“Having been conned by lower than market interest rates heavily set by the Central Bank of Canada, people were misled into purchasing “investments” they will not be able to afford in the future once interest rates rise.”
Canada is quickly becoming much worse off than the US was (in terms of house prices to income levels) before their bubble burst. House prices in the US are much lower on average than Canada and they have higher incomes with lower taxes, so how is this sustainable in Canada then?
Prior to a few years back, home prices moved in tandem with wage increases, inflation, and the CPI. The lines on the graph pretty much traced over each other. Then easy credit became the norm “courtesy” of the Central Bank of Canada’s setting interest rates below market price. People could borrow more with less and for longer periods than ever before. At that time, home prices diverged, radically, from their historical traveling companions. People with no sense of reality thought it could go on forever. Now look at the US. A Florida house that may have cost $200K in 2000 may have gone for $450K in 2007, but in 2010 might be back down to $200K, $250K max – and by even the rosiest picture, will not regain its 2007 value for another 15 to 20 years.
“The reality is, that if we put interest rates anywhere near where they ought to be, we would bankrupt most of our financial entities and we’d have a real collapse. We’re never going to have a real recovery until the market lets us have a real recession. Our phony consumer-based economy isn’t viable; it only exists as long as the Chinese and Japanese lend us money to buy their stuff.” Peter Schiff
Canadians sound exactly like countless people in the USA before things went belly up. Many critics said things like “All the people predicting a bubble are just jealous. They wish they got in when the getting was good.” Well, to cut to the chase here, in response to these critic, “Show us a stat that says most people are in over their heads, the only challenge here is fitting it within the character limit here. The fact that you don’t know how in over their heads Canadians are is testament to your state of denial and the value of your opinion on the bubble. Please just Google “canadian consumer debt” and you’ll see volumes. Here’s just a taste form the Certified General Accountants Association of Canada:
- Household debt is at an all-time high reaching $1.3 trillion in 2008 and the escalation of debt is primarily caused by consumption motives rather than asset accumulation.
- One third of Canadians do not commit any resources to savings and deteriorating economic conditions have not yet had the usual effect of encouraging increased savings.
- Canadian households are financing consumption activity and fuelling gross domestic product growth with unearned money as families increasingly reach for credit to finance day-to-day living expenses.
- Even with the temporary relief of a credit card or line of credit, one quarter of Canadians would not be able to handle an unforeseen expenditure of $5,000 and 1 in 10 would face difficulty in dealing with $500 unforeseen expense.
- The majority (78%) of surveyed said they would not change their saving patterns in order to build or rebuild the financial cushion.
To all the people who kid themselves into thinking that a crash couldn’t happen in Canada because theirs banks are just so much better than those in the US, and that because your banks (coming from an American perspective) didn’t lend to people with bad credit, Canadians should realize they were brainwashed their sacred CBC state owned propaganda arm.
We see comments all over the US and Canadian media that the time which assumed that the wreckage in the US was (and still is, it’s still going on) due to subprime loans, but it really wasn’t. Fact of the matter is that the subprime fallout pretty much ended some time ago and the majority of defaults on the books now and into the future are from “good” credit risks who could just not make their payments anymore due to interest adjustments or loss of income, or due to people walking away from a home that was worth less than they owed. The vast majority of our problems have been caused by just normal folks with normal jobs who over-leveraged themselves. Having been conned by lower than market interest rates heavily set by the Central Bank of Canada, people were misled into purchasing “investments” they will not be able to afford in the future once interest rates rise. Subsequently people purchased too big a mortgage, too much credit card debt, and presto, defaults a plenty. Well, if you haven’t noticed, Canada is no longer a nation of savers. Americans are up to their necks in consumer debt too. That 30-some % which economists pretty much agree is the upper limit of income that should be devoted to housing, American people rocketed past long ago.
Canada’s sub-prime mortgage time bomb
By Murray Dobbin | October 22, 2009
What do the mid-recession housing boom and the Harper Conservatives’ rise in the polls have in common? Answer: the Canada Mortgage and Housing Corporation’s massive sub-prime mortgage scheme that is keeping up the appearance of an economic recovery.
Reading the newspapers these days you have to wonder whether Canada was on another planet when the global credit crisis hit. House prices have actually increased in some provinces and now there is a shortage of houses for sale in southern Ontario. Credit is flowing everywhere. Source: Rabble News
Moreover, believing that you people don’t have subprime mortgages on the books is kidding yourself as well. 40 year zero down? If that isn’t subprime, we don’t know what is; and that’s just one aspect of your subprime market. We had our deniers here too saying that a crash could never happen. Well, reality does matter and if housing costs far outstrip income gains, which they do, astronomically, you’ve got problems.
Borrow as much money as you can at 3% and then go invest it in oil stock that are paying anywhere from 8% to 15% in dividends. Keep the difference. When the economy recovers, interest rates will rise, but so will stock prices. So then sell the stocks, pay off the loan and keep the difference. Easy money. Even some bank dividends are more than 3% so you could borrow from the bank, invest in the bank, and still make a couple of percent. Average Canadian family income after taxes $ 71,500.00. Average price of a home in Canada $ 327,500.00. It simply does not compute.
It is about time that the federal government introduced new mortgage rules. The caveat is that these are not really “new” rules. Weren’t these the same rules that were in place a decade or so ago? Credit check on earning power and debt load capability, with 20% minimum down payment?
When the average Canadian looks around the neighbourhood in which they live, they are astounded that people can afford such luxurious, spacious homes. (Many prudent people live in the “shacks on the street of castles”) Low interest rates simply allow people to live beyond their means, if not now, for sure in the future when interest rates rise, when heating costs rise, etc. etc. Down will come tumbling the prices of large homes that people cannot afford to live in and up go prices of modest sized homes – or at least remain stable and good value prices, or at worse, decline modestly while large home prices plummet.
Prudent use of personal credit is one of life’s great lessons! Sure, it is nice to pursue one’s dream home – and we are not denying that – but one must be cautioned that the dream home really is a dream if it is not affordable. Everyone woud love to own a Ferrari but reality promptly corrects this fantasy.