CMHC: A Danger to Canada's Economy?

CD Howe says that CMHC is too big

"The federal government should limit tax payer exposure to potential problems in the housing market by winding back the role of the Canada Mortgage and Housing Corp.
The CMHC has a pervasive presence in the domestic mortgage market, potentially resulting in “unmanageably large risks in financial markets” that are ultimately borne by the Canadian public, says the report.
Under current rules, people who borrow more than 80% of the value of the home they want to buy must also take out insurance, and the CMHC is by far the most dominant player in that market.
According to the report by Finn Poschmann, vice president of research at the CD Howe Institute,  the CMHC now backstops mortgages equivalent to more than 30% of Canada’s gross domestic product."

CMHC- with assets at about 10 billion, is it too big to fail?

"As a result, Canadians are exposed to “large, ill-defined risks,” says the report, which argues that Ottawa should crank back the CMHCs presence in mortgage insurance and allow more room for private sector insurers.
Originally conceived as a mechanism for executing public policy, the CHMC has expanded dramatically, especially in the wake of the financial crisis as the government encouraged banks to boost lending by allowing them to securitize more home loans."

1954- CMHC introduced Mortgage Loan Insurance, taking on mortgage risks with a 25% down payment, making home ownership more accessible to Canadians.
1954-1990- Somewhere along this time, 10% became minimum down payment.
1990- 5% was introduced as a trial run, then officially accepted in 1999.
2001 – Genworth (GE Capital) enters the Canadian mortgage insurance market
2001 – CIBC offered below-prime mortgages.
Pre-2003 – CMHC: 5% down with price limit depending on area, 25 yr amortizations, no price limit if 10% or more down
Sep 2003 – CMHC: 5% down, 25 yr amortizations, removed all price ceiling limitations. Now any mortgage would be insured regardless of the cost.
Mar 2004 – CMHC: Flex-Down product allows 5% down to be borrowed and 1.5% closing costs to be borrowed (essentially zero down, but 95% insured)
Mar 2006 – AIG enters the Canadian mortgage insurance market
Mar 2006 – CMHC: 0% down, 30 yr amortizations (Genworth anounces 35 yr amortizations)
Jun 2006 – CMHC: 0% down, 35 yr amortizations, interest only payments allowed for 10 years
Nov 2006 – CMHC: 0% down, 40 yr amortizations, interest only payments allowed for 10 years
Oct 2008 – CMHC: 5% down, 35 yr amortizations, investors need 20% down.
April 2010- CMHC did some minor tightening of their guidelines.
Mar 2011- CMHC: 5% down, 30 yr amortizations,

The loosening of lending standards in Canada is one of the reasons why home ownership rates are higher than the Americans.  The effects of clamping down on mortgages will be felt when interest rates move up.

"But critics worry that the unintended consequence was that mortgages became too easy to get, pushing up real estate prices across much of the country to unsustainable levels."

Looks like Canadian homes are overvalued by at least 30%.  If a Saskatoon bungalow followed inflation over the long term, it would be around 160-170k.  As it stands now, bungalows in Saskatoon are just a tad above that.  Partly in thanks to CMHC.

Canada has followed the US on the way up, if Canada follows them on the way down, even just part of the ways, we will find out how dangerous CMHC has been to the housing market and to the overall economy.

Saskatoon Real Estate Housing Measures

Last week I made some comparisons of housing measures between the Canadian and American housing markets.  Here I am taking a look at some economic measures of Saskatoon housing market.

Saskatoon average house to inflation

Since 1997, the average Saskatoon house price has increased from $96,000 to $296,000 while inflation in Saskatchewan increased 35%.

Saskatoon average house price to rent

Since 1997, the average Saskatoon house price has increased from $96,000 to $296,000 while rent for a 3 bedroom apartment has increased from $561 to $950.

Saskatoon average house price with average Saskatchewan weekly wage

Since 1997, the average Saskatoon house price has increased from $96,000 to $296,000 while the weekly wage in Saskatchewan has increased from $503 to $830 during the same time.

Saskatoon average house price with outstanding Canadian mortgage credit

Since 2000, the average house price in Saskatoon has increased from $110,000 to $296,000 while outstanding mortgage credit in Canada has climbed from 440 billion to over 1 trillion in 2010.  The run up in house prices across the country coincides with the rise in mortgage credit growth.  Totally unsustainable and one of the reasons why the Feds are clamping down on the mortgage market.

Median Multiple

Last week Demographia came out with their annual report on housing affordability across English speaking countries around the world.  This report measures median house prices to median household income.  A ratio of 3 or less is deemed affordable housing.  Saskatoon came in at 4.3.  There is no stats for Saskatoon prior to 2005 with this report but it is safe to say that Saskatoon was near the national average in the first graph.  In the second graph, we can see how Saskatoon became more unaffordable than the national average.

Affordability

Affordability in Saskatoon has improved from the 2008 highs but only because of emergency low interest rates.

Conclusion
Clearly, Saskatoon house prices show a definite disconnect in relation to inflation, wages, and rents.  These 3 fundamentals are what allow house prices to rise in value over the long term.  Saskatoon house prices do show a direct correlation to outstanding mortgage credit growth.  Historically, right now, Saskatoon house prices to household income are out of whack but low interest rates make monthly housing payments at the upper end of being affordable.

The foundation of high Saskatoon home values looks to be based on credit and the bubble is ready to be busted at any time.

Is a 0.2% growth rate in Saskatchewan jobs a boom?

From November 2009 to November 2010, Saskatchewan gained 1000 jobs.  This was actually the slowest growth ( 0.2%) of jobs by all the provinces.  Saskatoon did drag the numbers down as Saskatoon lost about 4,300 jobs in that same time period.

Wage growth was up for Saskatchewan at 5.7% tying PEI for the biggest growth.  The National average grew 4.4% to $865.17 a week while Saskatchewan grew 5.7% to $862.83.Currently Saskatchewan sits in 6th place out of 13 areas for average weekly earnings across Canada.

Hours worked  from November 2009 were up from 32.6 hours to 33 hours (1.3%).

Is Saskatchewan booming in jobs?

We know that Potash Corp is doing very well.  Saskatchewan’s mining industry creates direct and indirect employment for approximately 25,000 people.  But this is only about 4% of the working population in the province.
With the tens of millions of Federal government stimulus, increased Provincial government spending (30% since the Sask Party took office) , population growth of 15,000 from a year earlier, low interest rate environment, commodities rebounding, record spending by the city of Saskatoon and high spending by the city of Regina, Saskatchewan could only muster up 1000 jobs.  If that is a boom, I would hate to see a bust.

It is all not that bad.  Saskjobs is showing over 7000 job postings at the moment, but for me it does not look a boom at the moment

Saskatoon Median Family Income Growth: How has it grown and could it fall?

The growth in median family income in Saskatoon over the past decade or so has been quite impressive relatively speaking compared to the average throughout Canada. But it does not justify the increase in house prices in the same period. In 1998 the median family income in Canada was $47,300 while in Saskatoon it was $48,900.  Fast forward to 2008 and the median family income in Canada was $68,860 while in Saskatoon it was $77,740.
This is how Saskatoon's median family income has grown over the past few years.

2004 $59,900
2005 $63,600
2006 $68,300
2007 $72,970
2008 $77,740
In 2011, I am guessing the median family income in Saskatoon is about $85,000.  This is just an assumption, as the market crash and the lowering of interest rates would have an effect on seniors income and certain pension plans and even with wage growth median family incomes could have turned negative in 2009.  But for this exercise, we will assume it kept climbing a little more than inflation.

So $85,000 works out to be 73% growth in just over 13 years when inflation in Canada was about 30% in that same time period.  I don't have the exact number but inflation in Saskatoon since 1998 has grown about 35%.  Hey, that's great since average family income for Saskatoon in 1995 was less than in 1990 adjusted for inflation. Or maybe not, what is this all based on?

We can see that average total income has not really changed much for men. Woman in Canada have experienced some growth in wages, but this does not account for all the growth. So what else has increased total median family income? 
I have come up with two things.  The wealth effect caused by the rise in house prices which has led to a bigger participation rate.

The Wealth Effect Caused by the Expansion of Credit
One of my first posts was how the wealth effect that housing has on Saskatoon's economy. 
One estimates that a $100 rise in housing wealth leads to a $9 increase in spending. Another finds that increases in housing wealth generate three times the spending from stock-price gains. Together, higher home values and financial innovations have enabled homeowners to more easily tap housing wealth. Mortgage equity withdrawals have risen sharply recently relative to income.


With 100,000 Saskatoon homes increasing in value on average from $150,000 to $300,000 in just 5 short years, the amount of extra spending contributed towards Saskatoon's economy would be over 1.25 billion following the Dallas Fed study. 

It was not a robust economy that fueled the housing boom bubble at the beginning of 2006-07.  Actually, a CMHC report in the spring of 2006 showed that there was 3800 less people working in Saskatoon from a year prior. The report mentioned that they forecast Saskatoon to see 9% in house price growth but there was no mention that Saskatoon houses were " undervalued" and needed to rise 53%  the next year or over 30% the year after.

The expansion of credit fueled by low interest rates, loosening mortgage rules and financial innovations has given the appearance of a robust economy in Saskatoon over the past few years.  This expansion of credit fueled consumer spending, which pushed up employment and wage growth.

This chart is a bit outdated, as Canadian households debt to income of 148% is now higher than the Americans of 147%.  I don't have any numbers on Saskatoon households but I would believe that credit growth in Saskatoon has been more than the national average of the last 5 years.


Participation Rate 
The participation rate in Saskatoon is higher now than compared to the mid 90's. In 1998, the participation rate was 68%. In 2009, with an unemployment rate of 5.5%, the participation rate was 74.1%.  With more families have both people working, it only makes sense that income for families has gone up.  But 2010 has seen some weakeness in the job market for Saskatoon. 

We can see the percentage of women who are in the work force has grown more than men.  And women also had bigger wage increases than men "Between 2000 and 2008, average total income for Canadian women increased at almost twice the pace as it did for men, although women continued to have lower income levels."

On this chart, we can see that rate of young women with children who are working has steadily increased over the years.  Now is this by choice or by force?  According to the Vanier Institute, with debt levels so high and with the high cost of housing, many young women with children have no choice but to work just to make ends meet.

The expansion of credit fueled by low interest rates, loosening mortgage rules and financial innovations has given the appearance of a robust economy in Saskatoon over the past few years.  This expansion of credit fueled consumer spending, which pushed up employment and wage growth.

Conclusion
There was no new industry created in 2006 to justify house prices doubling in a few short years, unless you consider a housing bubble a new industry.  The growth in median family incomes is correlated with the rise in house values in the time period after 2005.  But the growth in median family incomes was not the reason that house prices jumped in value.  Rather, it was the expansion in credit by house values skyrocketing that pushed up median family income.  The expansion in credit fueled consumer spending and this created jobs.   The rising cost of living also forced more young women with children to enter the work force just to make ends meet.  Add in a larger participation rate and there you have it.

Even with the tens of millions of Federal government stimulus, increased Provincial government spending, population growth of 6,000, low interest rate environment, commodities rebounding and record spending by the city of Saskatoon, job growth in Saskatoon for 2010 was negative 4,300 jobs.  Now I am not suggesting that Saskatoon will revisit double digit unemployment any time soon like the early 90's but it is something to be aware of with a housing and credit correction upon the horizon for Saskatoon. 

A participation rate in the low to mid 70's is not sustainable for Saskatoon.  Once the wealth effect goes into reverse, and in a low inflation environment, Saskatoon will probably give up some gains in median family income. A lower participation rate is almost a guarantee. I don't think wages will drop, but it is possible as it has happened in Calgary in the 80's.  I don't have data for Saskatoon, but it is possible wages dropped in Saskatoon at the same time. 

The gains in median family income that are lost will be dependant on how big  and the duration of the housing bust really becomes.

Expect taxes to soar in the next decade

The financial post has an article Get ready to pay the real cost of infrastructure well worth the read.

Too long the cost of infrastructure in Canada has been artificially kept low. Imagine learning that you had a completely unexpected $1,500 bill for housing repairs this year. Then imagine this same "emergency" coming again every year for the next 10 years. After that, you'll find a permanent hole in your budget as you spend more on house maintenance to prevent further emergencies.

The Federation of Canadian Municipalities reported in 2007 that Canada has a municipal infrastructure deficit of $123-billion, amounting to around $9,000 per household. Some cities, including Regina, the city hosting the National Infrastructure Summit, are worse off: Regina recently reported that it needs $2.1-billion over 10 years to repair and maintain its infrastructure. With 80,000 households, the average Regina home owes $25,000.

Here is a comparison between Saskatoon and Regina

University of Saskatchewan needs $617 million

As anyone can attest who has watched the many construction cranes come and go on campus, the University of Saskatchewan has experienced unprecedented growth over the past decade and is currently in the midst of a $1-billion building boom.

The fact that our deferred maintenance costs have risen over decades to $617 million is of concern to the U of S and to the provincial government.

And this is not even considering what a housing bust does to Government and city revenues.

The Aftermath of Financial Crisis

This paper examines the depth and duration of the slump that invariably follows severe financial crises, which tend to be protracted affairs. We find that asset market collapses are deep and prolonged. On a peak-to-trough basis, real housing price declines average 35 percent stretched out over six years,while equity price collapses average 55 percent over a downturn of about three and a half years. Not surprisingly, banking crises are associated with profound declines in output and employment. The unemployment rate rises an average of 7 percentage points over the down phase of the cycle, which lasts on average over four years. Output falls an average of over 9 percent, although the duration of the downturn is considerably shorter than for unemployment. The real value of government debt tends to explode, rising an average of 86 percent in the major post–World War II episodes. The main cause of debt explosions is usually not the widely cited costs of bailing out and recapitalizing the banking system. The collapse in tax revenues in the wake of deep and prolonged economic contractions is a critical factor in explaining the large budget deficits and increases in debt that follow the crisis. Our estimates of the rise in government debt are likely to be conservative, as these do not include increases in government guarantees, which also expand briskly during these episodes.

Taxes will defintiely rise faster than inflation or incomes with or without a housing bust in the next decade.

Mix in household debt at record highs, Canadian public debt at the PIIGS levels, climbing interest rates,baby boomers just past their peak spending age, a pension crisis among other things and I have to ask why would people in Saskatoon would spend 4.3 times the median household income for a house?

Comparing the United States and Canadian housing markets with some economic measurements

Is the Canadian housing market really different from the United States housing market?  Or is there just a time lag between the two countries?  We have all heard how Canadian banks are more conservative than their American counterparts but that does not mean that Canada does not have a housing bubble.  Previous housing bubbles in Canada had stricter lending than now and the amount of household debt is at all time highs with interest rates set to rise.

Here is a comparision of the United States housing market at the peak 2007 and Canada at the end of 2010.  These housing market indicators measure if homes are fair value or not.

Real House Prices
United States

Canada

Median Multiple

United States

Historically, the Median Multiple (median house price divided by median household income) has averaged 3.0 or less in the United States.  The third quarter of 2007 represented the peak of the housing bubble in many markets. By this point, the Median Multiple averaged 4.6. The average in

More Prescriptive Markets was 5.8, with the Ground Zero Markets at 7.3 and the Other Prescriptive Markets at 4.8, The More Responsive Markets had an average Median Multiple of 3.2.

Canada

Historically, the Median Multiple (median house price divided by median household income) has averaged 3.0 or less in Canada. Housing in Canada is moderately unaffordable with a Median Multiple of 4.6 in major metropolitan markets and 3.4 overall.

Price to Rent

Months of Supply
United States

Canada

Affordability
United States households
In 2007, the ratio was 26.02 percent for US households.  This does not include taxes, or utillities.

Canadian households

In 2010, the RBC affordability showed that the average Canadian house ate about 36% of income for Canadians. ( condos, bungalows, two storey) This does include taxes and utilities.

Ownership ratio

United States households

The peak of home ownership hit 69% in 2006 and has declined since.

Canadian households

Home ownership rates have surpassed 70% in Canada.  Is that the peak?

Debt-to-income

Canadian households had a higher debt-to-income ratio than their U.S. counterparts for the first time in 12 years in 2010.  The ratio of household credit market debt-to-personal disposable income rose to 148.1 percent from 143.4 percent as income fell 1.5 percent. In the U.S., debts represent 147.2 percent of households’ disposable income, according to the U.S. Federal Reserve.

Outstanding Mortgage Credit Growth

From 1980 to 2008, Canadian mortgage credit growth was over 775%!

From 1980 to 2008, American mortgage credit growth was over 825%!

These charts look like twins.

Inflation

Inflation in Canada from 1980 to 2008 totaled 164%

Inflation in the US from 1980 to 2008 totaled 161%

Population Growth

Canada population in 1980- 24,517,000

Canada population in 2008- 33,506,000

An increase of 37%

United States population in 1980-226,545,805

United States population in 2008-305,000,000

An increase of 34.7%

Residential Investment as % of GDP

It does not look like Canada is too different from the United States using all these measures.  Granted, housing markets are not limited to only some of these measurements.  And some of these measurements are from different sources so some of the data can be skewed.  But there is no denying the fact that Canadian and American housing strayed away the long term growth fundamentals of a housing market which is inflation and incomes, and used easy, cheap credit to bid up houses and create a housing bubbles. 

Some other economic comparisions between Canada and the United States

The Great Housing Bubble

Here is a pdf book that I just finished reading: The Great Housing Bubble: Why Did House Prices Fall? by Lawrence Roberts. It is about 250 pages long.  Check it out.  An excellent and very important read.

The best quote:
"Since 1890 houses have appreciated at 0.7% over the general rate of inflation. Over the long term house values are tied to incomes because most people buy houses with mortgages for which they must qualify based on their income. Inflation keeps pace with wage growth because people will bid up the prices of goods and services with their available income. Therefore, over the long term house prices, wages and inflation all move in concert. There are short-term fluctuations in this relationship due to variations in financing terms, migration patterns, employment, local limits on construction and irrational exuberance, but any such deviations from the mean will be corrected over time by market forces. As an investment, houses serve as a hedge against the corrosive effect of inflation, but over the long term appreciation much in excess of the general rate of inflation is not possible. In this regard, houses are little better than savings accounts as an asset class, and they are inferior to stocks or bonds in the long term."

Inflation since 1998- 30%.
House price growth since 1998 for Saskatoon- about 200%

For Saskatoon's time period of 2004 onward, is it a short term fluctuation, or is it different here?

Demographia: Saskatoon seriously unaffordable at a median multiple of 4.3

The 7th annual Demographia Housing Affordability Survey has come out for 2011.

"Housing in Canada is moderately unaffordable with a Median Multiple of 4.6 in major metropolitan markets and 3.4overall. Housing was generally affordable in Canada as late as 2000."

Saskatoon had a multiple median of 4.3 derived from a median house price of 277k and median household income of 63k.  The median household income should not be confused with the median family income because it does not include persons not in census families.  The median household income includes both. The Saskatoon median of 4.3 puts Saskatoon in the seriously unaffordable range.

"Historically, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices generally being 3.0 or less times median household incomes."

Historically, Saskatoon's median multiple has been between 2 and 2.7.

A picture of a Saskatoon average bungalow listed for $329,000

The leaderpost has an article comparing Saskatchewan houses to Saskatoon's with comparable prices.

Photos: Comparing Sask. real estate prices with Saskatoon's

Money just doesn't go as far as it used to in Saskatoon's real estate market. For many on the lower end, a starter home is no longer affordable. See what you can get for the money in Saskatoon compared to other communities in Saskatchewan

With a Saskatoon average household income of $70,000, this house would cost 4.7 times income.  And it looks like this house needs some work. At least it is in a decent neighborhood. In Vancouver, this house would go for at least a cool million.

Saskatoon real estate bubble: average bungalow, two-storey price to income, affordability

When Royal Lepage came out with their report on average prices for bungalows and two storey homes, I was surprised to see that Saskatoon had more expensive housing than Edmonton and the spread between Calgary and Saskatoon was only $45,000 for two storey homes.

This is how Canadian cities look like at the end of 2010

This is from 2006

This is from 2001

"Continued healthy demand for homes in Saskatoon prompted average prices to rise in most areas in fourth quarter 2001 compared to fourth quarter 2000, though more modest demand was seen in Regina with minor fluctuations in house prices during the same period.


Based on the Saskatoon markets examined, the average price of a detached bungalow marginally increased to $131,375 (+2.5%), a standard two-storey home rose to $146,250 (+2.3%), and a standard condominium edged down to $87,500 (-0.6%), year-over-year."

It is amazing what lax lending, lower interest rates and a belief that real estate is the greatest investment ever, can do to a housing market in a decade.

We all know that nations with housing markets that have the majority of cities with average house price to average household income under 3, do not have housing bubbles.  Furthermore, new starter housing of acceptable quality should be no more than 2.5 times income.  A previous blog post mentions on how most new households are already loaded with debt and any ratio over 2.5 times income can be disastrous.

This chart is taking into account that the median total income by all census families in Saskatoon is $85,000.  According to stats can, it was $77,000 in 2009. 

* Just before I posted this I noticed I have made the mistake of using this as the median household income for Saskatoon since I started this blog. The actual median household income is lower when taking into account persons not included in census families which for Saskatoon is $24,000 in 2009.  I would guess the median household income for Saskatoon in 2011 is between $75,000 and $80,000.  I'm not going to change the chart for this post, just know that the actual price to income is higher than the chart.  So the price to income is even worse than I make it out to be.
Using a median household income of $75,000 in 2011, the ratio for a bungalow is 4.4 , a two storey home is 4.8 and a condo is 3.06.

Affordability
 True affordability in Saskatoon is hidden by the ultra low interest rates.  Slowly they will rise.  This graph from RBC measures affordability with a 5 year fixed rate mortgage over 25 years with 25% down. 

25% down is possible with trade up buyers, but with any first time buyers, they are struggling to get 5% down.  So affordability for first time buyers would be worse. 

Here I plugged in RBC's numbers for a first time buyer with 5% down in Saskatchewan.  Buying an average bungalow with an average household income in Saskatchewan would consume about 50% of income for that household.  Is it any wonder why 70% of all young households with children need to have both adults working just to make ends meet.  And that 6 out 10 Canadians live pay cheque to pay cheque.
No, I didn't think so.

Is Saskatoon really booming? Mayor says yes, CIBC says no

Mayor says Saskatoon is emerging as the country's economic driver
In delivering his state of the city address, the Mayor said that people in Saskatoon need to change their mind.

"Atchison told around 400 people at a Chamber of Commerce Luncheon that Saskatoon is ‘emerging’ as the country’s economic driver led by huge and continued growth in the mining sector.
No doubt that the mining sector is growing but, the stats show that Saskatoon was not a economic driver at the end of 2010.  More on this later.

Atchison lamented a continued mentality where people don’t believe that growth can be sustained over the course of a number of years.
“We need to change our state of mind and think of all the good things that are happening for us,” he said."

Led by growth in the “food, fuel, and fertilizer” industries, the city will hit the 300,000 mark by 2020 and Saskatoon “is well on (its) way to half-a-million people,” he said.

All I will say is 'where is most of the growth coming from?'  One word and it starts with C and ends with REDIT.  There has not been a new potash mine built in Saskatchewan in over 40 years and less than 2% of Saskatoon's working population actually work in mining.  There is a higher % of people who live and work in Saskatoon that are employed by Walmart and Home Depot than mining.  And the nearest that oil and gas can be found is about an hour and a half away.
Here is a map showing Saskatchewan mineral resources.

I would love to see the city hit the 300,000 mark but with affordable housing for everybody. 

CIBC stats show that Saskatoon is in the middle of the pack as a economic driver

The macro variables used to develop the index are: (1) Population growth, (2) Employment growth, (3) Unemployment rate, (4) Full-time share in total employment, (5) Personal bankruptcy rate, (6) Business bankruptcy rate, (7) Housing starts, (8) MLS Housing resales, and (9) Non-Residential building permits. We combined all the above information into one index per city: "The CIBCWM Metropolitan Economic Activity Index"¹.

We can see that while Saskatoon had the biggest population growth of the major centers it had the third worst employment growth (actually negative).  MLS unit sales were in the bottom half while average prices were in the upper half.  For some more economic variables from CIBC go here.

I have said all along that most of the boom this city is experiencing is based on debt.  From the Federal Government stimulus projects injecting tens of millions of dollars into the local economy.  The Provincial Government has increased spending over 30% over the last 3 and a half years.  The City of Saskatoon has doubled spending in the last 5 years, while Saskatoon consumers have led or been near the top of consumer spending growth in the nation at the same time.  All of this is unsustainable over the long term as credit growth over the past decade mushroomed.

I would ask if Saskatoon is really booming, are public and private balance sheets in order to weather a downturn?

Saskatoon real estate bubble: Average family maximum affordability, past, present, future

With the new mortgage rules coming into affect in March, lets take a look at what the average family in Saskatoon can afford in the past, present, future.

*this scenarios will suggest that the borrower do not have any debt for ease of calculation, different mortgage calculators will produce different results.  For this I used can equity mortgage calculator.

Past ( before the bubble 2005)
In 2005 the average household income in Saskatoon was $63,000
The average 5 year mortgage rate was 5.5%
The longest amortization allowed was 25 years.
Using 5% down, the most the average household could afford was a property worth about $230,000.

Past ( during the 0 down 40 years bubble years 2008)
In 2008 the average household income in Saskatoon was $77,000
The average 5 year mortgage rate was about 5%
The longest amortization allowed was 40 years.
Using 0% down, the most the average household could afford was a property worth about $330,000.

Now (2011)
In 2011 the average household income in Saskatoon is about $85,000
The average 5 year mortgage rate is about 3.5%
The longest amortization allowed is 35 years.
Using 5% down, the most the average household can afford is a property worth about $364,000.

After March 2011
In 2011 the average household income in Saskatoon is about $85,000
The average 5 year mortgage rate is about 3.5%
The longest amortization allowed is 30 years.
Using 5% down, the most the average household can afford is a property worth about $347,000.


As I have said before, the effects of changing the amortization from 40 years to 35 years were hidden by the drop of variable and fixed rate mortgages after the market crash in the fall of 2008.  With the change of 35 years to 30 years and with interest rates forecast to go up, the effects of the changes will be more pronounced than what is being forecast by the media.

Mortgage rules are here

Globe and Mail is reporting that the Government is coming out with new mortgage rules today.

The Finance Department is expected to announce that Ottawa will stop backing mortgages with amortization periods longer than 30 years, cutting off support for the 35-year mortgage.

This is the effect that 40,35 and 30 year has had on the market.

I would expect the home ownwership ratio to go down over the coming years

In addition to cutting mortgage terms, Ottawa is also expected to take action to reduce the rapid rise in home equity lines of credit, or HELOCs. The government will do this by clamping down on the insurance that Canada Mortgage and Housing Corporation offers to the lines of credit.

The government is also planning a third measure that will reduce how much Canadians can draw on their home equity. Last February the Finance Department announced that it would lower the maximum amount Canadians could withdraw in refinancing their mortgages to 90 per cent from 95 per cent of the value of their homes. It is now expected to reduce that maximum to 85 per cent from 90 per cent.

This is the third time since October 2008 that the Government has tightened mortgage rules.

First time buyers are loaded with debt before they buy a home

With house prices so high, many first time buyers need post secondary education to achieve the kind of job that would allow them to enter into the housing market.  The problem is that post secondary education comes at a monetary cost that puts the average graduate into loads of debt.  So much debt, that buying a home, or starting a family is put on the back burner for some young couples.  Only low interest rates and long amortizations have helped them get into the housing market.

Between 1990 and 2000, the average debt for a university graduate more than doubled. By 2009, the average debt for university graduates was $26,680, while the average for college graduates was $13,600.

Student loans are big business: (2009 numbers)
Canadians who have pursued post-secondary studies now owe the federal government $13 billion in outstanding loans, according to new figures from the Canadian Federation of Students.
The CFS says Canada Student Loan debt increases by $1.2 million per day and will cross the $13 billion mark on Wednesday.

So lets pick a fictional couple, Scott who has a University degree and Amy who is a College graduate.  Following the average debt load for students, this couple would have $40,000 in student debt.  Throw in a car loan of $10,000, some other small loans and/ or credit card debt of $10,000 and this young couple is $60,000 in debt just after post secondary school.

So lets say this couple make $100,000 between the both of them.  Scott makes $60,000 and Amy makes $40,000 right after their schooling.  This would be about $15,000 more than the average household income in Saskatoon.  Their income should allow them to buy an above average house in a pretty good neighborhood.  But taking a quick look at MLS.ca and by multiplying their income by 2.5, there is nothing even close.  They have to go past 3.5 times their income for a decent bungalow or two story that most would deem acceptable as an above average house.

From http://www.demographia.com/dhi.pdf
For metropolitan areas to rate as 'affordable' and ensure that housing bubbles are not triggered, housing prices should not exceed three times gross annual household income.

To allow this to occur, new starter housing of an acceptable quality to the purchasers with associated commercial and industrial development, must be allowed to be provided on the urban fringes at 2.5 times the gross annual household income of that urban market. 

You can see why new starter housing of an acceptable quality needs to be no more than 2.5 times the gross annual household income.  The average first time buyer already has a load of debt and if they want to start a family, they need that cushion when one of the parents stays home for the first year for maternal care.  EI pays 55% of the wage of a caregiver to stay home for a year.

The only way that these first time buyers can enter the market are low down payments, low interest rates and amortizations that are 35 years.

Is it any wonder why 6 out of 10 Canadians live pay cheque to pay cheque with housing costs and debt levels so high.

Vanier said today that about 59% of family finances were in such a fragile situation that a delay of just one week in a pay cheque would spell financial disaster. It also found that 70% of women with young children were now working outside the home, pointing to the need for two incomes to make ends meet.

First time buyers are the life blood of not only the housing market but the economy now and into the future.  Having them loading up on debt levels that are unsustainable will have disastrous consequences for economic growth down the road especially since baby boomers have just passed their peak spending years.

First time buyers do not need long amortizations, or creative financing to get into the mortgage market, what first time buyers need is affordable housing.  It is that simple.

Tougher mortgage rules are coming, but which ones?

Financial post has an article " Tougher condo mortgage may be on the way".

Sources say rules now being discussed would add 100% of condominium fees to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage. Currently, only 50% of the fee is considered. The move has the potential to squeeze thousands of consumers out of the market.

This is a no brainer.  Should have never been 50%.

It is almost a guarantee that the government will once again lower the maximum length of amortizations for a mortgage, down to 30 years from 35. Longer amortizations lower monthly mortgage fees making it easier for consumers to borrow more.

The effects of the mortgage changes from Oct 2008 in regards to mortgage amortizations shortening from 40 years to 35 years are unknown.  When the changes were put into effect, mortgage rates were not at all time lows.  When the stock market crash happened, fixed five year rates fell from over 5% to the mid 3's while the prime rate fell to 2.25% from about 4.  The lower rates allowed buyers to buy more house than before, the same result as a longer amortization.

Some calculations have shown the longer amortizations have goosed prices up over 18%.  So on an average Canadian home at 330k, that is about 60k.

Ottawa is also still considering a far more controversial proposal to increase the minimum downpayment required to buy a home but it is unlikely to go from the current 5% to 10%, as some have speculated. A 6% to 7% range seems more likely, said the source.

What CMHC needs to do, is not insure any cash back mortgage which is essentially a subprime mortgage.  5% down payments were not a problem before the bubble blew up.  But if they do change the down payment requirement, 6% or 7% is not a bad idea.  This would give first time buyers the ability to learn how to save, which could come beneficial down the road when they can not borrow against their home to fix the roof or do some reno's.

Everybody but the real estate association knows that something must be done.  Credit is still exploding higher.  Something will be done, but until the mortgage rules are actually changed, it is all rumors.

Subprime in Canada, the cracks are appearing

Who says we do not have subprime in Canada? 

Xceed posts loss, won’t accept new mortgages

"Xceed Mortgage Corp. said it would no longer accept new mortgage applications after posting an annual loss of $17.6-million, focusing instead on managing the $1.6-billion of loans already on its books.
A quarter of the loans on its portfolio, about $400-million, is from the company’s foray into subprime lending from 2002 through 2008."

Will there be more of these corporations possibly folding in the future?

Today's subprime lending consists of 0 down mortgages or cash back.

We all know the big banks will give cash back mortgages.
CIBC Up to 7% cash back mortgage
TD 5% cash back mortgage
RBC Up to 7% cash back mortgage
National Bank 5.5% cash back mortgage
If you do not know it by now, cash back mortgages are a bad idea.


Canada did not experience the same level of subprime lending like in the US.  Here is a chart comparing subprime mortgage lending between the US to Canada up to 2006.  Since then, lenders in Canada have quietly side stepped the publics eye of lending subprime loans while the Government and media have loudly proclaimed that Canada has conservative lending, hah.

Here is a sample list of subprime lenders in Canada who give out the cash back mortgage.

http://absolutemortgage.ca/
http://www.canequity.com/no_money_down_mortgage.stm
http://www.canadianmortgagesinc.ca/home_mortgage/
http://www.midislandmortgage.com/services.html
http://www.realmortgagesolutions.ca/
http://www.mortgageopportunities.ca/Loan_Programs.html
http://www.mortgageland.com/bad-credit.html
http://www.onestopmortgage.ca/products.html
http://www.pioneerwest.com/services.htm
http://www.canadian-mortgages.com/index.php?option=com_content&view=article&id=33&Itemid=80
http://kamloopsmortgagegroup.com/
http://www.alexandermacleod.com/default.aspx?PageID=1001

Here in Saskatoon, there is a program called the Mortgage Flexibility Support Program to promote home ownership.  In the US, they called this subprime lending.

"The City of Saskatoon, Canada Mortgage and Housing Corporation (CMHC) and the Saskatchewan Housing Corporation have created the Mortgage Flexibilities Support Program to increase affordable homeownership opportunities in Saskatoon.

With a 5% down payment grant from the City of Saskatoon and mortgage loan insurance from CMHC or Genworth Financial, qualified homebuyers will have the means to finance the purchase of a new home."

Remember, Canada did not have lending like this in the 80's.  10% down over 25 years was the minimum.  Still, Canada experienced housing bubbles in the West in the early 80's and in the Toronto area in the late 80's.  It won't be a US style crash but a Canadian style crash will be hard enough on thousands of families.

How would Saskatchewan be affected if China crashes? Or has a slowdown? What about India?

With the US struggling with the bursting of the housing bubble and a possibility of a double dip, along with parts of Europe being a basket case, the world is looking towards India and China to keep the world economy afloat.  Long term, I am bullish on commodities, but short term, it is a different story.  For me, I see too many warning signs from places like India and China that may slow the commodity sector.  And as we know Saskatchewan has many commodities.  This map shows a list of mineral resources of Saskatchewan.  (Take a look).

If you follow MISH, great, if you don't, you better start.  Here is a great post on why China  may face a hard landing.

Eight Problems Facing China
Hot money inflows
Huge property bubble
Massive increases in money supply, much of it property speculation and building of unneeded capacity
Currency manipulation charges from the US and potential trade wars
Unsterilized trade imbalances fuel inflation
Slowing Europe
Dearth of Jobs for new graduates
Potential social unrest

Here are 15 facts about China that will blow your mind
and if you wonder what would happen if China crashed, take a look at China's 14 dominoes of destruction.
Ghost cities of China with enough vacant homes to house the population of Canada over 4 times!

It's only a matter of time before China's housing bubble bursts from the Shanghai daily.
To understand how big the real estate bubble is in China, take a look at this chart.  Japan had such an asset bubble in the 80's, they still have not recovered from it.  China 2011 is definitely in the same territory as Japan 1990 in regards to housing value relative to GDP.  These two countries make the US housing bubble look small.

As for India, it is expected to be the worlds fastest growing country by 2014, but to achieve this, the country will have to stave off price inflation, asset bubbles and civil unrest.  Here are 15 facts about India that will blow your mind from business insider.  I don't think that India is in as big problem as China, that's why most of this post is focused on China, but India is definitely important to Saskatchewan.

So how does this affect Saskatchewan?
Just over 60% of Saskatchewan's exports go to the US, while the Canadian average is about 80%.  So the slowdown in the US has not affected Saskatchewan as much as the rest of the country.  A slowdown in China would have a big ripple affect that would be felt around the world with these 10 US states in bigger trouble than they already are.  Out of all the provinces, Saskatchewan would be hit the hardest because China is the second largest trading partner after the US in terms of Countries. Just for reference, Saskatchewan GDP in 2009 was 56 Billion.  In the last few years, exports have pretty well doubled to China.  As for India, exports have quadrupled since 2005.

It is not because commodities would take a big hit that would cause the problem here, ( no doubt it would hurt as provincial coffers would not be as full) the problem would be the drop in consumer confidence.  If commodities were hit hard twice in 5 years, Saskatchewan residents would know it is not different here. The two things going well for this province at this moment are confidence and credit.  A slowdown in China and India would produce a drop in consumer confidence in Saskatchewan.  And then consumers would realise that the debt levels do matter. In a consumer spending economy that has seen much of the growth from credit you can see how this would affect housing markets such as Regina and Saskatoon.

If China were to crash, the implications of Vancouver's and Canada's real estate markets would be huge.  The only thing feeding the housing bubble to reach over $1 million for a house in Vancouver is Asian money, or aka Hot Asian Money ( HAM). Ben over at Financial Insights has covered this story very well.  In this scenario,once Vancouver's housing market falls then so does the rest of the housing markets in Canada, as the synchronization of markets takes hold across the nation, but only in reverse.

According to the Conference Board, the world could survive a China slowdown.  But stock markets and growth around the world would be severely impacted.  They compare Japan of the 80's to China now.

Japan accounted for close to 20 per cent of the global economy after its economy recorded average annual growth of between 8-10 per cent in the 1970s and 1980s. At the time, many experts predicted that Japan would eventually overtake the United States as the world’s largest economy within a couple decades (sound familiar?). Few doubted that a collapse in Japanese growth would be a disaster for the global economy. Well, the “unthinkable” happened as the bursting of a real estate bubble and deflation caused the Japanese economy to average growth of less than 1 per cent annually throughout much of the 1990s and 2000s. By 2010, the Japanese economy was less than one-third the size of the US economy!
Interestingly enough, the global economy generally experienced solid growth throughout much of the 1990s despite the disintegration of the Japanese economy.

If China, slows down, I hope they are right.



A China crash is not a certainty, but a slowdown is definite.  The world and Saskatchewan in particular will feel the affects of a China slowdown in more ways than one.