versus critical income. This concept, however, is counteracted by the fact that we are not equipped for any "correction" or "levelling" of prices because, when push comes to shove, our reserves are inadequate in such circumstances. I share five favorite points and elaborate on each one respectively.
1. This article does a great job of summarizing the two seemingly opposing think tanks -The Canadian Centre for Policy Alternatives (CCPA) and the C.D.Howe Institute - released papers/reports on the Canadian housing market. What he manages to prove in this article is that household debt levels, which are at 147% of disposable income as at the 1st quarter of 2010, still have a ways to go BEFORE they reach the lofty heights achieved by the United States and United Kingdom prior to the onset of the global recession.
2. The great fuel behind this disposable income growth has been the sheer house price growth and the ability for buyers to take equity out of their homes to continue their investments in further Real Estate - you could call it a self-perpetuating cycle.
3. The article shows that the moving average of the lending rates over the last 30 years has, overall and despite the momentary dips in the late 80s and mid 90s, been on a gradual slope downwards. Thischart should prove and be indicate of this point.
4. Has anyone asked what the average home equity ownership is in Canada, or Vancouver for that matter? That is to say, how much home does the average borrower own? The answer, according to some online resources (as well as Wikipedia, CMHC's website, and the ) is namely this:
"throughout 2007, the average Canadian home buyer who took out a mortgage had only 6% equity in their home, suggesting the risk of negative equity is high even if there is only a moderate correction."
5. The stark part of the article talks about what actual reserve the CMHC has to base their "insurance" on? That is to say, if a significant proportion of high-risk loans actually do go under default, and the CMHC is looked upon to insure and pay out these loans, would the CMHC actually be able to repay, say, 20% of these loans, or how about 10% of them? In actuality, the CMHC holds about 9.3 billions Canadian Dollars but insures a whopping 473 billion, which positions it at a leverage point of no more than %1.97. Meaning, in a nutshell, that it could pay out less than 2% of all insured mortgages, and not a penny more!
"Most of the credit risk on their loans is being carried by Canadian taxpayers! The scary thing is, as at 31 December 2009, the CMHC had only $9.3 billion CAD of shareholder capital but a whopping $473 billion CAD of outstanding insured loans. Should a housing correction occur, and significant defaults take place, there is very little capital available to absorb losses. Rather, like in the United States, Canadian taxpayers would be called upon to stump up funds to bail-out the banks for their risky mortgage lending."
2010, September 08, "Canadian Housing: Another Debt-Fueled Bubble?"
2010, September 06, "Unconventional Economist".
Moving Average chart of Lending Rates over the last 30 years.
Image Credit: Cartoon Stock.