I’ve gotten my hands on the Capital Economics report and will be making another post about it later today. Also, it’s that the time of the month when we disect the most recent board stats. I’m hoping to get that out later today as well. In a fitting segue, John in Ottawa made another great comment, this time about the misleading characteristics of averages (like what happens when less than 3% of the housing transactions account for 25% of the total dollar volume….hello Vancouver!). We’ll get to the misleading new heights of the ‘average’ Vancouver detached home later today. In the meantime, enjoy!
I commented back in early December that a neighbor of mine received a call from his bank. They had “just noticed” that he hadn’t paid his mortgage for six months. Two weeks ago he declared bankruptcy and last weekend he moved out. Now the bank owns the house. The man is more than 50 years old.
He is now a data point in the national average for defaults and bankruptcy.
I don’t like averages. Canada is too big and diverse for averages to be useful. Even composites can be skewed significantly by large markets such as Vancouver Toronto. Averages can be alarmist or lulling and always misleading.
However, averages come from real data and somewhere in Canada that data is hidden, festering. House prices in Chibougamau, QC or Tuktoyaktuk, NT will probably not fall 2 or 3% and not all houses in Vancouver will fall 25-30%.
But that’s the problem with averages. If the average house price in Vancouver falls 25-30% a whole bunch of houses are going to drop 50 or 60 or 70%. That’s how we get averages and those houses that drop the most are going to be at the bottom of the price heap, not the top. That means that a whole lot of people are going to get hurt and hurt bad.
Face it, wealthy people can take a hit. Wealthy people don’t have high LTV mortgages. Wealthy people aren’t about to waste the money on mortgage insurance. That stuff’s expensive.
It’s the young, the stretched, the people who hope they can grow into their mortgage or hope that the value of the house will grow out of high LTV who are vulnerable and as can be deduced from this mad rush to get in on the last of the 5/35, there are a lot of them.
Is CMHC likely to take a $10 billion hit? I would hesitate to call it unlikely. Is that a disaster? Hardly. It isn’t anywhere near as extreme as the trillions the US has had to pour into its banking system to keep it afloat, with no end in sight. Canada is a strong country with tons of natural resources to sell to the world. Canada will survive. Canada is, after all, just a symbol we assign to an another average.
All those little real data points that make up the average. Ah, there is the rub. All those little real data points are people, most of them young and pretty naive. It reminds me of the military statistic that the “average life expectancy” of a second lieutenant in battle is 60 seconds. Hey, after the battle, you are either alive or you are dead. You are never average.
The average Canadian is going to be fine. The banks are going to be fine. CMHC will weather the hit. When the housing market turns not every market will be a metaphorical battle ground, but where the market turns the hardest, a bunch of young people are going to end up financially “dead.” And like my neighbor, they’ll be added to an average.