Home Buyers: Beware The Pumpers

If you get your news from the mainstream media outlets in Canada like most Canadians do then your view of the Canadian real estate market and financial system is a rosy one. With home prices that are near all time records and interest rates at all time lows what could there possibly be to worry about if you were considering buying a home?

Pump It Up, It Can’t Come Down

At least that’s what the “pump it up”, “house prices only go up” real estate industry would have you believe. Mantra’s like “it’s different here” and “Canadians don’t like leverage” or my personal favorite “Canadian banks didn’t need a bailout” are all headlines I am sure you have read repeatedly in the past 18 months if you have researched the real estate industry to any degree.

The latest home sales figures are in and for the first time in a long time sales are down:

“Canadian housing sales dropped 9.5% in May, led by declines in Toronto, Ottawa and Vancouver, adding to evidence the peak in the property market has passed, the Canadian Real Estate Association said on Wednesday.” Source: Toronto Sun

Unexpected Results But There Is No Problem

Of course there is always an excuse why these seemingly “unexpected” results occur and this time is no different. Apparently the prospect of higher interest rates and new tighter lending standards combined to drop the market almost 10% in one month. Is that all that is at play here? Tighter lending standards?

The new lending standards CREA is referring to can hardly be called “tighter”. Buyers can still enter the market with only a 5% down payment and still get ammortization periods of up to 35 years like they could before. The only restrictions really added by Finance Minister Flaherty were to speculators buying second and third properties who would now have to put up 20% as a down payment.

It’ true the Bank of Canada did increase it’s lending rate by 0.25% but are these two factors enough to drive a nail through sales to such a degree that there was a 10% drop in one month: a month that is typically one of the hottest selling months of the year in Canadian real estate?

No Problem Let’s Pull Forward A Few More Buyers

Even with the increase in the Bank of Canada’s lending rates commercial banks are once again lowering their rates to try to entice buyers, like BMO who recently dropped their 5 year fixed rate by 10 basis points. So after a lousy May sales number we now have banks once again lowering their mortgage rates even after the the Bank of Canada raised it’s rates because apparently our economy is overheating. What’s going on here?

If you ask Jay Bryan at the Montreal Gazette there never was a housing bubble and somehow this drop in sales is actually something good for the real estate market. Funny how no matter how dire the news the real estate pumpers and their pals in the media can find a way to tell you something bad is actually good. Of course the usual “our banks know what they are doing” and “it’s different here” and “we expected this” and now everything is cooling to a “normal” level are the excuses used.

Record Debt Levels For Canadians

Let’s look at some hard facts. Canadians are more in debt than they have ever been in the history of Canada. For every dollar they take in they owe on average $1.48 in debts. Record low interest rates and incentives to buyers like only needing 5% as down payment when even 10 years ago the average was 15% and allowing 35 year amortizations have turned people into debt slaves rather than equity owning homeowners.

The real estate industry and the Government of Canada have colluded to brainwash people into thinking it’s their “right” to own a home and it’s a good idea to lever up with 94% of the home price being borrowed money. Why would the banks allow these risky loans? Ahhh, because they have a get out of jail free card in the CMHC. The CMHC is backing all of these risky overleveraged mortgages with insurance policies.

“In situations where mortgagors haven’t made their regular payments, as required under the terms of their respective mortgages, the issuer MUST make these scheduled payments to the CPTA for credit to the NHA MBS investors, as if they had been made. CMHC mortgage insurance protects the lender/issuer against mortgage default, assuring payment of principal and interest in accordance with the terms of the mortgage insurance policy.” Source: CMHC FAQ

So you see my friend, whenever you hear your banking buddy or real estate agent tell you the housing industry is in great shape or “it’s different here” remember that the only difference is that the Government of Canada (ie. you the taxpayer) is insuring all of these risky mortgages, otherwise your banking buddy never would have lent out the money in the first place. Not only that, the Government is using your tax dollars to write the insurance policy. Did you even know that?

Don’t Forget the Boomers

All of these tricks and sales tools the real estate industry are using now to try to prop up the market is just the calm before the storm. Pray tell what will happen when all of the baby boomer supply comes on the market with no one left to buy their large homes as they try to down size into retirement? What happens in 5 years when all these risky mortgages reset at higher interest rates? Let the May sales numbers be your harbinger, lower prices are on the way unless we all start making about 2x our current salaries.