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July 28, 2015 | Missing F

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.
Ever wonder why the federal finance minister is such a wuss?“We do not see the need for major changes at this time,” Joe Owe told a realtors’ convention recently “We will continue to monitor the market and make adjustments, if needed, although none are being actively considered right now.”And, hey, how could there possibly be a problem? Average single-home prices in 416 and YVR blew through $1 million some time ago, new mortgage debt is piling up at five times the inflation rates, real estate values have detached from the economy, lenders are sucking in buyers with 1.99% quick-reset loans, the subprime market is bloating at an historic rate and buying a median-priced house in Vancouver (even at the cheapest-ever rates) eats 65% of family income.

What would F think?

Two years ago, before his untimely demise, the elfin deity was issuing warnings like this: “My expectation is that banks will engage in prudent lending — not the type of ‘race to the bottom’ practices that led to a mortgage crisis in the United States.” As one political staffer put it (as reported by the Financial Post):

“Flaherty spoke to bank CEOs all the time. I would think he had moral-suasion-type conversations with them on many occasions. And he also intervened in the market dramatically four times. He felt quite strongly that, as finance minister, he did have a fair bit of moral suasion at his disposal that he could use. Much of the time that was done quietly behind closed doors. But it was effective.”

OTTAWA- For national stories- Federal Finance Minister, Jim Flaherty, holds a news briefing for media held in the traditional "lock-up" prior to releasing the 2007 budget.  -Photo by Wayne Cuddington, Ottawa Citizen, CanWest News.  Assign#-82676--Federal Budget 2007

In stark contrast, Oliver says this: “Our long-term objective is to gradually reduce the government’s involvement in the residential mortgages.” And that means, ultimately, privatizing Canada Housing and Mortgage Corporation – if Joe and his party survive the coming federal election.

Now why such a dramatic difference between F and his heir, even as it becomes more evident the housing market is a towering, hulking pillar of risk that could collapse on the Canadian middle class as it did in the States? Simple. Letting people pickle themselves in debt, succumb to their hormones, spend far beyond their means and pull economic activity from the future is a cheap, quick and desperate way to try and rescue an economy in trouble by a government struggling in the polls.

And they’re still at it. This week CMHC made a bombshell announcement which – more than the bank rate cut – is designed to throw Lava Hot Scorpion BBQ Sauce all over the real estate market, especially in YVR. Simply put, CMHC will now count as “income” 100% of the money you received, or might possibly get, from a tenant renting your furnace room or garden shed. Until now only 50% of rental income was added to a mortgage applicant’s total income, which is then used to calculate how much debt can be carried.

What does this mean? Lots, actually.

A couple earning $100,000 between them with $50,000 to put down can qualify for a mortgage of about $420,000. But add in $12,000 a year from a basement suite (based on a rental agreement, not actual cash), and – presto – they qualify for a mortgage of $520,000. That’s seventy thousand more than using only half the potential rental income.

The mortgage guys are eatin’ it up. “The ability to utilize 100% of the rental income to qualify for the mortgage…can certainly make the difference for many homeowners and may move a larger number of homebuyers from condo purchases to a single family home with a mortgage helper,” a broker from Vancouver tells the trade mag Canadian Mortgage Trends – which itself gushes, “CMHC deserves applause for trying to boost the stock of affordable rentals and allowing young homebuyers an alternative to condo living.”

Yes, excellent social policy. Just when prices inflate the most, rates descend the furthest and debt hits new, epic levels, the feds encourage more borrowing and over-spending, making it all worse. Moreover, this throws the door wide open to abuse. The definition of a ‘legal suite’ is hazy, and income from new units (with no rental history) will be accepted at ‘market rates.’

And let’s remember the context in which all of this is happening. Oil’s crashed. The economy has stalled. Jobs are being scrubbed. And the central bank’s rate drop is the ultimate admission of trouble. Is this really the time you want your government loosening up mortgage regs to allow more debt, higher prices and enhanced risk?

“The Vancouver and Toronto housing markets appear to be enjoying a revival of late, in contrast to most other markets in Canada,” economist David Madani warns. “But with labour market conditions set to deteriorate this year and market bond yields expected to climb over the longer-term, they won’t defy gravity for much longer.” The guy is now forecasting a 30% price plop for these two Bubble Republics.

That equals the US crash. Ouch. By the way, homeownership in the States has plunged to 1967 levels. Some people learn lessons. Some people just sell out.

JOE modified

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July 28th, 2015

Posted In: The Greater Fool

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