Thursday, October 25, 2012

The Evolution of Rationalization

We seem to have entered an interesting phase in the media coverage of our housing collapse.

Instead of denying there is even a bubble to burst in the first place, now the media is filled with economists and 'experts' who predict that prices will fall but by a moderate level that does not resemble the U.S. crash.

The latest to join the chorus (after Muir and Somerville yesterday) is CIBC deputy-chief economist Benjamin Tal.

Tal, however, takes it beyond accepting there will be some price declines and minimizing them. For Tal it's about ensuring slipping prices don't trigger a collapse in buyer/seller confidence.
"There is nothing to fear but fear itself... Panic is the worst thing that could happen because when that mentality sets in and people become irrational, it’s hard to forecast how low prices will go."
Tal, Muir and Somerville have one central worry: that Canadians are starting to talk themselves into a housing crash by creating a scenario in which every new statistic is interpreted in the most negative way with an eye on trying to constantly compare the Canadian housing market with what Americans experienced just before their housing prices plummeted by as much as 50% in some markets.

Which is why each and everyone of them keeps insisting/re-assuring that there will be no U.S. style crash in Canada.

Says Tal:
"When you see headlines screaming that Canadian household debt has reached a record level, an eerily similar spot to where Americans were before the market crashed there, it adds to concern. But the similarity ends with the headline-grabbing number. The quality of the debt is much different here."
Err... quality?

Tal maintains the people who have taken on more debt have a much higher credit score than the Americans who did the same prior to their market crash.

Ummm... But if Canadians are such a better risk than what do you make of a Bank of Montreal report that BMO came out with on Monday that noted that almost three-quarters of Canadian homeowners would feel a significant squeeze from even a small rise in interest rates?

The report basically says 73% of the people surveyed can’t afford their own homes. And a lot of them are already feeling the pinch.

A third of these people have already cut back on other spending so they can make the mortgage payment.

One in six has been forced to raid their savings to pay current costs.

This is at a time when interest rates are at historic lows, which means they can only go up. That they will rise, eventually, is inevitable. Yet 16% of the people in the survey said they might not be able to make their payments if rates rose by even a tenth.

So much for Canadian debt being of a higher quality.

Another key factor that Tal insists is ignored in the current housing bubble discussion is how much of our Canadian mortgage debt is locked in for longer terms and not subject to the vagaries of rising rates.

Tal says 70% to 80% of Americans were in variable products at the peak while the Canadian figure is 29% (Tal cites the latest survey from the Canadian Association of Mortgage Professionals for this statistic).

Umm... just a quick question here.  When you say only 29% of Canadians are in variable products... does that mean we don't count a mortgage that resets to a different interest rate after five years?

I mean, aren't ALL Canadians in variable products when you consider this factor?  How many Canadians have 30 year locked in mortgages like in the United States?

Blink... blink.

Sorry Tal... I know I'm afraid.


Click 'comments' below to contribute to this post.

Please read disclaimer at bottom of blog.


  1. Even Turner is guilty of this error. His personal view (it is incorrect, by the way) is that we will have a minor correction followed by a long slow melt in prices. He wishes.

    Even the media buys it now because it is the least disturbing of all the other real world options we see before us. OK. So lets rationalize then.....we are better than the Americans.....we are better than the Americans.......

    We are all lying to ourselves.
    That is the truth.

    This is a first class disaster forming and no amount of fancy footwork in the pages of the papers can make it go away or soften the edges.

    Excellent post today by the way, Whisperer We are nowhere near enough yet to challenging the consensus view that is now forming. Most of it is rose-colored glasses bullshit that will be dispensed with as mere noise (after the fact).

    So lets screw our heads back on and look at reality. There is no more demand....there are virtually no more first time buyers....the retail economy is quickly being gutted by our high levels of debt and shortage of buying power.

    Nobody seems to have the nerve to just come out and say it in plain words. Let me help. We are F*ucked and the ride has just begun.

  2. High quality debt. Isn't that kind of like a polished turd?

  3. There was a column in the Vancouver Sun about this last Friday that said basically the same thing. The debt numbers were rigged (when they changed the measurement method) and the debt "quality" was better in Canada. More reassurance by the pumper paper that "everything will be all right". No bubble has ever just had a slow deflate, ever.

  4. I can't figure out where Garth Turner is coming from now. He's soft pedaling the housing crash issue; where he used to say there will be a significant decline (crash), now he's saying more of a soft landing lasting years. Maybe he doesn't want to be accused of causing the panic, or a housing crash would be bad for his investment business?

    1. As best I can tell, Garth Turner never put his weight behind the "soft landing" model, he just as struck down the gloom and doom predictions of some of the far out commenters on his blog. If you can find a counter example, I'd be happy to read it though.

    2. Garth has totally and completely changed his tune from "crash" to "no crash". Take a look at his book "After the Crash" published in January of 2009. In it, he talks about house values plunging.

      I've been following his blog basically since he started it. Clearly he was talking crash until shortly after the housing market crash of 08/09. Then he suddenly changed and stopped using that word.

      It doesn't make sense that he considered the Canadian housing market susceptible to a hard landing in 08/09, when it is obvious that the market is in a much more vulnerable position today.

    3. So true. We seem to have had the bad fortune to have peaked in our real estate mania at just about the same time the rest of the globe looks to be unravelling. It is worrisome. At other times in our history there was strength elsewhere in the world when we had troubles but this time we will go into a delevering and downturn coincident with all our trade partners softening. Not good to say the least.

  5. My sister in law works with a young single lady who just bought a new three bedroom condo in Richmond for $500,000. Her payments are around $3,000 per month which probably doesn't include maintenance fees or property taxes. Just another sheep led to slaughter by an unscrupulous real estate industry. I asked my sis in law why she bought now and she said it was a good deal and this lady just felt like she needed a home.

  6. As an American by birth it always seems that Canadians need to point out how they are different. So now Canadian's credit scores are better? Are they better then the UK, Ireland, Spain, Italy, all of which are going through massive recessions as well?

    At some point the only way you can service your increasing debt is by taking on more, no matter how good your credit score is. I think we are there here.

    I don't believe the variable rate figure for the US, it's between "70 and 80%"? That sounds like it's been pulled out of a hat to make a point. And in fact, it was.

    At the peak of the housing bubble in the US ARMs were 40% of all mortgages, with the rest likely being fixed 30 year. As Whisperer pointed out literally every mortgage in Canada is an ARM.

  7. The 70 - 80% number Tal quotes is an outright lie. Americans have these 30-year mortgages and a much more sizable sum are locked into those.

    Benny Tal works for a bank. His job is to lie to people. His job is to sell BS. His job is to keep blinding people with the "I'm an expert" routine. He's another corrupt slimeball, paid to say things no normal person ever would. People are figuring this scam out.

    1. Yes. The job of these people is to maintain calm and not get people into fear. They use fear to pump up the bubble but fear in a downmarket can turn into chaos. They want a slow and steady decline like slowly getting a frog use to it's environment until it's cooked in the pot.

  8. There is a difference in debt. Mortgage debt in the US is mostly non-recourse, so that you have the option of walking away from your house and it allows the consumer to de-leverage in the US at a much more quick rate than we can here. Mortgage debt here is recourse loans, and we can't just walk away from our houses if we feel like it. So it will take much longer for the Canadian consumer to de-leverage, when the time comes vs the US consumer that has been de-leveraging.

    1. Some states are recourse, some are non-recourse. Some provinces are recourse, some are non-recourse.

      The big picture in terms of how quickly prices will fall in Canada is not about recourse or non-recourse or the exact type of debt. People who argue this are only trying to distract and redirect attention away from the things that really matter.

      The size of the correction/crash in Canada relative to that in the US will be determined by many factors such as the fact that the average house price in Canada is much higher than it was in the US at the peak. As well, the price to income ratio in Canada is higher than it was in the US at peak. In the US, they can deduct mortgage interest. We cannot do this in Canada. In Canada we generally renew mortgages every 5 years vs. every 30 years in the US.

  9. This comment has been removed by the author.

  10. Exactly, anonymous number one. There are no more first time buyers. They either were lured in too early by cheap money, "priced out forever" rhetoric or the threat of tighter mortgage requirements and CMHC changes, or they are simply in the camp of never going to be a good credit risk.

    Home ownership is at 70 percent. Who's left to buy? Those of us who have owned houses before and are now out of the market are certainly not jumping back in any time soon. At my age, it would take a 50 percent drop, at least, to lure me back in to even considering home ownership, and even then, I'm not so sure. I've ended up renting the last nine years in Victoria because of a job change, so my children have grown up in rental houses. It hasn't hurt them, and it gave us flexibility. As we watched the market get crazier and crazier, we were more and more grateful to be out of it. Now, I really don't know that I ever want to enter this craps game again. I'm busy saving for retirement, eliminating all debt, and enjoying my beautiful home, $2300 for 6 bedrooms, 3000 sq. ft, on five acres just 10 minutes from downtown Victoria. And I don't have to fix the roof, upgrade the windows or replace the furnace. My landlord does all that for me. Why would I buy?

    1. Well thank you anonymous of October 25th. Always nice to hear from others when I hit a nerve with on online rant (some days I really have smoke coming out of my ears after reading the foolish remarks from the banks and realtor cabals). I love Victoria too, by the way. Sounds like you have a hell of a deal. I would move there but it is still too costly for my liking and all perspective has been lost. Not to be irritating but my rent is less than 50 bucks a month for a huge space and I have lemon, avocado and orange trees in the yard......but then it is not Canada either. We all make sacrifices I suppose. I am going swimming.