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Canadian residential real estate: you tought that we were protected?


Partner24
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You beat me to it with the americacanada blog post.

 

I have been thinking about buying puts on the Canadian banks. The author of the post in the second link seems to think the same way. Some of the comments were also interesting.

 

If it is true that most mortgages since 2007 have been insured. I really don't think it will end well for Canada. When the RE bubble bursts, it hurts to think that we will all be paying for it.  For now though, people think I'm the crazy one for thinking that the housing run will end badly.

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Keep in mind what wasn't in that analysis (mortgage amortization, mortgage premium income, etc.), & where the analysis originated. The risk is with CMHC (federal government), not the Cdn Banks.

 

The ticking bomb is really the UK commercial property market, as the mortgages (trillions) are coming due in 2009/10/11 at a time when there's zero interest. There will be a rush to foreclose untill the upfront loss exceeds the additional cost on regulatory capital on carrying the deadbeat credits. Being first past the post will have a very real advantage, so expect rapid price erosion.

 

The UK issues will quickly spead to Europe & then the US/Canada. The forced additional commercial mortgage provisioning could well do a number on bank earnings for a good 9-15 months. 

 

SD

 

 

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SD,

 

I know the banks are really passing the risk onto the taxpayer, but do you think the banks are immune to what may happen in a correction? I think they will go down, but I see your point.

 

I also traced the flow of the insured mortgages into the bonds guaranteed by CMHC. The stat that the mortgages on the bank balance sheets have not grown is quite telling. My thoughts on Canada mortgage bonds are that spreads may widen with price erosion, along with increased interest rates. Any thoughts?

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You can take on Cdn real estate risk essentially 4 ways - 1) Chartered Banks as mortgage originators, 2) Life Coys as the buyers of long term commercial mortgages, 3) Ppty Mgrs as building investors/managers, or 4) REITs. Moving from 1) to 4) reduces BOC influence, & multiplies the inherent business risk.

 

It is reasonable to assume increases in Chartered bank provisioning (commercial loans, credit cards, etc), but will it reduce overall profitability with enough certainty to bet on it ? And why is the REIT not the better bet ?

 

Then keep in mind that a ppty manager has an incentive to buy a REITs building, issue the property management contract to itself, & repo the building back to the REIT - with all of it at a rising price. Everyone shows gains, all the buildings get marked to these new prices, & the incentive is strongest when the times are toughest.

 

The bank franchises are extremely strong, deep, & protected.

Handle with care

 

SD

 

 

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