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Jonathan Tonge September 9, 2009 americacanada.blogspot.com
The Canadian Government, via CMHC, has stimulated an already very aggressive mortgage lending market. Please read CMHC - Canada's Breaking Point.
Derek Holt and Karen Cordes, economists at Scotiabank, reported 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"
"Pent-up demand from the sales slump last fall may explain some of the gains, said Bank of Nova Scotia economist Derek Holt, but low mortgage rates are the dominant factor."
Please read "Housing sales, prices surge in August" by the Globe and Mail
"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.
But he questioned whether mortgages could remain this affordable in the long term. Lenders may have offered "excessively generous financing terms" in their rush to build up product to put into the Insured Mortgage Purchase Program offered by the federal government, he explained in a research note released last week with fellow economist Karen Cordes.
That could be driving the kinds of astonishing gains seen in B.C. in August. Vancouver alone saw sales rise 117 per cent year over year.
"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.
"The kind of strength we've seen of late isn't necessarily sustainable."
Mr. Tal agreed that the market will likely slow when interest rates rise again.
"Are we stealing activity from 2010, 2011? Yes, I think so," he said. "We're getting out of the bunker and we're seeing that there's light ... but after the initial excitement, the real estate market of 2010 will be a very boring place, a much more relaxed place."
Even accounting for attractive rates, it is still surprising to see sales numbers surge so much compared to 2008, and earlier, said Tsur Somerville, a housing economist at the University of British Columbia.
The question is whether a spate of good deals on mortgage rates could mean Canadians are getting in over their heads."
Total mortgage credit in Canada will grow by 12-14% in 2009. This stimulus is icing on years of 10-13% annual growth in mortgage credit. We have a false sense of confidence that our overpriced assets aren't really overpriced. If these assets were fairly priced then why are debt levels rising so quickly to support these price levels? If the economic fundamentals were supportive, then we would be growing debt in line with GDP growth - give or take a couple percent.
We are ignorant to the reality around the world. Our lust for cheap money and attitude of 'buy now or be priced out forever' is not something unique to us. Our belief that real estate will remain high despite our low savings and high debt loads has been stated before. In fact, we can closely compare present Canadians back to Americans in 2006. Take a flashback to December 2006 when the US savings rate hits lowest level since 1933 to get a good idea of the street mentality down south not even three years ago.
What makes these handful of Canadians out on the street overloading on credit so special is that they have real life examples around them of what not to do and yet they are doing it anyways. Everyone else has jumped off the bridge and these Canadians staring down at the bloody aftermath are following in their footsteps. This is proof of why emotions are generally more in control of the economy than cognition and why marketers, banks and trade associations can successfully appeal to your affective decision making set despite grim realities.
To repay this debt borrowers will in essence, work for free for the creditors tomorrow. One has to hope that the creditors still want what the debtors produce.
Excessively generous lending terms in the USA has destroyed present consumption. Consider Job Creation Down 35%, Consumer Spending Down 33% From Year Ago. Longer amortizations steal consumption from the economies of future generations, literally.
If we consume less, then our consumer economies will shrink. The burden of the debt would grow. So one has to hope that we are all expecting a huge economic growth in future years to offset this inevitable decline. Growth can come in many ways. Here is a common sense approach to growing the economy:
1. Productivity (how much goods we produce when we work)
2. Investments in Innovation (the value of the goods we produce today and tomorrow)
3. Savings (if high, implies a possible increase in future spending)
4. Debt (if low, implies a possible increase in borrowing which will be spent on consumption today)
These four factors could be viewed as the most important elements in our economic lives. Factors 1 and 2 provide you with your expected income. Factors 3 and 4 dictate how flexible your spending is today relative to your disposable income.
Technically debt and savings should be balanced in an economy, at least when it is operating near capacity. That is when one saves, another lends. Money is after all simply just a way to transact work.
Consider an economy with two people. One individual wants to borrow from you to build a factory. He wants you to help him build the factory for free today but with the promise that if the factory is a success, then he will provide you with as many goods as you'd like from the factory. You want these goods and to buy them today individually would require a lot of work. So you decide to build the factory for free.
But now let's take an example where your friend wants you to work for free building him a house - a really nice one, much nicer than your own. He says after the house is built he will work for you for free. Over the next twenty years, as a form of interest, he will reward you on your gratuity by working for you for twice the number of hours you originally gave him.
In the first example your friend is easily able to pay you back. Not only that but his added wealth allows him to buy even more of your work. Because of the return on the project, he can have his lunch and eat it to.
In the second example your friend will struggle to pay you back. He can't pay you back in products or services because he hasn't invested in any. As such, in the future he won't be able to engage your services or labour as he has nothing to offer in exchange as his time is already tied up working for you.
People prefer to transact their work as soon as possible and as such need compensation for any delays. This rate would be captured in a free market interest rate. However the interest rates are not set by the free markets and thanks to the money creation process that is the banks, there is a whole lot of debt and very little savings. This means that not all that much work was lent to create the debt we have today. Most of it was just pretended to have existed. The rest was imported from Asia. Hence why asset prices shot through the roof and quickly fell. There values rested on our imaginations that money actually represented work.
Canada has borrowed our future capacity on debts that can be considered malinvestment. They won't produce a future return. Debt has been used to buy residential and commercial real estate, government borrowing, leveraged corporate buyouts, acquisitions of competitors, and of course, consumption. None of this borrowing has made a positive impact on future PIDS (Productivity, Innovation, Debt, Savings). Please see Majority of Canadian employees living paycheque to paycheque, survey shows.
Not only that but there are very few savers. So even if we had invested in innovative productive projects there would be a lack of buyers to support the growing economy. In fact the only way that economy could grow is if consumers took on more debt.
So how do we plan on paying back all this debt if we can't plan on economic growth? Looking at our two person economy in Example 2 above, it would dictate that as debt is paid back, our economy will immediately shrink and then stagnate with very high unemployment. Sounds realistic.
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