Housing starts down…but at least debt’s not an issue

Lots of good info out today.

Housing starts decline

If you haven’t yet read the primer on the importance that real estate plays to the health of the broader economy, you need to.  Let me remind you of the experience of our neighbours to the south.  When people stopped buying houses, it had wide-spread economic impacts on consumer spending, consumer confidence, economic growth, and employment.

Consider this graph showing housing starts in blue and unemployment (inverted) in red.

Get it?  Now, let’s turn our eyes to the news out of CMHC today:

“Housing starts fell more than expected in October, Canada Mortgage and Housing Corp. said Monday.

The federal housing agency said there was an annualized rate of 167,900 starts last month, down 9.2% from 185,000 in September. The September number was revised down from the previously reported 186,400.

Housing starts moved lower in October due to a decrease in urban single starts in all regions.”

Not hard to see what’s coming down the pipes.  Homes are near all-time record highs verses both rents and incomes.  Home ownership rates have never been higher.  Debt has never been more burdensome.  It’s hard to see how this rate of housing starts is sustainable.  You know what that means to the broader economy.

What mortgage debt problem?

The Canadian Association of Accredited Mortgage Professionals, surely an unbiased source of information on the state of mortgage debt in Canada, has released a report today.

Let me read some of the key quotes before giving you their conclusion:

“Over the past 15 years, the volume of residential mortgages has expanded 194%, or about 7.5% a year. Growth was especially rampant between 2004 to 2008, exceeding 10% each year, the report said.”

Now compare this to inflation over that time period (averaged roughly 3-4%) and income growth (3-4%) and tell me how this is sustainable.  As I’ve noted before, high price to income ratios can exist during times of declining interest rates, which has basically been the past 15 years and the past 10 in particular.

“Mortgages debt topped one trillion dollars ($1,008,000,000) in mortgages outstanding at the end of August, a gain of 7.6 per cent in one year”

“Canadians are being very smart and responsible with their mortgages,” Jim Murphy, president and chief executive of CAAMP, said in a release. “They are building equity in their homes and making informed, long-term mortgage decisions.”

Of course!  The average down payment is now around 7%, with many mortgages being amortized over 30+ years.  If we went back to the standards of 25 year, 20% down mortgages (which were smart and responsible), the housing market would grind to a halt overnight and you’d see massive price realignments.  So no, Jim, Canadians are not being particularly smart and responsible.  In fact, the entire real estate market currently depends on people who are willing to be gullible and irresponsible by historic standards to maintain a semblance of normality.

“Of the 18% of Canadian homeowners who removed some equity from their homes at an average of $46,000 over the past year, the most common use for the extra cash was to pay down debt.”

Holy crap!  One in five homeowners used their home as an ATM in the past YEAR, with the average amount of equity extraction being 46K!  Wow that says a lot about the true financial state of many Canadians.  And no, the money was not used to pay down debt, it was used to CONSOLIDATE it!  Big difference.

Equity withdrawals bolster consumer spending….just like in the US, pre-crash!

I posted on this very topic of equity withdrawal via HELOCs.  Some rudimentary math tells us that equity withdrawals added over $8,000 of additional spending per household!  That is HUGE!   This is money that bolsters the broader economy.  But it only lasts while home prices increase and people are confident enough to tap their equity.

How has no one in the main stream media made the connection between HELOC growth and consumer spending growth?  THIS IS NOT SUSTAINABLE!!!!!

Our experience will mirror that of the US.  When home prices weaken, people will stop tapping home equity to buy stuff they don’t need.  Consumer spending will constrict.  The economy will stall.  Bank on it!

The lee side of this credit mountain is highly deflationary as consumer spending constricts, bringing the economy with it.

The ultimate conclusion of the non-biased report?

“Canadian homeowners are handling their mortgage debt so well they could handle paying more each month”

Thank God!  For a second there I was actually worried about our economy.

The spin continues.  I can’t believe the negative data contained in this report.  I am shocked that the mainstream media brushes off the fact that one in five homeowners borrowed an average of 46K against their home equity last year.  Why does no one ask whether or not that is sustainable, or what happens to the economy if it isn’t?

The madness continues….but for a while!


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7 Responses to Housing starts down…but at least debt’s not an issue

  1. Alex says:

    My god, you’re coming up with some good stuff lately.

  2. MadMan says:

    Wait a sec… I am to understand that those 18% of Canadians borrowed against home equity to an average of $46k LAST YEAR ALONE? And this is in spite what other debt they might already have on their HELOC from the previous year ?!? Please tell me I’ve misread this somehow… so I can sleep tonight!

  3. Pingback: Shocking report by CAAMP….part 1 | Financial Insights

  4. Bruce says:

    The numbers are scary and 18% seems accurate. My experience is that the majority were used as debt consolidations to reduce the payments on consumer debt. The sad part is many banks/brokers think their financial wizards for reducing total debt payments and not educating their clients on the long term affects of not paying down their debt. Not to mention almost none of these service people think for themselves bank marketing is not focused on creating awareness. Another great post Ben.

  5. Pingback: Bubble in China means Canada at risk; The economic headwinds in pictures | Financial Insights

  6. Pingback: Watching for signs of a deflating Canadian debt/real estate bubble | Financial Insights

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