Worthwhile Canadian Intiative

[Parsad]

Article by Fareed Zakaria on Canadian banks and fiscal policy.  Cheers!

 

http://www.newsweek.com/id/183670/output/print

[Smazz]

How appropriate,

A Canadian would never write something like that ;)

[EdWatchesBoxing]

I think that the article is a little wrong on housing up here in Canada. Our correction is just starting. I don't know if the avg drop will be as severe as the US averages, but I think price will come down more in Canada. In the Toronto area, sales volume has gone down a lot, but price has not yet dropped much. I think inventory is up from the statistics that I've seen.

[Crip1]

"I think that the article is a little wrong on housing up here in Canada. Our correction is just starting. I don't know if the avg drop will be as severe as the US averages, but I think price will come down more in Canada. In the Toronto area, sales volume has gone down a lot, but price has not yet dropped much. I think inventory is up from the statistics that I've seen."

 

My knowledge on Canadian housing is, admittedly, minimal. It looks like Canada's economy-based correction is just starting, but so is the same economy-based correction in the US. The issue is that the US has also endured, and continues to endure, a correction based on excess capital providing loans to those unworthy. Bye-bye capital, bye-bye buyers, and the supply-demand curve is thrown totally out of whack. When all is said and done, the Canadian housing market will see a drop, the US will see a plummet, Canada will endure a problem, the US will endure a catastrophy...you get the picture.

 

At least it's warmer down here.

 

-Crip

[Uccmal]

Liar loans, and upside down loans got started in Canada a few months ahead of July 2007.  Very few were ever issued.  Housing prices went up substantially in a select few areas, notably parts of Toronto, and Calgary.  For the most part they went up a maximum of 1.5% from 2004 to 2008 after languishing for 16 years.  Not enough stress to cause bank issues here.  Most of the Canadian Bank exposures came from US holdings (Subs, and MBS). 

[Packer16]

I think the key point the article makes is leverage.  The US system could have made it through if it were not leveraged like it is.  The banks would have lost money on its loans but not threaten the whole system.  I think the article points out that Europe (with higher leverage) is in a much worse situation than either the US or Canada and even if the US system was less leveraged the European bank would have cause similar problems.

 

Packer

[StubbleJumper]

Sure, leverage is a huge factor in what is going on at the moment.  However, it is equally important (more important?) to consider what it is that you are leveraging with.  If you are leveraging with NINJA loans or over-priced real estate, clearly you have a problem.  However, the National Housing Act requires CMHC insurance for mortgages greater than 75% loan to value.  As a result, much of the volume of bad mortgages to which our banks are exposed are either 1) insured by the federal government, or 2) less than 75% LTV. 

 

Now, things got over priced in a serious way in a few markets, but the 75% LTV cushion will significantly reduce losses from mortgage loans.

 

All the personal loans, credit cards, and corporate loans are a completely different story!

 

SJ

[Guest Broxburnboy]

Another issue is inventory of unsold homes. Canadian markets were not overbuilt to the extent they were in the US.

The inventory of foreclosed homes must be sold or written off before prices will stabilize. New homes may be built

in select regional markets, but there appears to be a way to go before demand picks up again.

[Viking]

Boy have I been sounding bearish lately!

 

Regarding home prices, some large markets like Vancouver saw increases in excess of 100% since 2000. In Vancouver, sales are off more than 50% and listings are up 50%. Months of inventory are at historic highs. This spring will tell the take (outright bust of simple slowdown). If prices fall another 20% this year (in Vancouver) someone will be taking it on the chin. Want to see serious oversupply? Check out the Vancouver condo market (I also read somewhere that Toronto is the condo capital of NA).

 

The economy is just starting to slow in Vancouver. We are about 12-18 months behind the US. 18 months ago everyone in the US thought everything was going to be just fine.

 

Yes, our banks appear to be in better shape than the US and our mortgage practices appear to have been more disciplined. However, given the size of the bubble (yes, it was a bubble) and as the economy slow and unemployment increases we will see our fair share of pain. Time will tell how our institutions will fare. 

[SharperDingaan]

 

Canadian cultural practice is typically a 25 yr amortizing recourse mortgage, that results in a mortgage free house at retirement (55-70). Consequently, a large part of the lenders mortgage portfolio has systemic monthly & cummulative equity growth to offset adverse price volatility. For the most part, the average equity is also well > 25% of the house value.

 

All mortgages with < 25% DP are insured by CMHC/BOC. The insurance is essentially a put priced to favour a minimum 10-25% DP - & if execized, results in (1) the CHMC re-paying the lender 100% of the mortgage (2) seizing your house & selling it, & (3) prosecuting you for any shortfall. In really bad times CHMC can deliberatly hold the houses off the market (BOC essentially finances them) untill pricing improves.

 

Customary lending practice is to automatically refinance mortgages @ 25% DP, through the use of a LOC & (often) mandatory CHMC insurance. Monthly payments decline significantly (better debt servicing) & any further decline becomes the governments problem. The last 3-4 years have changed practices a bit, but the safeguards are largely still intact.

 

We will get falling house prices, but it is highly unlikely that you will see it to the same degree as in the US or UK. Even if a large chunk of the population is out of work.

 

SD