Wednesday, January 19, 2011

CAAMP gets it

And they're trying to push that when prices start falling it's a result of the government making it too difficult for a small subset (the fringe) of potential home buyers.
CAAMP said 79% of mortgages in Canada have fixed rates and most of them are locked in for terms longer than five years, meaning only 21% of people with mortgages are vulnerable to a spike in rates.
First off, I doubt it if this quote is accurate. The most popular mortgage product in Canada is a a five year term, so I don't see how "most of them" are "for terms longer than five years." I can't find it anywhere in CAAMP's actual report.

Nor can I find these two statements that appeared in CAAMP's fall consumer report; statements which can't be taken back empirically, and statements which shouldn't be ignored in light of CAAMP's renewed vigour against policy changes that make it harder for their members to make a buck:
  1. 16% of Canadians with a mortgage could not manage an extra $300 increase in mortgage payments.  
  2. In addition, 11% of households would run into financial trouble if mortgage rates rose only 1.5%.
That's a sizable issue for Canadian financial policy makers. And CAAMP just "forgot" to mention these folks in their latest report.

Remember, these rule changes don't prevent lenders from offering flexible mortgage terms to the 79% of prudent Canadian borrowers (as per CAAMP). These rule changes just mean the fringe won't benefit from subsidized interest rates through CMHC insurance anymore unless they can meet marginally more difficult terms, today.


Just Jack said...

You can fiddle with a person's income. You can fiddle with a person's expenses. But you can't fiddle with the amortization period. The fact that the majority of prospective buyers are going for the "full monty" is evidence of a market that is stretched too far. That one in every four buyers on March 18, will qualify for 7% less in financing should make the property lambs hold back from making a purchase.

But most likely they won't and they will rush in to buy while they can get the riskiest cheap money they can.

The median price for the last 500 condo sales in Victoria was $280,000. The new rules should help to push up this price for the next 60 days. After that prices should drift down to $260,000.

If you own a condo you have 60 days to make the deal-of-the- century.

a simple man said...

Unfortunately, all of the people rushing to make a deal in the next 60 days will largely be those who can least afford it.

Robert Reynolds - GBA said...

For some time now, most of the commentators on this blog have suggested that prices will fall when the following conditions are met.

1) Govt. reigns in credit.
2) Interest rates rise.

Number 1 has come true. With the last two policy changes, we now have 5% down, 30 year amortization, and qualifying at the posted 5 year rate. This is a fair bit tighter than a few years ago.

Number 2 is still nowhere to be seen, we had a small bump in the BoC Prime, which effected VRMs, but not much, and the BoC has since stated that these increases were probably a mistake. I can't see BoC raising rates for a year or more. Fixed rates have fallen to new lows, and with the uncertainty in the PIIG's and Eurozone, I can see another flight to quality, which means low interest rates for a few years more at least.

I think we are going to be waiting a while for #2 to happen. So I also think we are going to be in a holding pattern for prices.

DavidL said...

@ Robert Reynolds - GBA wrote: Number 2 is still nowhere to be seen, we had a small bump in the BoC Prime, which effected VRMs, but not much, and the BoC has since stated that these increases were probably a mistake.

As I'm sure you know, the bond market is the influencing factor in setting fixed rate mortgages. In spite of a 0.75% increase in the BoC overnight rate over the past year, fixed mortgage rates have "slumped" due to the declining bond (and surging stock) market.

However, when you have European governments (PIGS) on the edge of bancrupcy, 48 of of the 50 US states are bankrupt and many some US municipalities are 180 days in arrears (and about the default) - most pundits expect there will be a brisk upturn in the bond market, likely in mid-2011. Increasing bonds rates translate into increasing fixed-rate mortages.

phil said...
This comment has been removed by the author.
phil said...


I think a lot of the commenters here have put as much weight on jobs, debt, affordability, sovereign default risk, rising fixed rates, demographics, commodity prices, substitution effect of US, EM’s slowing (China), psych shift, slowing economy/wages..but I agree your #1 and 2 could be important for a shift.

Robert Reynolds - HMR Insurance said...

I just had a nice long post written then blogger ate it... *sigh*

The jist of it was, if Eurozone implodes, people will want safety, so they look to quality investments like Govt. of Canada Bonds. When lots of people want bonds, the yields fall. Since our 5 year fixed term mortgages are tied to 5 year bonds, their rates also fall.

phil said...


The part I find entertaining is how investors think we’re the fiscally sound ones(cmhc,etc aside). Now I’m no government auditor, but Economist studies like the one below make me think twice. Especially when you plug in say Canada, Ireland, Spain on the right, then realize how high their fixed yields have risen lately.

Who knows, maybe Canadians will be the ones running to European bonds for safety?

DavidL said...

Fascinating interactive overview of government debt across the planet. Thanks.

@Robert Reynolds
I totally agree that investors will be turning to bonds. I'm no financial whiz - but I would assume that the rates offered on bonds will need to outpace inflation by a healthy margin in order to make them salable. With all the money printing (sorry - quantitative easing) that various governments have been practicing - I forsee inflation increasing, followed by bonds yields, followed by mortgage rates.

Just Jack said...

For me, interest rates are one of the many factors influencing value. But I would put consumer confidence at the top of the list.

It doesn't matter how low the interest rate is, if people have lost the lust to buy there goes the market.

A market solely surviving on price appreciation while having falling sale volumes is marked for failure. Because one Monday morning, the phones may stop to ring. (or play Dire Straits - Money for Nothing)

Ooops, not allowed to play that song in Canada unless you bleep out words.

Mr.4AM said...

I tend to agree with RBA. Carney *may* up the lending rate another 0.5% this year after Q2, but that's only if things remain more or less stable or if there's signs of *core* inflation slightly increasing.

With all the China/Europe + US municipal/state debt risks in 2011, and comodity inflationary pressures, I expect 2011 to be anything but a calm year in the markets.

Historically, it's made good common sense to evaluate real estate markets based sole on what goes on in your country or even province, but we can't go on ignoring the macro economical impacts of our globalized world.

Yes, the #1 thing that impacts real estate markets is buyer/seller psychology - but that is only a symptom of some set of trigger point(s). These being interest rates, consumer confidence, real inflation, unemployment, wages, real estate government intervention (i.e. mortgage rule changes), etc.

So far we have most of those in theory working against the real estate market in terms of a combined force that SHOULD be pushing prices down. But really the combined forces of all these hasn't been strong enough to push consumer affordability to a point where market psychology reaches some inflection point and simply 'flips' to a negative perspective.

The biggest of the forces (aside from *dramatic* government intervention - which we haven't really seen yet), is interest rates.

The BoC indirectly impacts Variable rates and yes the bond market fixed rates.


Mr.4AM said...

I really don't see the BoC cranking up interest rates a la Volker in the early 80's any time soon, certainly not in 2011. Our economic "recovery" is still rather fragile and with our dollar now just above par, it would be suicide to start cranking up the overnight lending rate to banks.

As for bond markets, and whether Canadian bonds could be considered a serious international option in terms of flight to safety I don't know but sounds somewhat plausible given the rising strength of our currency primary due to US dollar debasement, but I would still bet that the next major global stock market panic would result in what happened last time - flight into the US dollar, not Canadian dollar/bonds. So the Canadian bond market may find its yields decrease slightly in 2011 or remain mostly flat. Canada is not even in the top 10 on the watchlist of sovereign nations at high risk of capitulation (despite our ridiculous debt loads). "Our banks are the most stable in the world" marketing campaign appears to have fooled the masses, for now anyway.

At any rate, my main point is that since I don't expect interest rates to do much of anything this year, and no specific trigger to be strong enough to flip consumer real estate market psychology to the negative side, I expect housing prices to do a whole lot of 'nothing' dramatic (meaning in excess of +/- 10% changes) this year - whether to the up side or down side.

Meanwhile, I do expect global financial market risks to continue to increase dramatically, which should - over the course of the year - result in a strong increase in comodity prices (at least until China pops).

My nicely growing house deposit/down payment fund since ~Q3 2008 has been primarily in gold & silver - which over the long term (2,3, 4 years) should continue rise significantly as global risks continue to accumulate. Until somebody fixes the global economy PMs have a hefty upward trend to continue to look forward to, despite the odd 10-20% dips that may occur along the way due to outer market panics.

In short, while I still very much believe Victoria real estate is way over priced and will eventually significantly come down in price, I'm waiting in the side lines invested in PMs (precious metals) which as they rise and Victoria housing prices start to negatively trend, should allow me to buy much more house than I could otherwise afford down the road.

My main point is this - carry on thinking, debating and investigating the Victoria real estate market, but do not ignore what interest rates are doing and will likely be doing, and do not ignore the global macro economic picture - these two factors alone WILL likely have the biggest impact on your housing affordability.


Robert Reynolds - HMR Insurance said...

Very good post/s Mr.4am

I agree with everything but the Precious Metal part. Though I do have to hand it to you on the performance the last year or two.

I don't think Canadian bonds will be a global draw, but they will certainly be a draw for Canadians. The USD will still be the reserve currency of the world for a good time to come (and hence their bonds).

Consumer confidence is definitely the biggest impact on a bubble. But the change in consumer confidence is directly due to all the other things you mentioned, such as interest rates, regulation, unemployment rate, etc.

So I see a lot more "Hurry up and wait" in the future.

phil said...

Anything's possible dudes. Yield (fixed rates) on the Canadian 5 yr note most likely rises another 100 basis points this year. BoC will have little choice but to follow with variable - possibly a more deleterious effect on housing market if they didn’t keep pace.

Dave said...

Great posts.

I was just about to ask about the PM market and whether or not anyone thinks it's looking a bit frothy. If so, how long will it continue to be flocked to? Is there anything else to turn to besides US Bonds?


phil said...


My opinion for what it’s worth, both PM’s and Bonds are best to 'short' for now.

You got me thinking more about variable rates. Even barring any future flight to safety episodes, USD should still continue rising along with treasury yields and a slowly strengthening US economy. Thus with a falling loonie and unwinding commodities, the BoC would then have further room to push up variable.

nan said...

Although there might not be a defined crash-causing "trigger point" on the immediate horizon, what about the trend that has been developing over the past year?

Housing prices are flat, for the first year in the last 10 and with the new rule changes, without an ENORMOUS influx of foreign cash I don't expect to see anything other than flat or decreasing prices this year either.

When this happens to a growth stock, prices can fall instantly and dramatically. When expected and priced-in price increases all of a sudden become less likely in the housing market, all many real estate owners will be left with are hefty mortgages and/or negative rental yields.

I honestly don't think we'll need a trigger point - I think the realization that the castle that has been built in the sky indeed has no foundation may well be enough to precipitate a buyer strike and ensuing crash.

If I go to a party and no one is bragging about all their real estate gains this year, what incentive do I have to follow them by getting up to my ears in debt?

Just Jack said...

I'm in agreement with Nan, I don't think a definite "trigger" is needed. The marketplace has just matured and now needs to correct for its excesses.

The difference between now and when the market should have begun a contraction two years ago is that the government is no longer willing to stimulate the market. The government has exposed CMHC and the taxpayers to billions of dollars of liability in order to keep prices basically flat for the last two years. Now that stimulus is about to be removed, the ability of a sizable chunk of prospective purchasers to buy homes at over inflated prices is about to be eliminated.

There is only one cure for the marketplace and ultimately the economy and that is to hit the reset button.

The only question that is left is which professorship Harper will be taking Yale or Harvard?

Mr.4AM said...

"If I go to a party and no one is bragging about all their real estate gains this year, what incentive do I have to follow them by getting up to my ears in debt?"

Never underestimate the verbal nonsensicle power of realtors over the naivety of first time buyers. I can hear them already...

"Prices have come down, interest rates are so low but mortgage rules are about to tighten so don't miss this buying oportunity, it's a buyer's market and a great time to give me some huge undeserved commission... I mean,it's a great time to buy!!"

nan said...

But if there's no potential for future gains, even an unreasonable person would compare a monthly mortgage to rent, which for a comparable property in vic is usually around double. That realtor might then be asked "why buy? Rent is cheaper!" Eliminating the uncertainty of future growth from the equation doesn't remove the emotional aspect from purchasing a house, but it definitely simplifies the decision making process.

Mr.4AM said...

Nan said: "even an unreasonable person would compare a monthly mortgage to rent"

Nan, you must be living in dream-land alternate universe. Don't you know that any time you rent you are always without exception "throwing money away"? Come on... get with the program! Here in Canada, this is the aspiration of the majority, basic math, fundamentals and economics be damned!


nan said...

That's why I put "might", and identified the emotional aspect. The only point I was trying to make is that in the absence of rising prices, there is very little a realtor can do to convince you paying 2x for the same thing is a good idea.