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Wednesday, September 30, 2009

The Looming Era of Inflation?

Last week at an economic briefing sponsored by Toronto accountants Hogg Shain & Scheck, economic forecaster Brian Beaulieu of the New Hampshire based Institute for Trend Research shared his view of the post-recession world.

The thrust of his presentation was that the recession may be ending, but a new era of renewed inflation and higher interest rates could be right around the corner.

Beaulieu made the cast that inflation will ooze back, fuelled by higher commodity prices, labour cost increases, and the need to service the huge government deficits rung up to deal with the recession.

By 2012, Beaulieu says the U.S. consumer price index could be increasing 6% a year, which would be the highest inflation rate in the past 25 years.

And yes, interest rates will jump - dramatically.

Beaulieu joins the ranks of doomsayers, like this blog, who have been echoing this theme for the better part of the year.

But as we scan the pages of the North American media, so many still warn of deflation and the threat of a decade long morass similar to what Japan is experiencing.

Why is that?

A follow up tomorrow.

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Tuesday, September 29, 2009

Greater Vancouver House Prices and Local Incomes

Click on the image above to enlarge.

This is a nice chart put together by the Vancouver Condo Info blog.

Using data from the BC Provincial Government website of BC Stats, our intrepid blogger has put together a graph which compares the increase in local incomes to the run-up in house prices from 2000 to 2007 (which is the last available year of local income statistics from Revenue Canada).

The house price data comes from the house sales data at BC Stats too.

House prices are dramatically outpacing increases in income.

Which brings us to the eternal evaluation of housing prices - regardless of your geographic location: There may be other considerations, but financially speaking, if home prices are out of line with rental prices, wages and wage growth, and jobs, then you are in a dangerous bubble.

And in the Lower Mainland the rental prices for homes are far lower than current mortgage payments while wages and wage growth haven't kept pace with the dramatic rise in prices.

How can anyone possibly think this trend will continue indefinitely and that housing prices will keep going up, up, up?

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Monday, September 28, 2009

When it comes...

"There is no doubt an eerie parallelism (exists) between the Canadian situation today and that in the States before the bust... The crucial question in my mind is: when housing prices start to fall, is a Canadian with no or negative equity (assuming he/she still has a job and the ability to pay) more likely to A) walk away (if there are no legal ramifications); B) keep paying thereby turning himself to a debt slave virtually for life; or C) declare bankruptcy? This may determine the velocity of the downturn - a crash versus a protracted deflation. Any feedback would be much appreciated."

This question was asked in response to Saturday morning's post.

We promised to address it today and as fate would have it, Garth Turner touched on this with his post on Saturday night. You can read his full post here.

In a nutshell, in all of Canada (except Alberta) Canadians will be in a significant bind.

Canadian mortgages are known as “recourse” loans, which means the bank has full recourse to collect not only on the debt, but the costs of the debt. If you execute a standard mortgage document, and miss mortgage payments during the term, or fail to fully pay it off at the end of the term, or do not refinance it satisfactorily, then the lender can legally gain title to the property, and sell it. Then they will sue you for the difference between the mortgage amount and the sale proceeds. You will also be sued for costs, including all legal activity, real estate commissions and taxes, and if you cannot pay this amount, banks will get a court order to garnishee your wages for what will probably be the rest of your miserable life.

This will happen even if your mortgage was CMHC insured.

It means that Canadians will, en mass, pursue the only alternate option: Personal Bankruptcy.

By declaring personal bankruptcy, the bank gets the house and you get a black mark that lasts for seven years. It will mean no credit cards, no loans, no new mortgage, no new car, no running for political office. It will mean difficulty finding almost any white collar job and even hassles trying to rent.

But it will get you out from your mortgage obligation.

The problem is that it's not an immediately implemented solution.

In British Columbia the foreclosure process can be A drawn out affair and then the bankruptcy process will take even more time to wind it's way through the system.

And because so many people will be forced to pursue this option (rather than simply handing over the keys to your home to the bank as in the United States), once it gets going the sequence of events could plunge BC real estate into a morass that compounds and intensifies the collapse (just look at how the collapse in confidence froze up the market this past winter).

When it comes to pass one thing will be certain.

It will be ugly.

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Sunday, September 27, 2009

Sunday Funnies - September 27th, 2009

(Click on image to enlarge)
































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Saturday, September 26, 2009

Time Mortgage Bomb

According to CMHC, 30% of all Canadian mortgages are now variable rate mortgages, up from 3% in 1998. And fixed 5 year terms account for almost 70% of the mortgage market.

So why don't many Canadians take out a 25 year mortgage? They exist. Royal Bank even lists them on their residential mortgage rate page.

It's all about 'affordability', the real estate industry's favorite catchword.

A 7.85% rate on a $555,000 amortized over 35 years results in a monthly payment of $4,420.

You can currently get a 1 year variable rate for 2.35%, which translates into a monthly payment of $2,495.

That's almost $2,000 a month less in payments.

So who in their right mind would opt for a 25 year mortgage? Even a five year rate from Royal (4.19%) will set you back $3,070 a month.

And for all those suckers buyers rushing into the market right now because homes are 'affordable' (i.e. low interest rates), saving $500 a month makes all the difference in the world.

And besides, rates have been relatively low for the past 8 years. They will stay like this for a long time.

And therein lies the looming disaster.

$500 makes all the difference in the world. As rates start to go up, many variable rate mortgage holders won't lock into 10 or 25 year rates. It's too much of a jump.

They won't even lock into a five year rate.

They have rationalized 'affordability' to make the purchase. When rates jump up 2%, the one year variable rate will cost them $500 more. To lock into a 5 year rate will cost them another $500 over that (at least).

The same argument that keeps them in a one year rate, will keep them in that rate then.

Even if some do lock in to a longer term rate, it will be a five year rate - at best.

But the fuse on the Lower Mainland mortgage time bomb will have been lit. And when it explodes this is what it will look like.

As the San Francisco Chronicle reports, the Bay area is sitting on a $30 Billion dollar time bomb of homes purchased with loans known as option ARMs, short for adjustable rate mortgages (Alt-A).

From 2004 to 2008, "one in five people who took out a mortgage loan (for both purchases and refinancing) in the San Francisco metropolitan region got an option ARM," said Bob Visini, senior director of marketing in San Francisco at First American CoreLogic, a mortgage research firm.

With these mortgages, the interest rate will reset after 5 years to a dramatically higher rate. Buyers took them because Alt-A and Option ARM allowed them to enjoy an 'affordable' low interest rate for the first five years. At the end of five years (during the boom years), buyers were advised they could re-negotiate a new mortgage (with a new low five year rate) especially since the value of their home will have risen.

Problem is... housing prices in San Francisco have evaporated... and so has the chance to obtain a new mortgage. It means thousands of buyers in the Bay area are going to be forced to watch their mortgages reset at dramatically higher interest rates as their five year terms expire.

There are over 54,000 option ARMs issued in greater San Francisco with a value of about $30.9 billion.

"In markets where home prices were going up rapidly, more and more borrowers needed a product like this to afford something," said Alla Sirotic, senior director at Fitch Ratings. The loans became a tool for regular people to "stretch" to buy homes that were beyond their means.

Can you see the parallel to what may happend in Canada when mortgage rates start rising?

The sad thing is, if you can, you are in the minority.

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Friday, September 25, 2009

Is the 'vicious' dog included?

It's Friday so let's go for another installment of the 'Million Dollar Dump of the Day'.

Today's treatise is this 2,400 square foot palace at 1520 Avery Avenue in the Marpole district of Vancouver. Lot size is 49 x 122 (or 6039 sq. feet). From the listing details (and we ain't making this up), "Note: Tenant occupied please do not walk on ppty weekends or Thursday mornings, vicious dog!"

Hey, what respectable crack shack doesn't have the mandatory vicious dog?

Asking price: $1,188,000

Remember, homes like these are a "relative bargain" compared to the rest of the world, So act now.

MLS link to the listing, vicious dog quote included, is here.

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Thursday, September 24, 2009

Bernanke’s Debt Solution

So the big news yesterday was a report released by the real estate firm Coldwell Banker in which the firm contends that "real estate in Canada is a relative bargain compared to homes in many other parts of the world."

Gee... a real estate company telling you that now's the best time to buy. No surprise there. What galls, however, is the way the media regurgitated it as news.

It wasn't. It was a press release promoting the self-interest of a real estate company, nothing more.

And it ignores the real looming threat: interest rates.

It's funny... 28 years ago the majority of people genuinely despaired that interest rates might never again drop to as low as 10%. Now... the majority can't fathom rates spiking up above 7%.

But rates will go back up, inflation will storm back, and it will all be about government debt.

Consider these facts:

  • Through August, the US federal deficit had already hit $1.38 trillion, or TRIPLE last year’s all-time record deficit of $454.8 billion. And in September alone, the Obama administration expects another $200 billion in red ink, bringing the total for the year to $1.58 trillion.
  • The U.S. government’s official debt is now at an all-time high of $11.8 trillion. That’s over $100,000 for each and every household in America.
  • Both the Obama administration and its opponents agree that, over the next 10 years, the cumulative federal deficit will be another $9 trillion, bringing the burden per household up to $177,000.
  • The US Federal Reserve is also in hock up to its eyeballs, with more than $2 trillion in liabilities on its balance sheet. That brings the total burden up to $194,000 per household.
  • Perhaps worst of all, the unfunded government IOUs that are now starting to come due on Social Security, Medicare, and Federal pension payments are also ballooning higher and now stand at an estimated $104 trillion, or $886,000 per household.


Grand total: Each and every household in America is indirectly responsible for a debt burden of over 1 million dollars!

Bottom line... even assuming they can save 5% of their income year after year - and even assuming every single penny of their savings is thrown into the pot - in order to pay off the U.S. government’s debts and obligations, each American family (and descendents) would have to toil for the next 429 years.

The problem is America hasn't borrowed all that money from themselves. More than half of the outstanding national debt has been borrowed from overseas investors. And those foreign creditors are starting to recoil in horror.

That’s why in April, U.S. bond purchases by foreign central banks plunged 41% from the month before, while purchases by foreign private investors dropped 7%. All in a single month!

Which is why the US started buying it's own treasuries with extra money it printed and added to the overall money supply. The Federal Reserve had no choice but to pump out more and more unbacked paper dollars and dump them into the economy.

And what is all of this doing to the US dollar?

It should come as no surprise that the widely watched U.S. Dollar Index, a measure of the dollar’s performance against a basket of six of the world’s major currencies, has plunged 15.1% since its high of March 4.

It’s plunging against the euro, the Japanese yen, the British pound, the Swiss franc and even the Canadian dollar.

Is this debasement of the US dollar a deliberate strategy?

Consider this excerpt from one of the most famous speeches U.S. Federal Reserve Chairman Ben Bernanke gave in 2002:

“By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services.”

Voila... instant, un-noticed, inflation.

Make no mistake about it: Bernanke is fully aware of what’s needed to defend the dollar. He could light the fuse on the greatest bull market in the history of the greenback with the stroke of a pen if he wanted to.

The sad fact is that the last thing Bernanke or President Obama want right now is a strong dollar.

Why have Obama and Bernanke failed to come to the greenback’s defense? Why is Washington continuing to spend, borrow and print knowing that by doing so they are, in effect, declaring war on the U.S. dollar?

Simple. They have no choice.

  • The U.S. government’s official debt is at an all-time high of $11.8 trillion. Every year, Washington has to make a staggering $335.3 billion in interest payments just to avoid default on that debt. In fact, just the interest on the national debt now equals 12% of all federal spending.
  • The Federal Reserve is also in hock up to its eyeballs — the liabilities on its balance sheet have DOUBLED — from $1.2 trillion a year ago to more than $2 trillion today.
  • Most terrifying of all — especially with the first wave of almost 4 million baby boomers reaching retirement age this year — unfunded government IOUs are coming due on Social Security, Medicare, and Federal pension payments. Those obligations are enormous: An estimated $104 trillion.

America is now the single most indebted nation in the history of the planet.

And Washington will add an all-time record $1.8 trillion to the national debt, pushing its budget deficits to almost 13% of GDP. This year and every year for the foreseeable future, Washington will have to borrow 80% of the world’s surplus savings just to pay its bills.

Gutting the dollar and triggering inflation is the only way Washington can hope to survive this massive debt catastrophe.

And when you need to borrow 80% of the world's surplus savings to pay your bills, the reality of looming higher interest rates is about as close to a sure thing you are ever going to get in the economic prediction biz.

Looming inflation and high interest rates.

Which brings us back to Coldwell Banker and their suggestion to Canadians that assuming hundreds of thousands of dollars in mortgage debt right now is a sound move because Canadian real estate is a relative 'bargain'.

Uh-huh.

Do I, at the very least, get a free bottle of snake-oil with that?

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Wednesday, September 23, 2009

Bad Consumer... Bad!

We couldn't help but laugh Monday as we scanned the global newspapers.

Seems the consumer is being faulted for not getting on board with all the 'recession is over' hype.

First it was the London Telegraph.

Bank of England warns of the consequences of thrift, screams the headline. "An attempt by British consumers to rein in spending after the harsh lessons of the recession could limit growth and therefore depress household income further," scolded the British central bank.

Meanwhile the L.A. Times bellowed that Savers need to resume buying habits to aid recovery. "The continuing refusal or inability of millions of American consumers to spend money the way they did before the financial crisis casts a potentially dark shadow over the nation's economic future."

Take note... it's the 'refusal' or 'inability' of savers to spend the way they did before.

Baaad consumer. Get your ass into more debt and do your part.

Not to be left out, CNBC jumped on the blame-the-consumer bandwagon as well. Apparently this winter will feature that old holiday favorite: the Consumer-Who-Stole-Christmas as the outlook for 'US Holiday Spending is Seen as Flat'.

Bah humbug.

Even the battered Japanese consumer doesn't escape unscathed as the New York Times notes that 'Once Slaves to Luxury, Japan Catches Thrift Bug'.

So now we have to ask the most important question. Is there something fundamentally wrong with an economy where more than 70% of all activity comes from personal consumption? Perhaps it's not the consumer that is the problem, but the fundamentals of the economy itself.

Bwahahahaha... what a silly notion.

Now do your part.

Roll up a newspaper, smack yourself over the head and go drop a 'mil on a Vancouver crack shack.

It's the least you can do.

Bonus Feature: Million Dollar Dump of the Day

Won't be an everyday feature, but let's let our eastern cousins see just how whacked-out we are here on the 'wet' coast.

Look at what your missing out on.

Here's a 1900 sq ft. 4 bedroom, 3 bath beauty built in 1951. It's located on the west side of Vancouver at 1030 West 49th Avenue. Asking price: $1,038,000

From the listing description:

"Priced to sell!!! Large lot 55.4 x 119. Completely renovated new roof, double glazed window, new stove & washer. Seller spent 80,000 for updates. Good for holding or build a new home."


I'll leave it to you to try and figure out where the $80,000 in updates was spent.

Just think, a million bucks for a tear-down with a carport.

Here's the mls link.

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Tuesday, September 22, 2009

The Prime Minister responds to CMHC concerns

Faithful readers will recall that back in July we made two posts regarding the Canadian Housing and Mortgage Corportation (see CMHC and CMHC 2)

To summarize - our colleague over at america.canada blogspot made the eloquent case that CMHC's mortgage insurance obligations present a looming credit quagmire that could put Canada in a far more precarious real estate position than the United States was in during 2006.

CMHC is well on it's way to insuring well over $500 billion in securitized mortgages and lines of credit by the end of 2010. It will also have issued over $600 billion in outstanding mortgage insurance.

So what would happen if Canada suffered a dramatic real estate decline (like the United States just suffered)? Who would be on the hook for these insured mortgages?

Why, the Government of Canada of course... meaning you and I.

Now our blogger colleague at america.canada didn't just write about this looming threat on his blog, he actually contacted the Prime Minister directly to express his concerns.

And earlier this month he received the following reply (click on image to enlarge)...


So what do we learn from our esteemed Prime Minister and his government?

It seems a chunk of this CMHC insurance is now protecting loans with a loan-to-value ratio of less than 80%. Rapidly increasing home prices of the past decade account for much of this.

What will happen if real estate values collapse?

More intriguing, however, is the denial mindset of our Prime Minister.

The letter asserts that only a small portion of Canadian homeowners default on their mortgage.

That's all fine and dandy today when the carrying costs of debt have been consistently made cheaper causing home prices to edge higher and higher.

But what happens when interest rates rise and home prices fall? That's when the real defaults will occur.

A problem so callously shrugged off could become a anchor around our collective necks.

If rising interest rates are indeed inevitable, then CMHC is insuring loans that are not sustainable.

CMHC is enabling banks to put people into homes at prices that can not be supported at higher interest rates or shorter amortizations.

According to page 4 of the CMHC Housing Report "Housing Now, Canada", demand for variable rate mortgages began to dramatically increase in 2008. 30% of all Canadian mortgages are now variable rate, up from 3% in 1998.

Fixed 5 year terms account for almost 70% of the mortgage market. Almost all fixed rate loans are insured (100%), securitized and sold to investors.

The reality is that all of these five year mortgages are no different from all those US mortgages that dangled 1,2 and 5 year teaser rates at the front end of them.

As those teaser rate mortgages now reset (with home owners unable to renew with new teaser rate mortgages), the American economy is drowning in a wave of defaults and foreclosures as home owners are unable to make the higher rates work.

And the basket of variable rate mortgages that now comprise 30% of all mortgages?

Even if the mortgage holders are bright enough to lock in to five-year mortgages now (and let me assure you... they are not that bright), all they will be doing is avoiding the inevitable.

This is nothing less than a ticking time bomb that has the potential to devestate government finances. If only 10% of that $600 billion in secured mortgages defaults, our government is on the hook for $60 Billion.

Significant when you consider our government is grabbling at this very moment with the largest deficit in Canadian history: $50 Billion.

Imagine if 25% of those mortgages fail? 40%?

How comforting, then, to know that our Prime Minister (and his government) are basically turning a blind eye to the potential threat.

"La, la, la, la, la..." appears to be the official government line.

Marvelous.

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Monday, September 21, 2009

Taking away the punch bowl

Ahh there's nothing like a flood of cheap, stimulus money to revitalize stumbling equity markets, rebuild shattered nest eggs and get investors thinking it's safe to resume the party.

Faithful readers will know we've written about the bear market trap, the final stage of which appears when everyone starts plowing back into the market.

If this truly is the bear trap, then that final sign is now showing itself.

The markets, as those of bearish bent know only too well, have been on a remarkable run for the past six months. But this isn't another post warning of the bear market trap.

Roger Bootle, a well-known British economist, author and government adviser who has a solid bubble-forecasting record, is yet another who is adding his voice to those who preach that potentially crippling bubbles can and must be prevented - with doses of bitter medicine, if necessary.

And the irrationally booming markets have him concerned to the point he believes it's time to administer that bitter medicine.

I don’t think it’s rocket science,” Mr. Bootle said earlier last week on a visit to Toronto to drum up business for his London-based research consulting firm, Capital Economics. “All I’m suggesting is a return to the old views of central bankers, in particular William McChesney Martin’s idea that the role of a central banker is to take away the punch bowl just as the party gets going.”

And what is the prescription for yanking away the punch bowl?

He stongly advocates imposing more stringent capital requirements or lending curbs on financial institutions and jacking up interest rates, even if it trips up an economy still trying to find its footing.

[Recall last week's post about Scotiabank economists Derek Holt and Karen Cordes warning that lenders have been providing "excessively generous financing terms."]

"The optimists in today’s markets could be right about the state of things to come," said Mr. Bootle. “But eventually one of two things is going to happen: Either the economy is going to be disappointing or interest rates are going to go up.”

The problem, of course, is that if the economy doesn't revive then crushing government debt and declining tax revenues are going to trigger interest rate hikes from the bond markets anyways.

It comes across as a catch-22. Raise the rates now to stiffle unfounded gains, or trigger higher rates later when the unfounded gains bubble up to cause another crash.

Bootle joins the growing ranks of those who do not subscribe to the doctrine which says market booms are best left to collapse under their own weight, leaving the cleanup for after the party is over.

In the long run, ensuring the stability of financial structures is paramount, Mr. Bootle said. When bubbles are allowed to form, the ensuing mess is so hard to clean up “that it’s worth almost anything to prevent that.”

So the remedy, according to the likes of Bootle, is to yank the stimulus punch bowl away right now.

Hmmm... what a choice.

Yank the stimulus immediately by jacking up interest rates now (and cause considerable pain), or let the bubble run amok and deal with the catastrophe later (which will result from sky-high interest rates to fund exploding government debt and decimated tax revenue).

Regardless of the choice, the forecast is the same.

High interest rates are coming. One way or another, they're coming.

What a great time to assume massive amounts of debt on million dollar crack shacks.

How can this possibly end badly?

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Sunday, September 20, 2009

Sunday Funnies - September 20, 2009

(Click on image to enlarge if necessary)

If you haven't heard it yet, here is a brilliant twisted tune from CFMI - 101.fm on the HST tax controversy. It is a take on 'Money for Nothing' by Dire Straits. Click here to take you to the CFMI website and it is the second twisted tune on the menu (Don't want the HST).





























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Saturday, September 19, 2009

The Million Dollar Crack Shack

2.5%

That's the latest rate that one faithful reader advises can be had for a one year fixed term mortgage.

Critics have dubbed these rates the crack cocaine of the housing market enabling local addicts to re-inflate Vancouver's status as the most bubbly real estate city in North America.

As Scotiabank economists Derek Holt and Karen Cordes have warned, lenders have been providing "excessively generous financing terms" which has had the effect of "putting people into homes at an earlier stage than would have otherwise been the case." The net effect? "Two or three years from now - once short and long interest rates are probably higher ... a lot of those mortgages will not be as easy to carry as they are right now."

On that note, come with us now as we take a tour of the high life in Vancouver. Let's see what a million dollar home looks like in this bubble inflated world of ours.

First up, this house on West 5th Avenue in Kitsilano.

This 1926 home features hardwood floors, a large renovated kitchen, a bright two-bedroom basement suite, a white picket fence and a tree swing.

Sure, the yard is small, the view out the back is of a giant condo complex, the bedrooms are tiny - the master is only slightly more than 100 square feet - and it is just half a block off one of the city's busiest thoroughfares. But those shortcomings were quickly forgiven by the dozens of prospective buyers who streamed through the first open house saying, "Honey, I love it" while trying to imagine life without closets.

Think you'd be interested? Too late.

Five days after that open house, seven agents lined up to make their offers. The asking price was $959,000, but because of the competition, the bidding war pushed the price higher. Only two bids came in at less than $1 million. In the end, the home sold for a staggering $1.142 million - more than $180,000 over the original price tag.

Earlier this week on the Eastside, we were advised about a partly updated Commercial Drive bungalow with a two-bedroom suite and a new garage and studio. That dump drew 10 offers - most of them with no inspections, despite the fact that the 1920's era house needed a new roof, electrical upgrades and drain tile work, and had an old oil tank buried in the back yard.

The first showing was Thursday last week, and on Sunday it sold for $113,000 over the asking price.

Let's cruise up to North Vancouver now. Deep Cove to be exact. Here's a beauty for you.

This beautiful one bedroom palace was described as 'liveable' and in a "fabulous location nestled in the middle of Panorama Park. You can almost touch the cove waters... in the heart of the action, yet surprisingly private."

'Surprisingly private' because you're probably too embarrased to have anyone visit you... or your friends don't want any photographic evidence proving they did.

Selling price? Just over a million (I am told the land is assessed for $775K and the house for $35K.)

So mortgage rates remain at an all time low despite bank economists warning that the cheap money is encouraging reckless behaviour... reckless behaviour that is manifested in prices that continue to rage and by buyers who bid them even higher with low-cost mortgages.

How can this possibly end badly?

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Friday, September 18, 2009

"Are Canadians getting in over their heads?"

You know our answer to that question.

But this week it was Scotiabank economists Derek Holt and Karen Cordes who were doing the asking.

In a research note released last week they noted that "lenders have been scrambling to get enough product to put into the federal government’s Insured Mortgage Purchase Program over the months, and that may have translated into excessively generous financing terms"

Excessively generous financing terms?

That's econo-talk, their way of saying the banks have been giving money to people they shouldn't be.

Ouch.

Sounds like Derek and Karen are biting the hand that feeds them (or in the vernacular of another local company we know... they're not 'team players').

But you gotta hand it to them. They're telling it like it is.

The report goes on to note that low mortgage rates are the dominant factor in the pent-up sales demand of the last few months. "I think that's having the effect of putting people into homes at an earlier stage than would have otherwise been the case," Mr. Holt said.

Ouch, again.

Holt goes on to question whether mortgages will remain this affordable in the long term.

"I do worry, longer term, not even that far out - two or three years from now - once short and long interest rates are probably higher ... whether a lot of those mortgages will be as easy to carry as they are right now," Mr. Holt said.

And in a blaze of insight, the Globe and Mail, in reporting the story, wonders "whether a spate of good deals on mortgage rates could mean Canadians are getting in over their heads."

Ya think?

"La, la, la, la, la..."

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Thursday, September 17, 2009

What would happend if the R/E market was flooded with listings?

The Rainforest Roundtable held it's monthly meeting last night.

Amid beer, B-B-Q and rain (fall is officially here), we were discussing the parents of one of our group.

As the youngest member of our little fraternity, Robert's parents are at the forefront of the Boomer generation and have only just retired last year. Their story is one that will most certainly be repeated over and over in the years to come.

Asset rich and cash poor, they are comfortable and their pensions allow them to make ends meet. But they are far from being considered 'rich' in so far as their bank accounts go... at least until now.

It has long been their plan to sell their spacious Kitsilano home and 'downsize'. Bought in the early 1970s for $86,000, the property was sold last week for $1.7 million dollars.

The sale was the culmination of a deliberate retirement strategy.

Our roundtable colleague freely admits his parents have never been great savers. Spending what they have and 'enjoying life', their plan has long been to use their massively appreciated home as their retirement fund.

After taking a scare over the past winter, they are overjoyed to see the market recover allowing them to capitalize on their plans to sell at the 'proper price'.

It is a retirement strategy common to many boomers.

Surveys consistently show about 85% of all the family net worth in the country sits in residential real estate.

59% of all Canadians are living paycheque to paycheque. In fact for many Canadians, if they miss one single paycheque by a single week, they wouldn’t be able to make ends meet at all. Compound that with surveys that show half of Canadians are incapable of saving 5% of their income, and the 'home as retirement fund' plan is common to many boomers.

Why? Because it's all about 'living the lifestyle'.

Statistics consistently show that a majority of Canadians have no retirement savings and don’t expect to get any.

They are like Robert's parents. Their house is their retirement fund. 85% of all family net worth in this country is tied up in the family home.

Can you see what looms on the horizon?

The first year of the boomer generation turns 65 this year. Our aging Canadian population is inching towards retirement. And the younger Gen X's are a much smaller group.

With each passing year more and more retiring Boomers will be enacting their retirement strategy just like Robert's parents. For the next 20 years wave after wave of boomers will retire.

Meaning that, with each successive year, we will see wave after wave of homes listed to finance underfunded retirement plans.

Who will buy them all?

This alone is going to trigger significant downward pressure on housing prices.

And then there is interest rates. Have we mentioned what this might do to the market?

You really don't need a market oracle to see how this is going to play out.

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Wednesday, September 16, 2009

Prechter Vs Schiff (Deflation vs Inflation)

Those of you who visit this site regularly know that we have harped ad nausem on the belief that the economic collapse that took place last year was a deep, economic earthquake... the repercussions of which we are still coming to grips with.

Will the ecomonic collapse and massive fiscal stimulus trigger high inflation and interest rates? Or is the economy in a spiral leading to further deflation and low interest rates for years to come?

In the past this blog has profiled the viewpoints of Bob Prechter and Peter Schiff. One is regarded as the leading deflationist speaker, the other considered the leading inflationist pundit.

Over the last two weeks two different interviews were conducted by Jim Puplava; one with Prechter and one with Schiff. The interviews gave these two a chance to clearly present their views and supporting evidence.

If you are so inclined, click on the links above to listen to the full interviews.

In summary, Prechter's key point is that there is an ocean of unpayable debt which must result in a deflationary collapse and depression (huge unemployment, big hit on the standard of living, etc.).

Schiff agrees that there is an ocean of unpayable debt, but disagrees on what the outcome will be. He expects a dollar collapse and an inflationary depression (huge unemployment, big hit on the standard of living, etc.).

Interestingly there is a lot more agreement between the “deflationists” and the “inflationists” than you would think.

Prechter claims that the creditors will not allow the Federal Reserve to “print its way out of the debt” and that the key evidence for this is that the Fed has tried really hard to keep from doing anything to really, really tick off its creditors.

Schiff claims that the Federal Reserve will keep “printing debt” until the creditors refuse to buy any more and that is when the printing goes into high-gear and there is a currency collapse (dollar plummets) and the inflationary depression really kicks in.

Personally we lean more towards Schiff's take on things.

Schiff claims that the government and Federal Reserve have been printing money and causing inflation non-stop for decades. That's how we ended up in the massive bubble conditions that currently exist (or, in the case of the US, are in the process of bursting). More importantly there's nothing to stop the American government and the Federal Reserve from continuing this process. Schiff cites very powerful reasons for the government to continue including:

  • Allowing the government to spend money without having to raise taxes.
  • Inflation allows the government to tax assets (when sold) which have not gone up in value (for example when you sell a house), and
  • Inflation automatically drives tax payers into higher brackets increasing their tax burden.

Prechter, on the other hand, claims a major shift has taken place in the last year with credit contracting and a major change attitude to avoid debt.

Prechter claims the amount of monetization so far is puny compared to shrinkage in the amount of credit outstanding and that even if all of the bad debt was replaced with 100 dollar bills it would not create inflation because it would just replace what was formally in place.

Schiff's outlook seems to be more based on data and natural reasoning about cause and effect and is more in sync with the experience of the last few decades. Prechter, on the other hand, has been more accurate on what has happened the last 18 months or so. To date Schiff has been wrong in the short-term about the dollar and inflation.

So what can we conclude?

Neither seems to understand why USA creditors (China, Japan, etc) keep buying USA debt and neither has a grip on what will trigger these nations to step back.

Yet this is the key to the current economic situation. Everyone wants to know when and/or if it will change suddenly.

Regrettably there is no clear winner of this controversy right now, although we favour Schiff's outlook.

We are nearing two crucial points that will occur towards the end of this year. They could tell us which way things are going to go.

The first is that the Federal Reserve funds for monetizing debt is scheduled to run out in October. The Federal Reserve will then either have to:

  • Stop buying treasuries and Fannie Mae/Freddie Mac debt. This may very well cause interest rates to launch into the stratosphere triggering another major contraction in the markets. This will result in the dollar rising in a flight to safety. If this happens Prechter is proved right.
  • Announce another round of monetization and have the creditors belly ache but keep on buying treasuries. If this happens the jury is still out.
  • The Federal Reserve will announce another round of moneitization and have the creditors refuse to keep buying treasuries resulting in a dollar collapse. If this happens Schiff is proved right short term.
  • Secretly continue monetization (with perhaps a delayed reaction resulting in a dollar collapse).

The second crucial point will come when year over year commodity prices start rising in Q4 (unless there is another crash). The Consumer Price Index (CPI) should stop falling and start rising. These events will probably keep the U.S. Dollar on its downward collapse.

Any significant resumption of CPI rise will prove Schiff right short term. Prechter's outlook doesn't really allow for this, although he gives himself test of requiring all prices to rise to new highs.

At this point we will have a clear picture of whether Inflation or Deflation lies on the horizon.

Of course, both may be wrong and the ocean of debt may be supportable. In that case the North American economy will just muddle through indefinitely, with GDP growth and super low interest rates allowing the USA to work its way out of debt (or at least sustain the debt).

Personally we don't see that happening.

The key to the whole situation is the reaction of USA creditors to the continued piling up of USA debt.

How how long will they just grin and bear it?

Ultimately that is the bottom line.

Personally we can't see any outcome other than that the USA will continue to pile up and monetize debt. Eventually this will lead to a major dollar collapse when times get really, really bad.

How to plan and prepare depends on your assessment of the situation.

We truly do live in interesting times.

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Tuesday, September 15, 2009

Party on, Garth!

No gloom and doom today... just a story of pure chutzpah.

Did you hear about the Malibu Colony, California couple who were devastated by Bernard L. Madoff's massive fraud scheme?


They were forced to surrender their oceanfront home to Wells Fargo Bank to help satisfy a larger debt as their finances collapsed.


Wells Fargo claims that it had an agreement with the prior owner which requires it to keep the home off the market "for a period of time".

But rather than let the house sit vacant, Cheronda Guyton (a Wells Fargo senior vice president who is responsible for foreclosed commercial properties) ensured the property was... ummm... well cared for.

Local residents said a woman they believe to be Guyton, along with her husband and two children, took up occupancy in home No. 106 in Malibu Colony shortly after Lawrence Elins turned it over to Wells Fargo Bank on May 13.


The residents said the family spent long weekends at the home and had guests over, including a large party the last weekend of August that featured a waterborne arrival.

"A yacht pulled up offshore, with one of those inflatable dinghies to take people back and forth to the shore," said a neighbour. "About 20 people got taken over in the dinghy."


After a wave of complaints from neighbours flooded into the media, Wells Fargo announced an investigation.


Yesterday the results of that investigation were released. "Our investigation concluded a single team member was responsible for violating our company policies," the San Francisco bank said in a statement. "As a result, employment of this individual has been terminated."

Hey... I'm sure it was fun while it lasted.

Party on Wayne.
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