Canada's Minister of Finance, Jim Flaherty, implemented policies to effectively curb the excesses of Canada's housing bubble. I am shocked, and today I eat my words to the contrary. Kudos to Mr. Flaherty.
Irvine Home Address … 25 CERRITO Irvine, CA 92612
Resale Home Price …… $459,000
Well, when I was younger, I was so full of fear
I hid behind anger, held back the tears
It was me against the world, I was sure that I'd win
But the world fought back, punished me for my sins
And they tried to warn me of my evil ways
But I couldn't hear what they had to say
I was wrong, self destruction's got me again
I was wrong, I realized now that I was wrong
I was wrong Ya!
I was wrong
Social Distortion – I Was Wrong
In the first article, I was very critical of Canada's Finance Minister because his public pronouncements have the same hubbub as the boobs in charge of the US housing finance markets. I was wrong about Jim Flaherty. I was as wrong as wrong can be, and today I eat crow.
First, let's review the a simple case for a Canadian housing bubble:
The Canadian Housing Bubble
Prior to 2009, there was little talk about a real estate bubble in Canada because there wasn't one. Prices in Canada have stayed relatively close to cashflow value for many years. Despite their over-reliance on adjustable-rate mortgages, their market has been a model of stability — at least it was until the implementation of new interest rate policies of the United States, a policy required by our own housing bubble ("It (expanding FHA) was an effort to keep prices from falling too fast. That’s a policy." — Barney Frank).
When the Federal Reserve in the United States lowered interest rates, it caused affordability to increase about 20%. [which is why prices did not fall much in 2009]
This is what Canada is facing, Canada housing market still ablaze in November:
OTTAWA, Dec 15 (Reuters) – Sales of existing homes in Canada jumped 73 percent in November from a year earlier to just below the record high for the month, the Canadian Real Estate Association said on Tuesday.
The average national price in November rose 19 percent from a year earlier to C$337,231 ($318,142). Year-to-date, the average price was up 4.4 percent from the same period of 2008.
How much more obvious can this situation be? Interest rates create a 20% increase in affordability, and during the depths of a deep recession, Canadians managed to make house prices go up 20%. Hmmm… I think cause and effect would indicate that prices have bubbled to match interest rates, and they will go back down when interest rates go up.
Canada Denies Housing Bubble
Is it the responsibility of politicians everywhere to deny the obvious and foster dreams of Bailouts and False Hopes? They seem to excel in this area, Canada minister sees no housing bubble at present:
"If we see — which we have not seen — but if we see clear evidence of an upward bubble, particularly with respect to insured mortgages, then we have some tools available which we've used before and we can use again," he said in his Ottawa office.
We have tools. LOL! I feel totally secure knowing the government has a tool like this guy in charge of finances.
Flaherty said it was not surprising to see substantial activity in the mortgage and housing markets given low interest rates and the fact that people had held back on big investments during the recession.
He said he was not as concerned about housing prices so much as the ability of Canadians to service their debt.
"I'm more concerned about affordability (of mortgages) and people not being lulled into a false sense of security, taking out relatively low interest-rate mortgages, when we all know that the mortgages rates have only one way to go over time — and that's up," he said.
Sorry to break the news to you Mr. Finance Minister, but you have inflated a housing bubble, and it will cause problems in your country as it did in ours. At least I give you high marks for choosing to do nothing about it. Perhaps the stooges in charge of our housing market can learn from you and do nothing further.
Eating my Words
I was critical of the Canadian Finance minister at the time because he sounded like the pirates captaining our ship, but then Mr. Flaherty did something shocking: he instituted significant policy changes that will stop the Canadian housing bubble from inflating further. In fact, many of his policies are similar to those I advocated in Regulatory Solutions to Prevent the Next Housing Bubble. Flaherty was right, and in my skepticism, I was wrong.
I have become too cynical about the embedded corruption in the United States government. The Canadian Finance Minister has proven that government can work, and that public officials have policy options available to them to prevent or curb housing bubble excess.
So why don't we?
Have we all resigned ourselves to the status quo? Are paper tigers purportedly too-big-to-fail scaring the sheeple into feeding them endless extortion profits while servile taxpayers act as grooms of the stool armed with bailout pooper scoopers to clean up the losses? Have the lobbyists for our lending oligarchs captured our legislature? Or has the Greenspan pathology of zero regulation poisoned our current batch of wouldbe regulators?
While US regulators choose wrongheaded policies designed merely to divert funds to a broken system, Canadians are fixing their problems. I give them credit for having the courage to limit credit.
TORONTO — Canada is tightening mortgage lending rules as historic low rates are raising fears of a potential housing bubble, the country's finance minister said Tuesday.
Finance Minister Jim Flaherty said there is no compelling evidence of a bubble but said the government is taking proactive measures to prevent one.
"We're looking ahead and taking action now before there is a problem," Flaherty said.
Notice the standard bureaucratic denial of a problem, and also notice the proactive measures to combat the denied problem — which by action tells you much more than the denying words.
Marvel at the clear thinking and thoughtful action this man took:
To qualify for a government-insured mortgage,  borrowers will have to meet the standards for a five-year fixed-rate mortgage — up from the current standard for three years.
Flaherty also said if Canadians want to purchase a property where they will not be living,  they will have to come up with a 20 percent down payment.
And he's imposing tighter restrictions on how much money people can borrow against their houses.  Instead of being able to borrow 95 percent of the value of their property, the limit will now be 90 percent. The changes take effect April 19.
Allow me to recap and interpret:
(1) He is forcing qualification at a higher payment rate. If he had stated 30-year fixed rather than a 5-year fixed, It would be better, but it is a step toward stable financing. I wish the statement clarified whether or not interest-only ARMs are permitted there. I believe the qualification standard he is imposing is based on a 30-year amortizing mortgage with only a 5 year fixed rate.
(2) Twenty percent down payments? I would like to see this on all property, but common sense says investment properties and second homes should require a significant down payment — people don't hesitate to walk away from investment properties.
(3) And limiting cash-out refinancing to 90% LTV is identical to the proposal I made. I like this requirement because it provides an equity cushion that stabilizes markets and prevents walkaways.
"We do want to discourage the tendency by some to use their home as an ATM machine, the tendency by some to buy three or four condominiums by way of speculation," Flaherty said. "This will discourage the kind of mortgage refinancing that can create unsustainable debt levels as interest rates go up."
Our government actively encouraged us to borrow, spend and be happy while Canadians are being warned about excessive debt and spending their equity foolishly. The contrast is conspicuous.
Canada's housing recovery has been so rapid that some are worried. There has been no crippling mortgage meltdown or banking crisis in Canada, where there is greater oversight of mortgages, but Canada's central bank has vowed to keep interest rates at a historic low of 0.25 percent until the middle of the year.
A variable-rate mortgage interest rate can be had for as low as 2 percent to 2.25 percent in Canada, while the fixed five-year posted rate at Canada's top five banks is 5.39 percent.
Some are worried that borrowers who are taking out variable-rate mortgage rates will struggle to make payments when interest rates rise. Canada's central bank been warning for months that homeowners should make sure they can absorb an increase in their floating-rate mortgages once rates start rising.
Canada's ARM Problem
I visited my friends at the local Google office last year, and I spoke with one manager there who recently moved from Canada. We talked about the many differences he noted between their market and ours and the two most notable were (1) the absence of a mortgage interest deduction in Canada and (2) the prevalence of adjustable rate mortgages.
I haven't written much recently on The ARM Problem here in the United States because it has since morphed into a Shadow Inventory problem as many ARMs including 75% of option ARMs, have already exploded or gone into default for other reasons, like unemployment, negative equity, or negative cashflow.
In Canada the majority of mortgages are ARMs and many of those are interest-only; the entire Canadian housing market is exposed to interest rate risk, and with most borrowers at their maximum ability to pay at historically low interest rates, they are certainly set up for a fall.
It may be too late for Canada. Their housing bubble is different than ours, it may even be a result of the response to ours — artificially low interest rates — but what makes Canada's housing bubble uniquely Canadian is the housing market foundation they built on the shifting sands of mortgage interest rates. Canada is likely to experience a slow grinding decline similar to ours over the next decade as interest rates rise keeping loan balances small, appreciation minimal, and foreclosures abundant.
Irvine Home Address … 25 CERRITO Irvine, CA 92612
Resale Home Price … $459,000
Income Requirement ……. $96,452
Down Payment Needed … $16,065
3.5% Down FHA Financing
Home Purchase Price … $262,500
Home Purchase Date …. 2/24/2000
Net Gain (Loss) ………. $168,960
Percent Change ………. 74.9%
Annual Appreciation … 5.6%
Mortgage Interest Rate ………. 5.13%
Monthly Mortgage Payment … $2,413
Monthly Cash Outlays …..….… $3,230
Monthly Cost of Ownership … $2,400
Baths 1 full 1 part baths
Home Size 1,507 sq ft
($305 / sq ft)
Lot Size n/a
Year Built 1975
Days on Market 107
Listing Updated 2/17/2010
MLS Number S595319
Property Type Condominium, Residential
Community Rancho San Joaquin
Absolutely charming end unit home located at the end of a tree lined cul-de-sac in the prestigious community of Rancho San Joaquin in Irvine! This gorgeous three bedroom (one currently being used as office) home has a most desirable floorplan & features a beautiful European white kitchen that opens to the dining & living areas making this home perfect for entertaining. Upgrades include designer paint, crown moulding, mirrored entry walls, hardwood floors in the kitchen and entryway, tile floors in the baths, & upgraded lighting fixtures. The master bedroom suite features dual sinks, large closets with built in organizers, ceiling fan, & custom draperies. With three spacious outdoor patios, enjoying the fresh outdoors & lush greenery is easily in reach from every part of this immaculate home! Inside laundry. Close to golf course, fabulous shopping, entertainment, So Cal beaches, the University of California Irvine, transportation & easy freeway access. Truly a great home!
I picked this property because the red in the decor. What do you think?
IMO, the red is a bit much in this office. It is a color more appropriate for a harlot's bed chamber.