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Saturday, December 1, 2012

The root of the analysts' belief why there won't be a system shock to create a housing collapse here



CIBC joins the list of banks warning Boomers who are counting on funding their retirement by downsizing and selling their bubble inflated house that their plans might be in jeopardy.

In the November 29th, 2012 edition of CIBC's Economic Insights, Avery Shenfeld says:
The evident slowing in Canadian home sales will take a bite out of domestic economic growth... But another dimension of the recent trend, a cooling in house prices, is less of an unambiguous negative as it’s often made out to be.

For one, a retreat today could be the preferred alternative to a harder landing from even higher prices down the road. Less understood is that cheaper home prices could bring winners as well as losers across the economy.
And who might the losers be?
A home owner that counted on downsizing to fund her retirement might have to pare spending plans.
Oh? And why is that?
While a month ago we quoted widely cited estimates of the wealth effect on spending, it’s difficult to disentangle them from the data.
Yes... it's a bitch when reality gets in the way, isn't it?  What is that data?
Most historic wealth declines coincided with other sources of economic weakness, including rising unemployment or high interest rates that depress consumption.
But wait a minute.  Is CIBC suggesting that a bigger storm is brewing beyond a simple 'flatlining' in housing.  Didn't Tsur Somerville just say yesterday that no one can see any economic shock on the horizon?

What about the shock of declining housing prices? CIBC sees a concern:
Didn’t house deflations sink the US and Ireland? Not on their own. It was the accompanying wave of defaults that devastated the financial system in both countries. Canada hasn’t lent as aggressively to its lower-income home buyers, and a correction in house prices caused by a tighter regulatory environment and earlier price overshooting, rather than by defaults, would not on its own generate that same banking system shock.
Hmm... "not on it's own." Does this support Somerville's view?

The central conflict is this belief that "Canada hasn't lent as aggressively to its lower-income home buyers." 

I know I beg to differ.

Zero down mortgages (aided by the banks 7% cash back mortgage plans) which were facilitated by CMHC's excessively easy liquidity boom (which saw the amount CMHC lent out rise from $100 Billion in 2006 to $600 Billion today), and all of this supposedly went to Canadians who weren't "lower-income home buyers?"

Alrighty then.

This belief, that Canada hasn't lent as aggressively to its lower-income home buyers, is the crux of what the analysts like Somerville are counting on.

This is why they say "a correction in house prices caused by a tighter regulatory environment and earlier price overshooting, rather than by defaults, would not on its own generate that same banking system shock."

I suspect the pool of suspect borrowers is far higher than most are counting on. And that they are leveraged in such a way that the 'flatlining' housing market is going to have a much greater impact then ever imagined.

 We shall see in the months ahead.

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6 comments:

  1. The sooner the people stop pretending they are rich, smarter than those stupid countries and are entitled to keep their bubble gains the less annoying these "analysts" will become.

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  2. Article in the Burnabynow "newspaper" subtitled "Agent says Asian buyers pushing up prices" he basically states "so now with the Asian market, Richmond has actually been bumped up because of the demand from Asian buyers". His hypothesis is that this will happen in Burnaby too. Naturally I don't agree with any of that, but it just goes to show the spread of misinformation and outright lies being spread by the Real Estate industry. He also says buyers need to adjust their "expectations" and buy townhouses and condos when house prices rise so high. He must be reading from Cam Good's book.

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    Replies
    1. Ummm...what "Richmond" would the paper be referring to? ...certainly not Richmond, B.C. This place is DEAD! As Garth would say, I can hear the crickets chirping. What's that "whooshing" sound?...that's the air coming out of the deflated balloon.

      "Just like Richmond"?...good luck with that!

      Delete
    2. EinsatzgruppenVancouverDecember 1, 2012 at 11:21 PM

      Heh, here's how you make Burnaby seem hot - you build a time machine, and go back to 2010, or 2007, and then you pretend burnaby is like 2007 richmond.

      Absent the time machine strategy, I don't know the hell you do...

      Delete
  3. "But another dimension of the recent trend, a cooling in house prices, is less of an unambiguous negative as it’s often made out to be"

    They couldn't have made that statement less unambigious if they didn't even try!

    ReplyDelete
  4. The article in the Burnaby Now also reported that Burnaby has the 3rd highest home prices in the country behind Vancouver West and Richmond... and then it goes on to say "for a specific type of home".

    So, basically they go on to say they only looked at 4 bedroom 2 bathroom single family homes and used that to determine that Burnaby is in 3rd place in the country and Richmond is in 2nd and they speak of all the asian buyers creating lots of demand.

    I'm used to the real estate industry twisting numbers and stats around but this is a whole new level of stupid.

    An Observer

    ReplyDelete