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September 9, 2015 | Different Here?

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.


First, no rate cut. As promised yesterday. And I’m now thinkin’ the Fed will go next Thursday.

Okay, so Elise has a good question. First she has to suck up a little, thinking that flattery, adulation and some genuflecting matters to me (it does):  “Thanks for all the help you’ve offered to so many of us – we’re very lucky you’ve bothered month after month!”

“But please bear with me for needing some clarification of today’s  blog; I’m more than a little confused. You say that if oil prices start to rise, the current TSX will seem cheap. But what about current levels of debt in Canada, and the housing bubble? Won’t a correction in the housing market, and the problem of debt mean significant problems for the economy? Are a correction, and bringing down the debt, necessarily going to happen? I’d always assumed that if the economy began to falter, so would the market. I am befuddled by the relationship between the two. Can you explain?”

Sure, Elise. Lots of people think this way, based largely on what happened in the US when the housing market popped. As we now know, real estate values nationally in the States declined by 32%, and within a year or two unemployment was at 10%, gold was reaching for $2,000 an ounce, Wall Street banks were toppling and the TSX gave up 55% of its value. In fact, what started as a Yankee housing mess turned into a global credit crisis. Six years later we’re just emerging from the detritus.

Would it be the same here if housing crumbles, maybe from a lousy economy, higher rates or the shock of a Dipper-led Parliament?

True enough, real estate and related activities have come to represent way too much of the Canadian economy – a far higher share than the US back in 2005 or even house-mad California at the home ownership peak (CA is about the size of Canuckistan). Also true that household and personal debt in Canada now exceed the highest levels ever hit in the States before the financial crisis hit. And, yes, it’s correct that we now have liar loans, mortgage fraud, zero downs and adjustable-rate teaser mortgages in Canada. Finally, you bet, house prices here as a multiple of incomes or rents are off the chart, running about 60% higher than in the US.

Bad. It looks bad. But it’s not exactly the same.

The good news is that virtually all of the high-ratio, high-risk mortgages the banks have lavished on the moist virgins and move-up trophy hunters are insured. Such was not the case in the States where loads of them were securitized and sold in tranches to unwary investors. Of course, this just transfers risk from the private sector to the taxpayers through CMHC but, like I said, it’s different.

Second, we have fewer and stronger, massively-profitable banks who together just earned $9 billion in 90 days. They may well be part of the larger problem, cutting mortgage rates in a race to the bottom and lending to anyone with glands, but when was the last time this decade you heard about federal regulators here shutting down a bank and making terrified depositors whole? You’re right. Never.

Third, a housing correction (we won’t have a crash, as I’ve always maintained) is the worst news for homeowners, but not necessarily for the banks, equity markets or the larger economy. Why? For the same reason Alberta’s in deep trouble but house prices in Calgary have barely fallen. Homeowners would rather eat drywall than sell their houses for less than they paid. It therefore takes a long time for lower prices to ripple through the economy, and meanwhile people continue to pay their mortgages even if they’re sliding underwater.

That’s why mortgage default rates in Canada are irrelevant. They indicate nothing. Canadians have no history of walking away from their declining houses or their epic debts. They just quietly, respectfully, painfully get poorer. So low defaults mean the banks continue to get paid and tons of dough carries on being transferred from homeowners to stockholders through fat, ever-increasing dividends.

Having said this, Elise, houses are going down. There will be a correction.

Lots of people will be wounded by this, and for years now this pathetic blog has piddled into the wind trying to stress the importance of balance, plus the inherent danger of a one-asset strategy. The situation many people find themselves in today is truly scary. Look at the stats released on Wednesday. Yikes.

The Canadian Payroll Association found 48% of Canadians could not survive missing a single paycheque. A quarter of us couldn’t find two grand for an emergency. Three-quarters are massively behind in saving for retirement. Even half of all people over 50 are missing 80% of what they’ll need to get by after working.

This is what house lust does. It blinds and steals. Seems like enough.

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September 9th, 2015

Posted In: The Greater Fool

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