Bush overjoyed -- WMDs found

George Bush must be overjoyed.  They just found the WMDs and arrested a group of religious extremists (the Hutarees) who were going to use them against Americans.

Unfortunately the extremists were an American Christian militia group, which sort of diminishes the joy.  They're still looking for the Al Qaeda connection and are hopeful DNA analysis will prove a direct family link to Saddam Hussein ;-)

The End is Nigh

Numbers don't lie.  But people may.  The numbers tell me that the Canadian credit bubble is coming to a peak, and will be followed by a credit contraction, similar to the American one.  We are behind the Americans by 3-5 years, but we aren't different, smarter, or immune from the same economic constraints that apply people of all nations. 

The Canadian credit bubble is evident in personal loans, credit card balances, and most importantly in the over-priced housing market.  Read Jonathan Tonge's AmericaCanada blog to get good background data.  And lately the credit bubble has shown up in increasing federal and provincial debt as the politicians attempt to prevent or at least delay the inevitable economic downturn.   As soon as the bubble in one form of debt pops, the deleveraging will move into all forms of debt, and general defaults will occur in places people never thought would be a problem.

Today three Canadian banks announced they will be increasing some mortgage rates as much as 60 basis points (0.6%) tomorrow.  This is no big deal.  I don't expect rates to go up much in the next few years because the Canadian economy is in much poorer condition than is publicly aknowledged, as is the American economy.  I expect the second half of a "double dip" recession to begin later this year in both countries, further eroding middle class wealth.   (But I could be wrong and the government officials, who would never deceive you, could be right.) 

In the early 1980s I recall people rushing out to lock in 18% mortgages, to ensure they got that rate before those rates went over 20%.  But of course 18% ended up being the top.  A decade later my co-workers were envious of one guy who had a 10% mortgage.  The long term average Canadian mortgage rate is in the 8% area.  So I don't see today's little rate announcement as slowing down housing sales.  Rather, it will increase sales as people rush to lock in sales before some mortgage qualification rules change on April 21, and before Ontario and BC introduce their HST (which will increase the tax load on real estate transactions in those two provinces).  The sellers are laughing all the way to the bank.

Garth Turner is on a roll on his "The Greater Fool" blog.  I particularly liked his latest post, entitled Condo Cowboy.  It turns out that in 2007 this guy, Danny, in Calgary put a $20,000 down payment on a condo (not yet built)  priced at $420,000.  I can't begin to outline in how many ways that could be problematic.  (Calgarians mailed their keys in to the banks en masse in the early 1990s because of an economic downturn in Alberta, and Danny is old enough to remember that.)  So now his condo is ready, but it is appraised at only $335,000.  Danny can't get financing and the developers are suing him for failure to carry out his end of the deal.  They want their $420,000.  Danny (in a CTV video clip) seems to feel that he's being treated unfairly; I doubt he would feel that way if the current appraised price were $500,000.  Nope.  Danny would feel he's a very smart man, a financial whiz who recognized value and bought it.  After all, housing always goes up.  Danny is what happens when the market runs out of greater fools to flip a property to; Danny is the last greater fool in the chain.  But he'll be better educated after paying his dues in court to learn the basics of contract law.

Garth has another post where some American analysts calculate the average Canadian house is 27% ($71,000) over-valued.  At the end he links to a video highlighting Laura, an 18 year old in Toronto, who was successful in buying what I assume will turn out to be an over-priced piece of junk.  Laura and her co-signing mommy are about to learn a very expensive lesson.  But there is no housing bubble in Canada ;-)  Many thousands of young people have just trapped themselves in a house they can't get out of.  When the price drops the value will likely be less than their mortgage and they will not be able to come up with enough money to sell at a loss.  So they're trapped even if they have a job opportunity in another location.

And Ontario is not going to be a place young people will be going to for jobs.  It could be an economic disaster zone in the making, like Indiana and Illinois.  But they have the votes and business leaders who can force all sorts of back door bailouts from the feds (that would be you and me paying).  "Mish" had a decent blog article today comparing Ontario to California.  California is a bankrupt basket case, but Ontario may be worse.  Mish gets carried away with blaming everything on the unions, but is rated as one of the top three American economic bloggers as I recall.  I read him daily.

This is funny.  As I was preparing a salad a few minutes ago I was listening to some .mp3 downloads.  I download from various sites like howestreet.com regularly, and this interview with Danielle Park was the next in my backlog.  I first met Danielle at an investment conference in Toronto in 2007 where she impressed me with her knowledge and common sense approach to investing.  I then bought her book Juggling Dynamite which I would recommend.  In 2008 I got her to autograph my copy at another conference in Calgary.  Anyhow, this interview is worth listening to because it focuses on the Canadian housing bubble;  her thoughts and observations are similar to mine.  In fact, she also linked to Alexandre Pestov's study (see my previous post), apparently about the same time I did.  I guess we all find the same things at about the same time when we watch the markets.


The Canadian Housing Bubble

There is no doubt in my mind that Canada is experiencing a housing bubble.  This is not in only a few cities like Vancouver and Toronto, but more of a country-wide over-valuation, just as it was in the USA.  And like all bubbles, it is difficult to predict when it will pop.  I expect the top to be in the summer of 2010, but bubbles often carry on further than anyone expects.  It is not easy to predict the exact financial disaster created by the bubble popping, even if you know the extent of over-valuation at the top.  But it will be bad for the finances of Canadians, and for the finances of the provinces and the nation.  All government budgets are going to be blown out, just like in the United Subsidies of America.

I touched on Canadian housing in a previous post, which you might want to skim for some general comments made there.

When getting information on housing, I would advise never accepting any statement from the following four sources at face value:
  1. The federal (or provincial) political party in power;
  2. Any bank or lending institution;
  3. The mass media (radio, TV, newspapers); and,
  4. CREA.
Politicians lie regularly.  I think it's a requirement of their job description.  In addition some may be totally incompetent, while sounding knowledgeable.  Our esteemed federal Finance Minister, Jim Flaherty stated vehemently on Oct. 9, 2008 that there would be no deficit budget.  On Oct. 10 Prime Minister Harper assured Canadians that there would be no recession.  The election was Oct. 14, and after that the truth came out.  (Anyone paying attention knew Flaherty was into deficit spending at the time of the election.)  On Jan. 27, 2009 Flaherty delivered a $33.7 billion deficit budget; then in May Flaherty updated his deficit estimate to over $50 billion.  Oops!  On March 4, 2010 Flaherty's 2010-11 budget deficit estimate was $49.2 billion.  I find this suspiciously just under $50 billion, and consequently predict the actual will be something over $50 billion.  Perhaps way over!  Currently the federal debt per capita in Canada is about $15,000;  provinces are piling on debt as well, even Alberta.  Kevin Page, the parliamentary budget watchdog, claims Flaherty's future budget projections are overly optimistic.  Flaherty claims Page doesn't know what he's talking about.  And Flaherty continues to insist there is no housing bubble in Canada.  You have been warned.

Banks and lending institutions should never be trusted.  They will always be your best friend, going out of their way to extend easy credit during the good times, but going after your assets without mercy whenever you encounter difficulty paying.  Banks will never lose much on defaulting Canadian mortgages because they either have sufficient collateral, or the borrower is paying CMHC to cover the first 20%.   CMHC is going to need a taxpayer bailout, just like Fannie Mae and Freddie Mac.

The media cannot be trusted because much of their advertising revenue comes from the housing and banking sectors.  As a consequence, most of what you read, hear, or watch on TV is basically an infomercial promoting the housing industry.

CREA is the Canadian Real Estate Association.  Repeat after me:  "Now is a good time to buy; real estate always goes up in the long run; buy now before you get priced out of the market!"  Congratulations!  You are now a Canadian real estate professional.

I started monitoring the American housing market seriously in 2005.  It was apparent there was mass delusion present, like the SoCals who thought house prices would continue up 22% per year for the next 10 years.  They were already at a median house price of about 10x median income in L.A. at the time, roughly equivalent to Vancouver metrics today.  David Rosenberg, chief economist of Merill Lynch stated there was a housing bubble, and everyone jumped all over him as being a "gloom and doomer".  This article was a typical response.

I hope you actually read the articles linked in the above paragraph.  Now read this one.  See any similarities?

Note in the Canadian article how 91% of Canadian "homeowners" "believe" housing is a good investment.  "Believe" is a good word to use in this context, because Canadians (like Americans) are financial illiterates; they are severely numerically challenged.  I would expect that at least 90 out of that 91% could not do an accurate calculation of the annualized net percentage gain (or loss) they have made on any property they have purchased.  One of the greatest scams of all time, foisted on gullible people worldwide, is the myth of housing being a good investment.  And anyone who thinks buying a house in Canada in any of  the major cities in 2010 will ever turn into a "good investment" is clearly delusional (or severely uninformed).

The article also states that 15% of 18-24 year-olds expect to buy a house in the next two years.  BWAAAHAAAHAAAHAAA!  Break out the popcorn and pull up a housing bubble blog!  Over the next five years you're about to see the greatest incidence of personal bankruptcies of Canadians under 30 years of age ever.  Many will be under 25, and we might even get a few sub-20-year-olds committing financial suicide.  And a lot of these Echo Boomers are going to drag down Daddy Boomer and Mommy Boomer with them, because most of them will need a co-signer.  These are clearly the last of the greater fools needed to sustain a Ponzi scheme like the current Canadian housing market; after the 18-24 year olds buy, who is there left to sell to?

And "26 per cent expect their home to be their primary source of income when they retire".  That's sad.  A house is not a legitimate retirement plan.  Never was, never will be.  Ask the American boomers how their "retirement house" plans are doing.  Don't rub it in about the huge increase in dependence on food stamps and soup kitchens from those who thought they had it made. 

I read David Rosenberg's daily economic reports (Gluskin Sheff), and find them quite thorough, reasoned, and educational.  He was ridiculed for calling a housing bubble in America in 2004, but he was correct.  In a recent Canadian Business Magazine article stating housing is not necessarily a good investment he is quoted as stating the various Canadian Markets are 15-35% over-valued.  I enjoyed  reading the reader comments under the CB article.  Talk about poking a wasp nest with a sharp stick!  Canadians don't like hearing that buying a house is not the secret key to untold wealth!  I particularly liked the lengthy discourse by some clown who identified himself a PhD economist; his illogical criticisms of the article (disguised as supposed economic theory that mere mortals cannot hope to understand) almost had me wetting my pants with laughter.  Most economists have no clue of how the real world works (which is proved if they ever start their own business), but they have some really nifty theories and mathematical models that somehow never seem to predict future economic conditions accurately.  Most of their models have to be modified even to predict the past.  Stick with the reliable economists with a track record like Rosenberg and Michael Panzner.  Otherwise go to a Taro reader or chicken entrail decipherer to get your economic forecasts. 

Alexandre is an MBA candidate at the Schulich School of Business in Toronto, and has written what I consider to be a very good analysis of the Canadian housing market, focussed on four metropolitan areas.
  This is worth reading front to back (all 52 pages), and storing for future reference.  It can be accessed here in Scribd format, or downloaded as a PDF document (which I find easiest to read). 

Anyone considering buying a house should read and re-read this report until everything in it is fully understood.  Sadly, few will.  We live in a society where almost everyone believes proper education is fundamental to making good decisions.  Most people study how to buy, yet very few ever take the time to educate themselves on the fundamentals of the housing market (which tells you whether buying makes sense).   And a house purchase is the largest financial personal transaction most people will make.  Go figure.

I left Garth's blog to the end because he tends to be a polarizing figure.  Some people really like him, others not so much.  I read his blog occasionally because it is a refreshing antidote to the incessant housing cheerleading from the Canadian media.  Reading the comments below his articles gives an insight into the thinking of others, and can sometimes be educational as well.  From what I have read recently I would put Canadians' attitudes to the current housing markets as roughly where the Americans were in 2005-2006.  And we all know what happened next.