I want to start this post with the following quote:
“Recent developments in consumer finances are characterized by an unusual combination of hopeful and worrisome trends. Consumers remain the primary source of strength for the economy, but rising consumer indebtedness is a source of concern. The reasons for increased indebtedness and the types of debt being accumulated, however, make consumer obligations somewhat less worrisome than aggregate statistics might suggest. Notably, strong income growth and a robust housing market have supported borrowing.”
I’ll get to the source of that quote in a moment, but first let’s consider the musings of one Hulmut Pastrick, chief economist of Central 1 Credit Union, a credit union with offices across the country but largely concentrated in British Columbia:
In spite of the warnings issued by the chiefs of Canada’s big banks, Mr. Pastrick has a decidedly different take on house prices and debt levels in Canada.
“I don’t see a price bubble and I don’t see that we need the mortgage criteria tightened as is suggested in some quarters”
In reference to the mortgage rule changes initiated by Jim Flaherty earlier this year, Pastrick had this to say:
“I didn’t think [the market] needed it at that time…the market was already in adjustment phase, housing sales were moving down…. So there was no bubble developing at that time, nor is there one developing now….(real estate) will continue to hold its value — unless of course the government decides to tinker”
So there’s no bubble in Canadian real estate. But just don’t ‘tinker’ with rule changes and re-institute the 25 or 30 year amortization that had been maximum allowable amortization CMHC would insure for the 60+ years prior to 2006, or the whole thing will pop. But it’s not a bubble.
As noted before, I find it amusing that any time the government loosens mortgage standards, it’s a good thing and is a sign of the free market, but when they tighten them (or ‘tinker’) in an effort to return to more prudent standards in order to protect taxpayers, it’s a bad thing. Go figure.
To his credit, Mr. Pastrick does seem to fully understand the great feedback mechanism that exists between home prices, credit demand, consumer spending, and the broader economy. It’s a topic I discuss quite a bit on this blog.
“If you slow down the housing market that in turn slows down the economy,” he said. “Housing is an important sector. It generates a considerable number of jobs, particularly in housing construction, and [to a lesser extend] in sales. And certainly as sales go, so go housing starts and housing construction.
“Most forecasters are saying it’s going to be the domestic economy that’s going to carry the day [over the next year], so if we begin to tighten on the housing front that too will begin to diminish the growth rates we see on the domestic side.”
He certainly gets it. I question whether or not he gets the unsustainability of the growth dynamic he just described.
“Mr. Pastrick argues that comparison (between Canada and the US) doesn’t work because the U.S. mortgage industry is fundamentally different from Canada’s. For instance, there is no significant subprime sector in this country, nor did Canadian mortgages get securitized to the degree they did in the United States.”
First of all, mortgages ARE being securitized at a GREATER degree than in the US. The latest mortgage credit figures from Stats Canada indicate that the growth in mortgage credit is over 100% driven by the MBS market. Yes, you read that right! Securitization consumes more than 100% of new mortgages.
Note that the total mortgages outstanding increased by $65.4 billion in 2009, yet the total MBS market grew by $84.6 billion!!!! This is only possible since the big banks actually reduced their mortgage exposure (go figure). It absolutely demolishes the notion that somehow our mortgage system is not dependent on securitization.
As for the fundamental differences between our mortgage markets, read here. We’ve discussed this too many times to repeat.
Finally, Mr. Pastrick notes the following:
“Even if consumers are borrowing more than ever before, that shouldn’t be seen as a problem because it’s mainly backed by real estate, which will continue to hold its value …”
The axiom that real estate is stable and safe holds true until all of a sudden it doesn’t. The notion that borrowers can leverage themselves in perpetuity as long as it is backed by real estate holdings which at best are at high valuation levels is simply ridiculous. Ask the US…or Ireland, Italy, Greece, Spain, etc. It’s a weak argument that assumes that the immediate future will mirror the past. I have my doubts.
Remember that quote at the beginning of this post? It was from the Federal Deposit Insurance Corporation in the US. It was made in 2003. Will we ever learn?