David Dodge, the former governor of the Bank of Canada, gave an interesting interview this past week on BNN where he discussed the new mortgage rule changes and the housing market in general.
Thanks to VREAA for this gem and for transcribing the interview. Some of the key quotes:
Dodge on the need for homeowner equity
“Let’s be very clear: a home purchaser is able to borrow at very low interest rates because you and I as taxpayers essentially guarantee that, when it’s a high ratio mortgage… and so it’s not at all unreasonable, again for us as taxpayers, to say, “Look mister borrower, you’ve gotta have an equity stake in this as well… so that if things go really bad, it’s not all on the Canadian taxpayer, part of it is on you.”
Despite some reports that Canada no longer embraces the zero down mortgage, this is far from the truth when you consider that you can buy a home for 5% down and then get a mortgage that comes with 7% cash back.
Even with a conventional 5% down payment, the new home ‘owner’ has no equity stake as the cost of sale typically carries a 5-6% commission. As Dodge suggests, it is important that all home owners have substantial equity positions as negative equity is the single most important factor in determining default rates. This is true even in jurisdictions where lenders have recourse options available to them.
Dodge on the housing valuations and the new mortgage rules
“What we saw was that Canadian housing prices fell sharply but then fully recovered and then overshot. So house price to income, house price to rent at the moment is at historic highs. And so we do risk, in the housing market, we risk a bubble forming, which is not helpful to anything/anybody… so I think the government took exactly the appropriate action… I might have wished they’d taken it a little sooner, but they took exactly the appropriate action, and they deserve full marks for that.”
House price to income at historic highs. House price to rent at historic highs. Consumer debt levels at historic highs. Percent of GDP driven by consumer spending at historic highs. Interest rates hovering neat historic lows. Not hard to see just how much of a pickle we’re in.
Though Dodge indicates that we risk a housing bubble forming, given the stats above I’d say we’re already there….at least in most major markets. Remember that Demographia recently calculated that the large centres in Canada had a median multiple (house price to income ratio) of 4.6 (seriously unaffordable), equalling the level of large US markets at their peak.
Dodge joins list of noted economists and money managers who see a Canadian housing bubble
Add David Dodge to a growing list of respected economists and money managers who have voiced their concerns over a Canadian housing bubble:
Dean Baker- “It looks me like you have some real problems…Canada could see house prices collapse by 25 to 30 per cent if interest rates rise by about two percentage points”
Robert Shiller– “The Canadian housing market could face a similar housing bust to the United States, particularly in more bubbly markets as Vancouver and Calgary”
Paul Krugman– “Canada cannot be complacent in the face of disturbingly bleak global conditions, because Canadians spend too much relative to their household incomes and the country’s housing bubble has yet to burst.”
David Rosenberg– “…Housing values are anywhere between 15 per cent and 35 per cent above levels we would label as being consistent with the fundamentals. If being 15 per cent to 35 per cent overvalued isn’t a bubble, then it’s the next closest thing. We are talking about two to three standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So, if it walks like a duck …”
Mike Shedlock– “A Canadian housing crash is a given. The only thing that remains to be seen is how deep the crash is.”
Don Coxe– “Canada continues to experience a real estate bubble”
Stephen Jarislowsky– “In Canada the hardship still lies ahead. Our houses are still 20 to 30 per cent above normal levels…I think things are going to get a hell of a lot worse….I hope I’m wrong but I think Canada is on the edge of a lot of trouble.”