The first, entitled What subprime crisis? reminded me that I'm pretty much sub-primed out. It's almost as if the sub-prime debts have become the big bad wolf that economists and people who write about the markets can just refer to and expect us all to just get it--though apparently few do--without question. It's as if they can't explain their point using rational, reasoned, time-tested economic theory, so they just cry "wolf."
In a completely different section, and an obscure location as if editors either expected no one to read, or wanted no one to read, Our housing bubble may be the next to pop seems to have a more credible author (economics professor) and an easier sell in hhv-land.
Here are the highlights:
What subprime crisis?
Subprime does not mean the interest rate is below the prime lending rate. It means the borrower is below what is considered a prime candidate for a mortgage.Look carefully at those last three lines: lowered lending criteria, not been artificially driven, chasing short term returns = correction. Anyone else see the contradictions there? Nope, no one in Victoria has been chasing short term returns in the RE market. Not my dad with his two houses, nor my friend's parents with their two houses, nor my other friends' parents with their three houses (only one of this group happens to be rented by the way). Nope 5 people, 7 properties, 3 principle residences, 1 rental, and 3 vacant "flips." Nothing to see here kids.
Canadians are not facing a subprime mortgage crisis.
After [subprime lenders] got the borrower to sign on the dotted line, the lending institutions packaged up the loans and sold them to hedge funds, mutual funds and private equity groups looking for quick returns.
The shares of these companies were then bought by pension funds and insurance companies looking for high returns, even though they would never have bought the risky mortgages outright.
Over the past five years, thousands of new mortgage brokers have entered the market in Canada and the U.S.
...it is true that some Canadian lenders dramatically lowered their lending criteria...
...the Canadian housing market has not been artificially driven by bad lending practices.
So, what's the lesson in all of this? Chasing short-term returns leads to an inevitable correction in any market.
Our housing bubble may be the next to pop
After a decade of low interest rates, it is no surprise that investors poured their money into real estate and the stock market.Reading this one seems kind of familiar to anything else being espoused lately by economists: inflation concerns, rising interest rates, over-valued markets, looming correction. History has a funny way of repeating itself, non?
Not raising interest rates in the foreseeable future may stave off pain for a little while longer, but the end of cheap credit is near.
...Canadian housing prices over the last decade have risen to the extent that we may also need to be concerned, given interest rate trends.
In Canada, the average MLS residential price rose from $150,720 in 1995 to reach $249,311 in 2005 -- a 65% increase.
In many cities, the price increases are so steep that homeowners are experiencing massive wealth effects as their homes appreciate, while first-time buyers are increasingly unable to afford a home.
The lowest interest rates in 40 years fueled this boom, and as prices and mortgage sizes have risen, financial institutions have "helpfully" come up with new affordability strategies, such as putting only 5% or even a zero down payment and extending amortization periods beyond 25 years.
A price-earnings ratio is the ratio of the price of an asset to its earnings flow.
...a crude P/E ratio can be constructed by taking the average MLS residential price and dividing it by the average annual rent for a two-bedroom apartment.
Declining P/E ratios can represent undervaluation, while rising P/E ratios can represent overvaluation.
...in Toronto, the residential housing P/E ratio remained at about 20 from 1995 to 2001 and then jumped to 27 by 2005.
...Vancouver, which already had P/E ratio of 31 in 1995. This actually declined to a range of 26 to 28, but then soared after 2003 and reached 35 by 2005.
Does this mean anything? Maybe no.
...in stock markets, whenever the P/E ratio for the market has risen substantially above 25 there has often been a correction, meaning a sharp drop in the prices of shares.
The P/E ratio for Canada as a whole is about 28, suggesting that the real estate market may be overvalued.
In light of the turmoil in the U.S. economy and the tightening of credit markets, which foretell a rise in interest rates, the question is not if but when the housing boom here will end.
As an aside, with my new schedule it would appear I will have all kinds of blogging going on over the weekends. I know many of the regular readers of HHV are Monday-Friday types, so I'll make a habit of indexing the weekend posts on Sunday afternoons so you can catch up Monday mornings if you'd like. Did you like the polls?
A life sentence to the poorhouse