The Day of reckoning is coming

Here’s something to ponder on the Christmas eve: Alberta finally has seen negative inter provincial immigration (something we did mention several quarters ago as a distinct possibility). We have also seen the mortgages in Alberta that are in arrears (pdf) rising to the highest levels in years. We also have a fairly high level of unemployment, both official and the invisible ones (those who are off the EI rolls).
The economy grew in October but only because utilities were slightly costlier and the realtors and mortgage brokers found some bigger fools who seem to learn nothing from other peoples' miseries(US bubble, Albertans who bought at peak who are still under water etc). Despite that we are still meandering somewhere in late 2005 GDP level territory. And given the population increases since then, we are certainly doing a lot worse than a lot of special interest groups would like you to believe.

So all in all, the "solid fundamentals" that drove the Alberta's real estate market during 2005-2007, have all but vanished. Just to recollect, remember all the arguments from that era:

• People are moving in droves to Alberta.
• There are plenty of jobs.
  
• There's Alberta Advantage.

Yet, the prices keep on rising in late 2009. Which means, there must be some other factors at work. Like the factors we discussed way back in 2007 - speculation fueled by cheap credit and abetted by CMHC. And nothing else. Nothing is more important to the health of real estate market than the availability of cheap and accessible credit. And accessibility sure means NINJA loans, government underwriting, lax conformance to solid rules of lending.
Jobs don't matter. We have seen that. Negative inter provincial immigration doesn't matter. We just saw that in this quarter. Overall shrinking economy doesn't matter. We saw that this quarter.
But credit matters only until it stops mattering. Sooner or later something will give in.

The Honourable finance minister, having woken up woken up to the reality of a real estate bubble and the devastating aftermath it might unleash when it bursts, is contemplating changes to the CMHC's requirements.

That this bubble will collapse is a mathematical and financial certainty. Will it collapse under its own weight, like it had started doing last summer, or will it be done by exogenous forces?
Will 2010 be the year when bond vigilantes finally wake up? Will the bond market really live up to its reputation as the scariest thing?

For all the renters who have managed to save goblets of cash, don't forget to share your good fortune with those in need around you. Happy Holidays to all of you.

Real estate surge no ‘blip,' TD says

How do you categorize the definat housing market in face of rising unemployment, continual contraction of the economy, global recession, massive problems in the economy of our largest partner, surging trade deficit and {add your list of other problems with the economy here}? Here are the choices:

a) It's a bubble.

b) It's a bubble on steroids fueled by the greatest fools who have learnt nothing from the real estate debacle in the US, UK, Dubai and several other parts of the world.

c)It's based on strong fundamentals.

If you answered c, you can get a job as an economist with the TD Bank. But seriously, why would you answer it any other way? If you make a good chunk of your money by lending obscene amounts of money riskfree to the greatest fools in many generations, this would seem an appropriate response.

Let's talk a little bit about the fundamentals here, since we haven't dealt with those in a long time. I'll focus on my favorite ones-the ones that use the cost of production model:

-How expensive should land be in a country like Canada where there's no dearth of land? Especially in Alberta where there's usable land. Why are lots in Calgary sub division three to four times as expensive in Texas? New Mexico? Colorado?

I won't even mention the lot sizes here. The newer lots are a fraction of the size of older lots in the same city. I won't dare do a comparison with the US suburbs here. Everything is so much smaller. Because the developers can get away with it, just as retailers, auto makers, cell phone providers and everyone else in our country can get away by milking the sheep-would be Canadian homeowners.

-Why should there be so much difference in cost of construction across different parts of Canada? Yes, excluding the cost of a lot, why does it cost so much more to build a house in Calgary or Vancouver than in say Guelph or Barrie? I won't even venture to do a comparison between the US construction costs and the Canadian ones. We no longer have the problems of 'surging labour costs' as evidenced by the nearly 8% unemployment in Alberta.

What are the real fundamentals behind the house price increases? If you have been reading this blog for a while, you know the answer. And it's a four letter word.

And the secret recipe for continued housing strength is...

CMHC. Or secruitization and mortgages backed by us, the poor Canadian tax payers. CMHC has been given the go ahead to increase its mortgage cap limit to $600 billion by the Federal government. The government has full commitment to just one thing-ensuring that assets bubble don't deflate, no matter what the cost. For stupid $2 to $5 million items and expense items much smaller than that, there's a lot of debate, discussion, media attention and bickering. Yet hundreds of billions are implicitly guaranteed without anyone asking a single question anywhere. Such is the power bankers yield in this day and age.

Just for perspective, this limit is roughly half of our GDP. And when things go south, as they most likely will, what would it do to the Canadian sovereign rating? And deficits? the Loonie? Most of the people would ignore this, as they generally do until it's too late. We are following the footsteps of US just too closely.

The question is-will be lucky and see the bubble pop when the guarantees are mere $600 billion or will we have to wait till we hit a sweet trillion dollars or more?

At least the illusions of the strength of the Canadian banking system and the robustness of our lending practices are intact.

Freddie/Fannie.....Can it happen here?

Two years ago the very thought that Freddie/Fannie would be "socialized" in the capitalistic paragon of the world would have been ridiculed. So at the risk, of inviting ridicule, I wonder, can something similar happen here? I've not had the time to dig deeper into the financial details of CMHC, but they are doing quite a bit of heavy lifting (around $120 billion in Canada Mortgage bonds) in terms of guaranteeing mortgages with a rather thin capital base (less than $7 billion in equity).
But in Canada no mid Sunday morning bail outs will be necessary, should we experience anything remotely resembling the rout in the US housing markets. After all, "CMHC’s Guarantee of Canada Mortgage Bonds carries the full faith and credit of Canada, and constitutes a direct, unconditional obligation of Canada."

Here is a video in celebration of the 'socialization' (heads bankers win, tails taxpayers lose) of our southern neighbour...