Garth Turner - Real Estate in Canada

[scorpioncapital]

https://www.mccarthy.ca/article_detail.aspx?id=7250

 

The banks are most certainly not going to be saved 100% in a crash. But depending on how much insurance the government housing agency insured and how much they are on the hook before the banks get hit will depend whether the banks have a big problem.

 

 

 

 

[wisdom]

In Canada, the insurers are backed by the tax payer ( if I understand this correctly). Until 2011 CMHC insured 50% of all mortgages. But there is tremendous amounts of HELOCS out there that are interest only payments and aren't insured. The so called ATM.

[rb]

In Canada, the insurers are backed by the tax payer ( if I understand this correctly). Until 2011 CMHC insured 50% of all mortgages. But there is tremendous amounts of HELOCS out there that are interest only payments and aren't insured. The so called ATM.

CMHC is the government and they write the bulk of insurance. MIC is private without gov't backing and they have been more than eager the worst of the mortgages out there (think NINJA). They're also too small to be systemically important. So if something happens IMO they're one of the first to go. I don;t think there's gonna be any gov't help for that one.

[bbarberayr]

I think inflation is coming.  It will help a lot of the issues with the current economy like over-valued real estate and excessive government  and other debt.

 

Likely the scenario is inflation rises due to increased costs due to things like rising wages and commodity prices.  The fed will be lenient on this as it wants higher wages and employment and prices.  Inflation will likely get up towards the 3% area, then the Fed raises rates slowly, allowing inflation to crush the real value of the excess debt.  Finally, inflation gets too hot and the Fed raises rates a lot and we get the inevitable recession and bear market.

[wisdom]

CMHC is a crown corp. But there are other players such a Genworth and Canada guaranty. I believe they have been agressive in increasing their market share after the government forced CMHC to reduce risk. In the first place it was the feds that doubled their cap to $600B after GFC to help the Canadian economy.

[rb]

I think inflation is coming.  It will help a lot of the issues with the current economy like over-valued real estate and excessive government  and other debt.

 

Likely the scenario is inflation rises due to increased costs due to things like rising wages and commodity prices.  The fed will be lenient on this as it wants higher wages and employment and prices.  Inflation will likely get up towards the 3% area, then the Fed raises rates slowly, allowing inflation to crush the real value of the excess debt.  Finally, inflation gets too hot and the Fed raises rates a lot and we get the inevitable recession and bear market.

I'm sorry, but I think you're way off the mark here.

 

First of all, we're talking about Canada here, so the Fed has nothing to do with this.

 

Second, I don't think we're anywhere near a commodity up cycle. Even then I don't think supply side inflation is what you're looking for to cure these ills.

 

Third, the idea that rising wages are just around the corner is a bit of a fantasy. Even if you would get a bump in wages that won't push inflation up. What you're describing would require a tight labour market and a supply constrained economy and we're pretty far away from both of those.

 

I'm sorry I wish you were right cause then the situation wouldn't be as dire. But it's not the case.

[rb]

CMHC is a crown corp. But there are other players such a Genworth and Canada guaranty. I believe they have been agressive in increasing their market share after the government forced CMHC to reduce risk. In the first place it was the feds that doubled their cap to $600B after GFC to help the Canadian economy.

Yea, that's what I've been talking about. MIC is Genworth. What I've said is that MIC doesn't have government backing. As you said they've aggressively picked up all that risk that the feds didn't want. One such area are loans to self employed that have no income verification. In Canada it's not a NINJA loan it's mortgage insurance for hard working entrepreneurs.

 

But as far as I know the only people that get insurance from MIC are the ones that don't qualify for CMHC. So you gotta think that the most rotten of the stuff will be with the MIC or Canada Guaranty.

 

It's also interesting that we're in the middle of a boom boom bull market and MIC trades at 2/3 book

[beerbaron]

CMHC is a crown corp. But there are other players such a Genworth and Canada guaranty. I believe they have been agressive in increasing their market share after the government forced CMHC to reduce risk. In the first place it was the feds that doubled their cap to $600B after GFC to help the Canadian economy.

Yea, that's what I've been talking about. MIC is Genworth. What I've said is that MIC doesn't have government backing. As you said they've aggressively picked up all that risk that the feds didn't want. One such area are loans to self employed that have no income verification. In Canada it's not a NINJA loan it's mortgage insurance for hard working entrepreneurs.

 

But as far as I know the only people that get insurance from MIC are the ones that don't qualify for CMHC. So you gotta think that the most rotten of the stuff will be with the MIC or Canada Guaranty.

 

It's also interesting that we're in the middle of a boom boom bull market and MIC trades at 2/3 book

 

I remember seeing that MIC insurances also backed by the Canadian government. Can anyone validate or deny that information?

 

BeerBaron

[rb]

CMHC is a crown corp. But there are other players such a Genworth and Canada guaranty. I believe they have been agressive in increasing their market share after the government forced CMHC to reduce risk. In the first place it was the feds that doubled their cap to $600B after GFC to help the Canadian economy.

Yea, that's what I've been talking about. MIC is Genworth. What I've said is that MIC doesn't have government backing. As you said they've aggressively picked up all that risk that the feds didn't want. One such area are loans to self employed that have no income verification. In Canada it's not a NINJA loan it's mortgage insurance for hard working entrepreneurs.

 

But as far as I know the only people that get insurance from MIC are the ones that don't qualify for CMHC. So you gotta think that the most rotten of the stuff will be with the MIC or Canada Guaranty.

 

It's also interesting that we're in the middle of a boom boom bull market and MIC trades at 2/3 book

 

I remember seeing that MIC insurances also backed by the Canadian government. Can anyone validate or deny that information?

 

BeerBaron

Just checked it out.

 

Outrageously there is some government involvement. Basically the government backing is this: if MIC goes bust and can't fulfill its obligations then the lender eats the first 10% of the loss and the government takes the rest. My government must be insane to backstop insurance contracts written by these clowns. :o

[Potato]

I remember seeing that MIC insurances also backed by the Canadian government. Can anyone validate or deny that information?

BeerBaron

 

The insurance is backed (90%) by the government, but not MIC itself (i.e., the gov't doesn't pay until MIC is out of capital).

 

But as far as I know the only people that get insurance from MIC are the ones that don't qualify for CMHC. So you gotta think that the most rotten of the stuff will be with the MIC or Canada Guaranty.

 

This has been central to my thesis as well -- to my mind, MIC shouldn't exist. There's no reason to go there unless CMHC won't insure. The buyers don't care one way or the other, and the lenders/banks prefer CMHC because it gets a lower risk weighting on their books.

[rb]

Yea, basically MIC is writing CDS on subprime mortgages.

[wisdom]

Spoke with mortgage brokers -

1) they can't believe the prices and the amount being borrowed

2) they see this as the time to make as much as they can to set themselves up for the rest of their lives. So they don't care as long as others are buying.

[Nelson]

I remember seeing that MIC insurances also backed by the Canadian government. Can anyone validate or deny that information?

BeerBaron

 

The insurance is backed (90%) by the government, but not MIC itself (i.e., the gov't doesn't pay until MIC is out of capital).

 

But as far as I know the only people that get insurance from MIC are the ones that don't qualify for CMHC. So you gotta think that the most rotten of the stuff will be with the MIC or Canada Guaranty.

 

This has been central to my thesis as well -- to my mind, MIC shouldn't exist. There's no reason to go there unless CMHC won't insure. The buyers don't care one way or the other, and the lenders/banks prefer CMHC because it gets a lower risk weighting on their books.

 

It's been a while since I used to be a mortgage broker (I quit in 2010), but when I was in the business quite a few lenders were using MIC because they were known to be more lax than CMHC. Most of the difference came via valuation. CMHC would approve deals, but at a lesser value. Say the buyer pays $400k, CMHC would come back and approve it, but only up to $380k. If you were putting down $100k, this wasn't a problem. But most people only put down $20-$40k. MIC tended to approve these loans at the price offered.

 

(Keep in mind that this was back in 2009, and these houses are now worth ~50% more. So in MIC's defense, the strategy worked, and worked well.)

[gary17]

I wonder if we could start a poll on the extent of the market correction people are seeing in Vancouver and Toronto.

 

If it is 20% - things just go back to where they were 2 months ago lol

[bbarberayr]

Canadian rates will follow the US, so what the Fed does is important.

 

Most commodities are far off their bottoms - look at oil, gold, base metals.  We've had the crash and now we are slowly building.  I agree these commodities are product are much lower than a couple of years ago, and these will start feeding into inflation numbers.

 

Unemployment in both Canada and the US is quite low, and we are seeing companies having trouble getting highly skilled labour and also minimum wages rising everywhere.  I think this cycle we see a cost/push inflation cycle and this is what the Fed would much prefer over a demand/pull style.

 

I think inflation is coming.  It will help a lot of the issues with the current economy like over-valued real estate and excessive government  and other debt.

 

Likely the scenario is inflation rises due to increased costs due to things like rising wages and commodity prices.  The fed will be lenient on this as it wants higher wages and employment and prices.  Inflation will likely get up towards the 3% area, then the Fed raises rates slowly, allowing inflation to crush the real value of the excess debt.  Finally, inflation gets too hot and the Fed raises rates a lot and we get the inevitable recession and bear market.

I'm sorry, but I think you're way off the mark here.

 

First of all, we're talking about Canada here, so the Fed has nothing to do with this.

 

Second, I don't think we're anywhere near a commodity up cycle. Even then I don't think supply side inflation is what you're looking for to cure these ills.

 

Third, the idea that rising wages are just around the corner is a bit of a fantasy. Even if you would get a bump in wages that won't push inflation up. What you're describing would require a tight labour market and a supply constrained economy and we're pretty far away from both of those.

 

I'm sorry I wish you were right cause then the situation wouldn't be as dire. But it's not the case.

[Guest 50centdollars]

yea, in those scenarios you are correct.

 

Also from the point of view of paying down debt we've seen pretty clearly that it's very hard to do at a large scale. Pretty much the only hope is to inflate it away. Not easy in a low inflation environment.

 

Personally I don't know what people are thinking. Last year my sister bought a $550,000 house in the middle of nowhere with 2% down. She is making 44k/year. TD wouldn't give her a mortgage. CIBC saw no problem with that.

 

RB - Ed Clark mentioned this a few years ago when he was CEO of TD. He said that if we didn't give the customer a mortgage, they would just go to the next bank. This is exactly what your sister did. Clark tried to get the gov't to make lending standards more stringent but was denied. The government will try to tighten now but the horses have already left the barn.

 

A friend of mine just won a bidding war in Georgetown Ontario. He paid $520K for a house with 5% down. He makes $50K per year. I don't know how much his wife makes. BMO gave him the mortgage. Like you said, in the middle of nowhere.

 

Buying assets at unreasonable valuations with minimum down-payments is not saving or investing, it is speculating. And speculating, like gambling, rarely pays off.

 

 

[wisdom]

http://www.theglobeandmail.com/report-on-business/canadas-banks-fall-behind-us-europe-lenders-in-strength-gauge/article29950134/

 

Could we be building towards the perfect storm? This might force Canadian banks to tighten lending at the same time we are potentially peaking.

[A_Hamilton]

http://www.theglobeandmail.com/report-on-business/canadas-banks-fall-behind-us-europe-lenders-in-strength-gauge/article29950134/

 

Could we building towards the perfect storm? This might force Canadian banks to tighten lending at the same time we are potentially peaking.

 

Ticking time bomb.

 

Who knows if a real estate bust will directly affect these banks' capital position or if ROE's will come down dramatically when CMHC needs to be bailed out and Canadians demand that these banks hold more capital so that they can't use regulatory arbitrage via CMHC to extort huge amounts of profits from the citizenry.

 

Probably better off shorting the C$ so the 20-30% ROE's don't blow you up in the interim period before the bust.

 

Next 10 years for Canadian banking very likely to include vast capital builds and retrenchment from interesting forays into the U.S., LatAm and the Caribbean. Seen this movie before.

[gary17]

http://vancouversun.com/storyline/student-owns-31-1-million-point-grey-mansion

 

LOL  - this is the typical phenomenon...

 

question is how much more money will flood into Vancouver RE

[alertmeipp]

I think the gov could have done something had the econ is not so bad as it is.

 

 

but in LT when larger part of spending is coming from home equity ... they will be in for bigger trouble.

[gary17]

I think the gov could have done something had the econ is not so bad as it is.

 

 

but in LT when larger part of spending is coming from home equity ... they will be in for bigger trouble.

 

I agree - essentially with weak oil & recovering manufacturing , the construction / real estate industry is "holding the government hostage".    It's back to the do you bail out wall street or main street.  Do you like a few next generations can't afford housing or risk the entire country go into a deep recession by raising rates... 

[mcliu]

http://vancouversun.com/storyline/student-owns-31-1-million-point-grey-mansion

 

LOL  - this is the typical phenomenon...

 

question is how much more money will flood into Vancouver RE

 

How do they get mortgages for these properties? Where's the income coming from? If there's a default, is there recourse?

[gary17]

http://vancouversun.com/storyline/student-owns-31-1-million-point-grey-mansion

 

LOL  - this is the typical phenomenon...

 

question is how much more money will flood into Vancouver RE

 

How do they get mortgages for these properties? Where's the income coming from? If there's a default, is there recourse?

 

a) they recognize foreign income -    probably the parents company in China is ok.  and Parents are co-signers.

b) they could also be getting a mortgage from HSBC -    I know they lend money to Asians in Canada if they have deposit with HSBC in HK / China or Taiwan. 

 

 

[alertmeipp]

http://vancouversun.com/storyline/student-owns-31-1-million-point-grey-mansion

 

LOL  - this is the typical phenomenon...

 

question is how much more money will flood into Vancouver RE

 

How do they get mortgages for these properties? Where's the income coming from? If there's a default, is there recourse?

 

Many dont need mortgage. Not sure how they move so much cash over given the Chinese regulation...

 

[wisdom]

Recognizing foreign income - What is the FI's recourse? The purchaser wins big if there is appreciation and walks away if the market goes the other way.

 

A perfect set up if I were to attract speculation.