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Why condos in Toronto are going through the roof is beyond me because the economy there is in a complete crapper,

I do not understand this at all, Toronto has something like 130+ high rises under construction, the most in North America!

Alberta is a little better because our *current incomes are much higher than the rest of the country so the affordability is slightly better than Toronto and Vancouver:

Calgary Median Household income: $89,000 (2009)
Average price (condo + townhouse + single family): $391,500 (2012)
Affordability ratio: 4.4

Toronto Median Household income: $66,750 (2009)
Average price (GTA condo + townhouse + detached + semi-detached): $463,000 (2012)
Affordability ratio: 6.93

Vancouver Median Household income: $67,550 (2009)
Average price (all residential properties in Greater Vancouver): $622,087 (Nov 2011)
Affordability ratio: 9.20

Now to rant, Alberta is definitely on the high side, we should really be at least 25% lower to be stable but rant on... *******N VANCOUVER YUPPIES AND TORONTO IDIOTS YOU ARE GOING TO KILL OUR COUNTRY, WHAT WERE YOU THINKING?

Pitz wrote..

40% of the residential RE loans in Canada are essentially callable on an overnight basis, so if there is a liquidity problem, the bank can immediately liquidate the collateral and defend the rest of their portfolios.

Hm... what happens to 'liquidity' if Canadian banks actually did this to a significant number of borrowers? Methinks the borrowers wouldn't be able to come up with the money (I think that's a safe bet), and the banks would end up holding a bunch of rapidly-diminishing assets (foreclosed homes in a deflating market.)

How exactly would that mitigate Canadian banks' liquidity problems?

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Hm... what happens to 'liquidity' if Canadian banks actually did this to a significant number of borrowers? Methinks the borrowers wouldn't be able to come up with the money (I think that's a safe bet), and the banks would end up holding a bunch of rapidly-diminishing assets (foreclosed homes in a deflating market.)

How exactly would that mitigate Canadian banks' liquidity problems?

If the loans couldn't be repaid from the asset value available, the CMHC would have to make up the shortfall as they are legally obliged to as the underwriter of the 'insurance' on the loans. Since the CMHC insures the worst quality/least equity loans in the overall marketplace.

The government is legally obligated to support the CMHC including issuing massive amounts of additional government debt if required (probably) in order to pay on the guarantees.

If the Government can't sell the new bonds into the available money supply, then the BoC would have to engage in some form of quantitative easing, much like in the United States, to monetize the Canadian government's debt.

If the Government tells the banks to go shove those CMHC mortgages up their as*, then contract law as we know it in Canada essentially would be dead.

Please wait until the event happens, instead of a statement of concern. Have we learned nothing? Math only matters in a controlled setting. Where we know all of the inputs and out puts. No one can say they know the numbers, or predict, the numbers. That would require knowing how the global money supply "TRULY" works. Do you REALLY THINK YOU KNOW?

If I have learned anything over the last 4 years it is that if you are not part of the top 1%, and I mean the very top, you don't know jack ****. It is all speculation. And history shows you are wrong.

Pitz wrote..

The government is legally obligated to support the CMHC including issuing massive amounts of additional government debt if required (probably) in order to pay on the guarantees.

This seems to me to be nothing more than TARP, TANF, TALF, and other bank bailout mechanisms performed by the Fed and Treasury as being "baked into" the Canadian financial system on an a priori basis, as opposed to being handled on an ad hoc basis after the fact here in the US.

Other than that, there seems to be no fundamental difference in a big picture sense.

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This seems to me to be nothing more than TARP, TANF, TALF, and other bank bailout mechanisms performed by the Fed and Treasury as being "baked into" the Canadian financial system on an a priori basis, as opposed to being handled on an ad hoc basis after the fact here in the US.

Other than that, there seems to be no fundamental difference in a big picture sense.

Bingo! And certainly Canada won't be immune to the social divide that such will cause, to wit: banks and bank shareholders will own a substantial pool of the assets in Canada once this is over with, which certainly may not be very palatable to many Canadians.

A significant chunk of Canadians are relishing in the artificial real estate gains they've made in the past decade, but they're, IMHO, in for a giant shock when those gains dissappear and are re-distributed into the pockets of bank shareholders.

Canadians only have themselves to blame for creating this mess. 40% of the real estate loans in Canada actually allow the bank to set whatever interest rate they want. Astonishing, isn't it?

The Queen sez, "No worries, mates!" (Give her a break, she doesn't know who Charles is anymore either.)

Peter :
Vancouver Median Household income: $67,550 (2009)
Average price (if you only take houses): $752 000 (Jan 2012) (http://www.livingin-canada.com/house-pri....
Affordability ratio: 11.13

Vancouver is indeed nuts.

At least Montreal is only around 5...

And it's nothing compared to Shanghai where the ratio is still around 80-85...

pitz wrote..

40% of the residential RE loans in Canada are essentially callable on an overnight basis, so if there is a liquidity problem, the bank can immediately liquidate the collateral and defend the rest of their portfolios.

Pitz, I had to take a second shot at you, but calling a real estate loan is like calling a disconnected phone number. The entire US mortgage business froze up. Think they could call these loans? If the government is backing them, then they aren't callable, but salable to the government. Also, a bank isn't equipped to match loan durations, as they are money institutions and not capital institutions. There is not much out there that has a less determinant term than a mortgage, which can last anywhere from a couple of months (figuring no one pays to get one for a couple of days)to 30 years. I doubt many US banks would have held them outside of a capital base investment or with the understanding they were marketable to FNMA/FHLMC

Call money works in the stock market. You get the call and they sell the stock and get the money. Takes a push of a button on a computer, about 20 seconds to put the whole transaction in and through. If the typical homeowner had a few hundred thousand dollars laying around, they might not have a mortgage. Anyhow, when the $500K loan is backed with a $400K asset, how you going to call that?

Ameicans, remember one thing. This bubble isn't the fault of the borrowers. Don't go for any long term recourse of mortgage debt. The banks knew the history of negative am loans and the pay option ARM's and the deep buydowns and the history of 1 year treasury rates and all the other stuff they put into the mortgage market back in the 1980's. It blew up then, once home prices levelled out and was sure to do so again. I'm sure they took in the parts of the country that prices never levelled out and assumed that to be the norm and not the exception. The whole message, all the radio bull**** get rich in real estate programs, the NAR driving the American Dream into people's heads and lying about the statistics and the bankers fabricating bad credit. The bubble would have never occurred without a long term trend of easier finance, more absurd loan programs and more and more leverage. I recall when FNM went to 97% in the 1990's. Later my sister told me you could get 105% with a good credit score. Of course, my family lived through the 1980's real estate depression and we all knew it was going to blow.

pitz wrote..

If the Government tells the banks to go shove those CMHC mortgages up their as*, then contract law as we know it in Canada essentially would be dead.

If the government doesn't tell banks to shove those mortgages up their ass, contract law is dead. This is a heads I win, tails you lose arrangement and void by its very nature that the entire agreement favors one party. The bank has no consideration in such an agreement, but instead is operating on the very credit of the group that is held liable in the first place. The idea that all of society is liable to bail out drunken sailors, making bar loans to their pals is wrong. It is anti-contract law in that the people of Canada or any other country are not signatories to the contract, but liable all the same. Look up unilateral contract. There are other reasons, like incapacity (the state is too broke to pay, which is already the truth), unconscionable (which reaping the benefits while providing nothing in return, not to mention obligating parties not included in the benefits of the contract), bad faith, you name it.

The bankers have turned law upside down. I guess they will be hung upside down as well.

I think the "I told you so" from Karl is premature. The real estate market has not corrected in any fashion in Canada. Yes Canada is due for a correction and likely a solid one but it may not happen for another year or two. Not sure predicting something to happen and being out by 5 years or more is such a great accomplishment..Karl has made many many other better predictions than this one.
And will we see prices drop 50 percent or more like in the USA..I am not so sure. Maybe 20-30 percent. We have a ton of resources in Canada..not just oil but minerals potash and are debt levels are still looking better than the USA. Vancouver has always been expensive..yes its ridiculous now..but there is a ton of money from China and Hong Kong that has flooded into the city for decades. So yes prices could drop but I suspect Vancouver will remain the most expensive real estate in Canada for decades to come.

50% in the USA. It's been about 30 so far.

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Pitz, I had to take a second shot at you, but calling a real estate loan is like calling a disconnected phone number

But in Canada, the number is not disconnected; it is connected to the CMHC, which has the obligation to pay up, in full, for losses on most at-risk loans written in Canada.

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Also, a bank isn't equipped to match loan durations, as they are money institutions and not capital institutions.

Canadian banks generally write mortgage terms 5 years and less, and sell CDs (or GICs as they're called here) for 5 years and less. Not hard, under such a scenario, to match the deposits to the mortgages. Which is exactly what the Canadian banks do.

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Anyhow, when the $500K loan is backed with a $400K asset, how you going to call that?

The government (CMHC) is obliged to make up the difference. They've insured a very large amount of the market against default, at the full notional value.

So the bank calls the $500k loan that is only backed with a $400k asset. They get the $400k asset. And the government cuts them a cheque for an additional $100k as a claim on insurance.

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If the government doesn't tell banks to shove those mortgages up their ass, contract law is dead. This is a heads I win, tails you lose arrangement and void by its very nature that the entire agreement favors one party. The bank has no consideration in such an agreement,

The banks and their customers paid a significant (but wholly inadequate) insurance premium to the government, in order to take out their risky loans and to have them insured. The government has gone around for the past number of years and bragged at how well CMHC has worked as a scheme to make the government money and to "help" Canadians own homes. If the government unilaterally comes to the revelation that CMHC has been a policy failure, when they're on the wrong side of the problem, and tries to impose, through legislation, a modification in the contracts, then Canada ends up looking like some sort of banana republic.

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So yes prices could drop but I suspect Vancouver will remain the most expensive real estate in Canada for decades to come.

The most severely leveraged places have the greatest potential for huge falls.

People have been saying real eatate in Vancouver is over-priced since the 1980s..how has that forecast worked out?? Yes prices are ridiculous now and of course they will fall but predicting prices to collapse in Vancouver is overdone. There is too much money from Asia circulsting in that city and it will not rush out anytime soon. And Vancouvers real estate market looks tame compared to some of the stories coming out of China and Hong Kong.

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There is too much money from Asia circulsting in that city and it will not rush out anytime soon.

If there was so much "money from Asia" circulating in Vancouver, then wouldn't salaries be considerably greater? Is it really possible, aside from an unsustainable bubble, that all the foreign investment (if, indeed, it exists) ends up in one particular asset class, to the exclusion of almost all others?

From what I've seen, the only thing "Asian money" about Vancouver is the propensity to leverage gains in previous RE investments into new RE investments. Sort of like using every last dime of margin available in your margin account, and then buying more stock the minute your portfolio goes up a few percent. Of course when that stops..... Vancouver Asians are perhaps more predisposed to this because when it collapses, they can leave Canada and not face the consequences.

Pitz wrote..

The government (CMHC) is obliged to make up the difference.

That works only if the gov't has the resources to do so. An obligation to make up the difference could be (and would likely end up being) merely one more of the promises of gov't that cannot be met without destroying the foundations of financial stability the gov't (and the country) needs to survive. In the US, gov't keeping its implied promise to not allow the collapse of the banks, Fannie, Freddie, and other financial institutions has been one of the major factors in bringing us closer to running off the cliff.

In the event of a Canadian housing crash, will the Canadian gov't actually make good on all of the CMHC obligations/promises and hurtle off the cliff, or are they likely to accept a failure of the banks but not the entire economy? The US seems to have made the decision that saving the financial institutions is worth the risk of long-term recession/depression.

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That works only if the gov't has the resources to do so. An obligation to make up the difference could be (and would likely end up being) merely one more of the promises of gov't that cannot be met without destroying the foundations of financial stability the gov't (and the country) needs to survive.

Sure. But Canadian stockholders, for the past decade, have seen their purchasing power in, for example, houses, absolutely decimated. Flat stock market, yet houses have doubled, and in some cases, tripled.

So what's so terribly bad about a system that would actually vest some purchasing power in the hands of those who responsibly decided to invest in banks, rather than in overpriced houses?

As for the government, it probably will have to cut back severely and stop wasting so much $$$$ on useless stuff.

Gov't using taxpayer money to bail out anyone is one of the major reasons we're where we are today.

IMO, the gov't should disengage from promising, guaranteeing, back-stopping, etc. anything as fast as it reasonably can in order to allow some sense of sanity to return to the financial system. In the US, "as fast as reasonable" is pretty close to immediate, and that's gonna cause major dislocations. Given that Canadian housing has not yet crashed, it's possible that Canada could significantly reduce the impacts of the dislocations by disengaging more gradually.

Pitz - Practically all the Asian money has gone into real estate. First there was a huge influx of money from Hong Kong back in the 1980s as people were fearful of the 1997 handover to China and they wanted a backup residence. Lately its hot money from China looking to invest in real estate. There is a very large Asian population in Vancouver hence the attraction for a lot of asian money to move there. Another significant but less dramatic impact was also all the retirees from the rest of Canada flocking to Vancouver because of its milder climate.
Its not the average people of Vancouver driving up the price of real estate..its the money from Asia thats doing it. Hence this notion of average salary is not meaningful in Vancouvers case.

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Practically all the Asian money has gone into real estate

If that was true, then we'd be seeing a reduction in leverage, not an increase in leverage in the sector. And Asians aren't stupid; the ones who are rich, probably didn't get to be rich by making bad investments (like buying cash-flow negative properties in Vancouver, for instance).

As I asked, is it really possible that a lot of 'foreign' money is flowing into particular areas of Canada when only one asset class seems to be going up (and that increase is happening roughly at the same rate as leverage is increasing against that particular asset class)?

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IMO, the gov't should disengage from promising, guaranteeing, back-stopping, etc.

Agreed, but how does this happen in Canada in an orderly retreat? As it stands, once the CMHC limit ($600B) is hit, the market is likely to crash as nobody will want to write the loans that keep the market propped up, at the margin, on an uninsured basis without dramatically greater interest rates.

Pitz - Asians speculate like crazy..just look at the real estate prices in Hong Kong and China..its insane. Its just an extension of the same mentality into Vancouver. Vancouver is totally different market from any other in Canada because of this foreign money from Asia. Yes its gotten even more frothy than normal hence a correction is coming. However I wouldnt be betting on a total collapse but a more moderate decline.
I see prices flatlining and starting to decline in most Canadian cities within 1 year..with bigger declines by 2015. But we wont see the same carnage as in the USA because we dont have subprime issues here and the resource sector will continue to be strong. Gold silver potash oil are all going much higher which means a pretty strong Canadian economy.

Pitz wrote..

. . . nobody will want to write the loans . . . without dramatically greater interest rates.

Bingo!! That's what gov't guarantees/incentives/whatever get you. It is a classic characteristic of a distorted market.

It's the gov't's choice: they keep the market propped at artificially high levels via CMHC guarantees and run the risk of gov't implosion if/when they have to make good on them, OR they disengage from the market and let it find its own level in terms of prices, mortgage interest rates, types of loans, durations, etc., etc. Lucky for Canada that they've got a perfect example of how NOT to do things just to their south, Eh?

If they believe they've got some years of breathing room, they can mitigate the severity of the shakeout effects by doing things gradually, but there will still be a shakeout. For example, they could establish an upper limit to the guarantee amount for each house and then reduce that limit over a period of time until it's zero. If there aren't years of breathing room left, then any disengagement will result in major perturbations.

As has been stated before: there are no good options, only those with differing degrees of badness.

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If they believe they've got some years of breathing room, they can mitigate the severity of the shakeout effects by doing things gradually

I don't believe they have 'years'. The CMHC insurance should have been gradually shut down 5 years ago, before things had run this far out of control. Instead, in response to the inflated bubble, the policy response was to grow CMHC even further by introducing 40 year amortizations and zero down programs.

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Pitz - Asians speculate like crazy..just look at the real estate prices in Hong Kong and China..its insane. Its just an extension of the same mentality into Vancouver. Vancouver is totally different market from any other in Canada because of this foreign money from Asia

Sure "Asians" speculate. But the evidence is that they're doing so with borrowed money, *not* "foreign money from Asia". Otherwise the leverage against the asset class would not be expanding at a rate that is highly correlated with price increases of housing.

True investment in Canada from Asia definitely would be welcome, but the current situation, of a bunch of Asians running around in Vancouver/Toronto, pyramaiding previous gains in RE into even more leverage, is destined to blow up at some point.

On the "Asians" and "foreign money" in Toronto:

http://www.talkcondo.com/wp-content/uplo....

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98% OF NEW CONDO BUYERS HAVE AN ONTARIO DRIVER’S LICENSE AND SOCIAL INSURANCE NUMBER

- Of the 28,000 new condos sold in 2011, our team sold close to 1% of them. Based on our sales, 98% of our buyers were ‘local’ with 2% coming from other countries. It is quite easy for us to track due to the fact that international investors have different requirements than those in the country (i.e. – the typical deposit structure is 20% for local investors, while international investors need to invest a minimum of 35%)

A bunch of "Asian money" coming into Canada might make for a good story, but the evidence points directly at a leverage bubble domestically.