The looming fire

Every day the fire conditions worsen. It's getting bigger, closer and faster people. And the useful idiots in the offices of industry associations and mainstream media outlets keep proclaiming that the tree on the edge of the fire is still growing.

If you buy a house today, you are either economically ignorant or a fool. And you know what they say about fools and money. (H/T to many of you readers for the links and tips in comments lately).

UPDATE
Just because folks seem to be picking on Cameron Muir's inability to look in the mirror and predict what he'll see, I figured I'd make it easier with a little help from the fine folks over at VancouverCondo.info.


Some of my personal favourites include:

“There is no indication, at this point, of any kind of substantial decline in prices,” July 2008

"Muir said home prices have been declining since their peak in the first quarter of 2008, but on balanced over the year, he expects the $453,000 average price to remain three per cent above the overall average home price of 2007.

Muir expects the average home price to decline nine per cent to $413,000 in 2009, but downward pressure on prices to ease by the second quarter of next year as homes become more affordable and inventories decline. Source. October 2008

Read more here.

Somethings rotten in the CAAMP

I guess fear is a prime motivator after all. [sarcasm off]

I can only imagine the prospect of declining sales volumes has agents and brokers waking up in a cold sweat at night. So much so they must be calling their industry associations each morning in a panic to get them to do something, anything about any possible chance the government could reign in their ability to sell their products.

Before I continue, let me make one thing absolutely clear: I believe the Canadian government needs to reign in the CMHC on behalf of the Canadian taxpayer. I believe the CMHC has moved beyond its mandate significantly and I believe the Canadian taxpayer is at significant risk of financial loss if the real estate market were to correct beyond 15 per cent.

Of course, CAAMP and the CREA take the opposite belief--to them, it is impossible for the real estate market to correct 15 per cent.

To show you how rotten things have gotten at CAAMP, I give you this: In November of 2009, less than 3 short months ago, they published this study, with this graphic showing that 68 per cent of mortgages written in 2009 were of the "fixed rate" variety:


Now with all the pending talk of limiting CAAMP member's abilities to give you and I too much money too fast, they've decided to revise their fall 2009 report with this gem, aptly titled: Revisiting the Canadian Mortgage Market. And here's their revision:

Line extends much higher than 68 per cent doesn't it? Wow. When the numbers don't support your argument, add 20 per cent. Here's further proof they have made this 80% number up (I'm wrong about this assumption, if Rob is correct in the update below).

Their report is full of other baseless calculations and assumptions, like their so-called "stress test" that demonstrates first time home buyers have never had a safer opportunity to buy or exercised such caution when entering the market--forgive me while I puke a little in my mouth.

I won't waste my time ripping the whole report to shreds, instead I recommend that it just get shredded.

I have a very good understanding of public policy process in Canada. It is a crying shame that organizations like this are allowed to play a part in the process at all. It is a freaking tragedy though that policy makers (the public servants who work in the departments, not the politicians) are forced to give these types of reports higher credence than detailed analysis by arms-length third party organizations simply because they don't exist in Canada. This report demonstrates that truth is apparently inconsequential to their business organization and is merely something to be rewritten when it doesn't support their outcomes.

Thanks to Skeptic and Double Agent in comments for the links and tips to this mess. Edmonton Housing Bust has another similar post up, and to their credit, the McListers aren't censoring comments on this bullsh&t on their blog.

IMPORTANT UPDATE
In all fairness to the CAAMP and their members, this comment was posted on the McLister's blog by Rob (link above):

...remember that this newest study included only purchases. The November 2009 study included purchases, refis, and renewals. People are more likely to get variables when renewing or refinancing. That is largely why the fixed-to-variable ratio is different in each study.

This explains the discrepancy in reported numbers. I've added a comment above in italics, but did not change my original post, not because I stand by my assertion that the CAAMP was making something up, but because I wrote it first, and meant it at the time given the information I had, and so that you can see I'm not hiding anything. I accept Rob's statement at face value and it is a reasonable explanation for the change in fixed rate percentages.

I still stand behind the general premise of this post: CAAMP is an industry lobby group with a financial interest in seeing mortgage related policy remain unchanged, or further liberalized, so that they can continue to sell mortgage products insured by Joe Taxpayer and they are using "clever tricks" to demonstrate why they believe mortgage insurance policy should remain unchanged. They are not an impartial source of mortgage related information and should never be viewed as such by the general public or the public service.

Utter failure

And they have no one but themselves to blame.

Canwest publishing group is for sale under protection from their creditors.

Are we really surprised when their reporting has become largely irrelevant parroting of industry-driven "news" releases? (H/T Skeptic)

I don't know who I feel more sorry for: the mail room people who will suffer through no fault of their own or the "journalists" who forgot how to Google, er, fact check, or the editors who chose to continually publish this crap under the guise of news.

Oh well, I suppose Canada's New Socialist Government may swoop in and save you from yourselves.

Patience

It's been almost three years since I started this blog. In that time, my wife and I have paid around $27,000 for shelter. Had we bought a condo in the first few months of our house hunt, over these past three years we would have paid around $65,600 for shelter, of which about $16,000 would be "equity" and around $50,000 would have been the cost of renting money, otherwise known as interest.

Do we regret not buying? Not. At. All.

Over the three years I've been writing, we have moved three times, my wife has changed jobs three times (all with the same employer mind you, but different locations), I've started my own business and we've managed to save more money than we would have built in equity and still pay down a significant amount of student debt. Looking back, I wouldn't change our decision at all. I'd even say I'm glad we didn't follow the vast majority of our peers and jump into the market at a time in our lives when we were "supposed" to.

We've watched friends and family sell homes to buy other homes. We've seen them earn real profit--all immediately spent on something bigger, newer, movable (read cars) or go to pay some other debt that was nipping on their heels. We've gone to bed at night thinking that could have been us and woken up knowing better than it *would* have been us--because none of those friends and family first bought in the past few years. The friends and family we do know who have first bought in the past few years live in homes we'd never want to live in and deal with location and home-specific costs and issues we'd never wish on anyone.

I've learned a lot about real estate and the real estate market through writing this blog. But the most important lesson I've learned is the importance of the long view. Every January my wife and I chat over a glass of wine about our dreams and plans for the coming year. We always ask the question "will this be the year we buy a home?" Our desire to plant roots is strong, but we recognize it's an emotion, not logic, driven desire.

At the beginning of 2009, we couldn't honestly answer the home buying question. We watched the market in the fall of 2008 drop consistently and rapidly with no signs of stability on the near horizon. We saw a market headed down fast and furious and thought we may find something that fit our parameters late in the fall of 2009. When the market re-ignited in the spring, we shelved that thought and focused on other things.

This year we know we won't be buying. We'll continue to rent. We'll continue to watch the market. We'll continue to learn and I'll continue to write. We'll continue to enjoy the flexibility, the freedom and the financial rewards of renting shelter. We'll continue to sleep well at night knowing our financial plan is working for us. We'll continue to be patient.

Questioning the CMHC

Canadian Mortgage Trends has an interesting interview with Pierre Serré, CMHC's Vice-President of Insurance Products and Business Development. There's a bit of discussion though not too much analysis of the interview over at Vancouver Condo. There's also a link to a really great piece on CMHC done by the America Canada blogger.

In the interview, Pierre doesn't really tell us anything too specific, and CMT seems to let him off a tad bit too easy IMO. Here's an example of what I mean:

CMT asks "What percentage of mortgagors put down only 5%, and how has this percentage changed in the past two years?"

Pierre responds: "While the recent CAAMP survey did not ask that question..."

CAAMP isn't CMHC. They're the Canadian Association of Accredited Mortgage Professionals. They sell CMHC backed products, but they aren't the CMHC. So Pierre doesn't answer the question but goes on to say the following:

"Their statistics show that only 9% of them have equity positions of less than 10%."

Here's my question, which is really CMT's question: What do CMHC's statistics show? Pierre never answers this question and what he does offer is just a bunch of spin.

"we have found that 73% of first-time purchasers used their own resources for a down payment"

So 27% don't. Is Pierre indirectly telling us that 27% of home buyers get their down payments as gifts or cash-backs? Sure looks like it. Is that statistic high? Seems like it to me. And it has absolutely nothing to do with equity position.

"75% of purchasers have a goal to be mortgage free sooner than their original amortization and 20% of recent purchasers report having made a lump sum payment to their mortgage. These results indicate that Canadians are astute mortgage consumers and manage their mortgages prudently"

I have a goal to win the lottery every Wednesday and Saturday. Whoop dee do. What Pierre is really telling us is only 26% of people with the "goal to be mortgage free sooner" are actually doing anything about it right now. That's not a good number and shouldn't be misconstrued as "astute mortgage consumers who manage their mortgages prudently." What this really indicates is 74% of mortgage consumers can't or won't pay down their mortgages faster at a time when interest rates allow them to. When interest rates jump by 1% or more, even if they want to, many mortgage payers won't be able to pay down faster. And again, the answer has nothing to do with true equity position.

The real trend is down on home equity in Canada, and remarkably so, over a period of maniacal home value appreciation, which probably explains why Pierre doesn't want to answer the question.

Let's look at another issue Pierre responds to. CMT asks: "What third parties oversee and regulate CMHC to ensure CMHC is insuring strong mortgages and not taking undue risk?"

Here's Pierre's response (excerpted):

"CMHC maintains capital reserves and premium reserves for future losses in accordance with guidelines set out by the Office of the Superintendent of Financial Institutions (OSFI), Canada’s mortgage insurance regulator. In fact, CMHC maintains capital reserves that are twice the minimum required by OSFI."

Coincidentally, CMHC is not actually regulated by the OSFI. They really only answer to cabinet and the Auditor General of Canada. So what does this really mean? Here we should be looking for ratios. How much asset reserve does CMHC hold to backstop it's growing portfolio of mortgage insurance liabilities? Here's their annual report. I've been reading it most of the night but haven't been able to make enough sense of it to quantify their capital reserve ratio. The best I've come up with is 1:33.5, but if that's accurate, and I'm certain it isn't, it actually exceeds the bank reserve ratio maximum of around 1:18. Perhaps one of you more financially literate readers will be able to nail the true number down in the comments?

The bottom line is this: CMHC only insures mortgages that banks wouldn't write if mortgage insurance didn't exist. By their very nature, CMHC only insures sub-prime mortgages despite the fact that they claim to have "stringent requirements at all levels of down payments to ensure borrowers are able to manage their debts prudently." What's more, CMHC has bought back almost all of the loans they've underwritten over the past 18 months allowing banks to double up on the number of sub-prime mortgages they've written and effectively doubled down on the insurance risk to CMHC. Take a look at this graphic and notice the changes from 2006 to 2008 and then the drastic jump to 2009:

They claim to be well capitalized, but what I want to see clarified is how. 2008 and 2009 were not good years for capital markets worldwide, so we know they didn't make good returns on their investments. 2008 saw roughly 75% of 2007 and 2009 sales volumes of homes, so we know they weren't collecting higher than usual premiums. Where did the capital come from that's necessary to back stop 180% compounded growth in exposure over 4 years? How does an insurance business maintain such growth (2006-2007 was 17%; 2007-2008 was 28%; and 2008-2009 is projected to be 41%)?

Perhaps the only move forward post-housing market meltdown will be to subject borrowers to the same strident restrictions as insurers are: that is, stress test lending. If a borrower wants $400K at 4% interest, they shouldn't get it unless they can handle the payments on $400K at 7% interest.

Haven't you heard?

Dear Landlord,

I'd like to take the opportunity to thank you for your warm seasons greetings I received from you today. I'd also like to confirm that I received your notice of rent increase form as well. The four months notice you've given me is generous.

I also want to thank you for not increasing my rent by the maximum allowable amount, instead choosing to keep the increase below 3% of my total, or about the price of a cold case of beer. I like beer. I like all kinds, but I'm especially partial to the kinds that only come in 1s or 6s. The premium kinds in other words. I can afford them; I earn a decent income and thanks to you subsidizing my lifestyle with market rent well below equivalent ownership costs I am able to drink a lot of premium beer each month--ask my wife, who is constantly reminding me that premium beer is creating premium pressure on my waistline. But I digress, and while beer is worthy of writing about anytime, my note to you has other purpose.

It's with beer in my mind, not affecting it mind you, that I kindly reject your annual rent increase for 2010. Now I know that inflation eats into your bottom line. I know this because the price of a six-pack of Heineken has increased lately too. We're all affected negatively by inflation. But inflation seems to swing both ways in some markets.

You see, things have changed over the past several months. Lots of people like me have moved on, to jobs elsewhere, to houses bought, to who knows where, but one thing is for sure, more have left than arrived--the For Rent sign on the front door reminds me of that each time I come and go myself.

I'm a good tenant. I pay my rent on time, I keep things clean and tidy, I don't lock myself out in the middle of the night (or day for that matter) and when something breaks I fix it myself if I can. You're lucky to have me. So I won't be paying you more next year.

It's simple really: the vacancy rate has climbed to a point where you can't be as choosy as you once were. In fact, it's climbed to a point where you may be lucky to even be able to choose. Come spring, it may have climbed to a point where you may have to drop rents or offer incentives to get a tenant to fill your vacant units. The last thing you need is for me to leave you over a cold case of beer. But remember, I like beer. Enough to leave you. And I don't want to allocate funds from other uses to make up for an unnecessary rent increase.

You might be wondering how I've come to realize this? Let me tell you: some people like to walk into Future Shop regularly to see if that 60" plasma flat screen has come down in price. Me? I like to check out vacant rental suites and see what I'm missing. Just the other day I was in one nice enough to make me think very seriously about moving. Sure it cost more per month, but it was worth every penny. I tried to negotiate with that landlord--they'd been trying to rent their new basement suite for over 3 weeks; I smelt a deal brewing.

That landlord had a false sense of the market though. They'd just bought the house and renovated it to create a suite, told me they wouldn't be able to afford their mortgage without it. It was nice, but they were asking too much, and they wanted someone in right away. Long story short, we gave them a call the next day and told them we'd take it in the middle of the month if they dropped the rent by $50/month or they gave us a 6 month lease instead of 12. They didn't feel they should have to do either. That was three weeks ago. I checked Craigslist while writing you this note and sure enough, there it still is, still vacant, and still asking too much. The money they left on the table in December by rejecting my offer would have more than made up the difference between my lower rent offer and their asking price over the course of the lease. But apparently they can't add months together in their calculations--they're probably part of this new "can I afford it this month" culture.

Do you see where I'm going with this? There's a lesson here. You want more money. I don't want to give it to you. I know there's a lot of unit choice out there, many of them nicer than where I live now. I could move, costing you money to advertise, clean, lost rent etc, and me some time and beer for the buddies with trucks who will help me out on moving day. I think the cost will be much greater for you than me. I'm willing to take a stand on this. Are you?

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

Best quote from that news story:

“It’s nerve-wracking because ... there’s not going to be anyone filling my place and that burden falls on you financially,” she said, adding she can’t afford the $2,130 mortgage without a little help.

“If I was to give anyone advice, it’s to not buy a place that you can’t afford on your own.”

I want to know how she got a mortgage for a two-bed condo she can't afford on her own? And they say there's no sub-prime lending in Canada. Sure.

BREAKING NEWS

News Release here. (H/T Skeptic)

The important bits:

The proposed OSFI changes will significantly decrease access to affordable mortgage loans for first time Canadian home-buyers and apartment investors as the Canada Mortgage and Housing "(CMHC)" securitization program is curtailed by changes to the capital governance rules that will restrict a financial institution's ability to generate Government guaranteed loans or require an injection of capital (equity).

CMHC's current securitization program supports affordable housing by enabling banks and financial institutions to issue more Government guaranteed loan products, thus making it possible for these institutions to provide credit to Canadians at lower interest rates as the securitization frees up space on their balance sheets. This allows these institutions to meet the demand for more mortgage loans than they otherwise could if they had to hold all the loans on their balance sheets, which are subject to several restrictive regulatory capital leverage ratios.

The OSFI's proposed policy will effectively tighten the capital governance rules and reduce an institutions capacity to generate these government backed mortgages.

"These are exactly the consequences that most of the academics, industry and political parties have openly said they do not want as they are all supportive of retaining the CMHC programs (supporting over 900,000 housing units worth $148 billion in 2008) instead of curtailing them" said Paul.

"CIBC senior economist, Benjamin Tal describes CMHC as the "secret weapon" and he credits CMHC's ability to provide inexpensive credit as one of the reasons Canadian banks did not need a bailout during the recent recession. (Globe and Mail, Report on Business October 17)"

Reading this release, it's an effective leak of plans by the Office of the Superintendent of Financial Institutions to end the CMHC buy-back of insured, "sub-prime" mortgages from the banks. Essentially, the Department of Finance is saying to institutions: "you've received all the support you're going to get from us."

What's next is anyone's guess. The author of the letter featured in the release believes this is bad for FTBers and the market in general. I'm inclined to believe him. If you're a FTBer looking to access more money than you ever should be able to using terms that are a fiscal time bomb for yourself, your family and Canada's taxpayers, you will find this to be terrible news. If you're a homeowner looking to sell your property, it appears the money for the greater fool may just dry up after all.

I dare say this may be the most fiscally conservative move the government has made since 2006.