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- Sep 25, 2007
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Hi all,
The cover story from the November 1st edition of the Globe and Mail (Report on Business Weekend). Excerpts:
Feeling house-rich, in other words, has the effect of pouring accelerant on the economy.
Benjamin Tal, senior economist at CIBC World Markets Inc., has often referred to this wealth effect when analyzing the state of the economy and the role that housing plays within it. "You basically feel richer, and you go and spend and have a nice dinner on the house. That`s the way I see it."
The aroma of the short-term environment is, at a minimum, worry. At a maximum, fear, which works as a decelerant on consumer spending.
"What we are starting to see here is something very interesting," says Mr. Tal at the CIBC.
"First of all, the spending-on-the-house is not there any more ... We are turning into active savers because of the fact that the housing market is levelling off and, in fact, slowing down."
Mr. Tal estimates that about $50-billion in "extra money" has gone into cash over the past year or so. "A declining real estate market can lead ironically to something desirable, which is a higher savings rate."
In June, 2006, the Canada Mortgage and Housing Corp. (CMHC) announced that in order to make home ownership "more affordable and accessible to Canadians" it was eliminating homeowner high-ratio mortgage insurance fees, offering insurance on mortgages amortized over 35 years (the agency would extend this again six months later to 40 years) and backing mortgages that give borrowers the option of making "interest-only mortgage payments for up to the first 10 years."
While CMHC billed the moves as "helping Canadians access a wide variety of quality, affordable homes, while making vibrant, healthy communities and cities a reality across the country," they could just as easily be seen as bubble enhancers.
Last July, the agency reversed gears, reintroducing a minimum down payment requirement of 5 per cent and chopping the maximum amortization to 35 years.
Economists have been wondering: What happened in those two years?
Is there looming bad news buried somewhere in the data?
Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP), says that in the 12 months leading up to the fall of 2007, 37 per cent of mortgages issued bore amortizations longer than 25 years. "That is huge to have such a large percentage in such a very short time frame," Mr. Murphy says.
By the end of last August, total residential mortgage credit had risen to an estimated $881-billion, an increase of $100-billion across a 12-month period, according to Bank of Canada statistics. CAAMP estimates that outstanding mortgage credit will break through $1-trillion next year.
That number does not include home equity lines of credit. Total household credit does: That sum rose to an estimated $1.28-trillion as of August, an increase of $130-billion in the course of a year.
"This was artificial equity built on the basis of providing consumers with access to the real estate market before they were ready," he says, before adding, "We can`t have everything we want."
Remember, this isn`t 1991. "The correction in the early 1990s was triggered by double-digit interest rates which reduced affordability dramatically and led to a dramatic decline in [house] prices," says the CIBC`s Mr. Tal. "Today we do not have the affordability trigger since rates are still relatively low. In fact, it`s still about 20 per cent cheaper to carry a house today than in the early 1990s."
In the current Toronto market, Mr. Tal sees prices falling by between 7 and 10 per cent by the end of next year before levelling off. "When you double the value of your real estate in the past few years you`re not panicking with even a 10- or 15- or 20-per-cent decline," he says. The blow-off that started six months ago in the West will, he believes, extend for another six to eight months, hitting close to 20 per cent in Calgary, Edmonton and Vancouver.
http://www.theglobeandmail.com/servlet/sto...=jennifer+wells
Keith
The cover story from the November 1st edition of the Globe and Mail (Report on Business Weekend). Excerpts:
Feeling house-rich, in other words, has the effect of pouring accelerant on the economy.
Benjamin Tal, senior economist at CIBC World Markets Inc., has often referred to this wealth effect when analyzing the state of the economy and the role that housing plays within it. "You basically feel richer, and you go and spend and have a nice dinner on the house. That`s the way I see it."
The aroma of the short-term environment is, at a minimum, worry. At a maximum, fear, which works as a decelerant on consumer spending.
"What we are starting to see here is something very interesting," says Mr. Tal at the CIBC.
"First of all, the spending-on-the-house is not there any more ... We are turning into active savers because of the fact that the housing market is levelling off and, in fact, slowing down."
Mr. Tal estimates that about $50-billion in "extra money" has gone into cash over the past year or so. "A declining real estate market can lead ironically to something desirable, which is a higher savings rate."
In June, 2006, the Canada Mortgage and Housing Corp. (CMHC) announced that in order to make home ownership "more affordable and accessible to Canadians" it was eliminating homeowner high-ratio mortgage insurance fees, offering insurance on mortgages amortized over 35 years (the agency would extend this again six months later to 40 years) and backing mortgages that give borrowers the option of making "interest-only mortgage payments for up to the first 10 years."
While CMHC billed the moves as "helping Canadians access a wide variety of quality, affordable homes, while making vibrant, healthy communities and cities a reality across the country," they could just as easily be seen as bubble enhancers.
Last July, the agency reversed gears, reintroducing a minimum down payment requirement of 5 per cent and chopping the maximum amortization to 35 years.
Economists have been wondering: What happened in those two years?
Is there looming bad news buried somewhere in the data?
Jim Murphy, CEO of the Canadian Association of Accredited Mortgage Professionals (CAAMP), says that in the 12 months leading up to the fall of 2007, 37 per cent of mortgages issued bore amortizations longer than 25 years. "That is huge to have such a large percentage in such a very short time frame," Mr. Murphy says.
By the end of last August, total residential mortgage credit had risen to an estimated $881-billion, an increase of $100-billion across a 12-month period, according to Bank of Canada statistics. CAAMP estimates that outstanding mortgage credit will break through $1-trillion next year.
That number does not include home equity lines of credit. Total household credit does: That sum rose to an estimated $1.28-trillion as of August, an increase of $130-billion in the course of a year.
"This was artificial equity built on the basis of providing consumers with access to the real estate market before they were ready," he says, before adding, "We can`t have everything we want."
Remember, this isn`t 1991. "The correction in the early 1990s was triggered by double-digit interest rates which reduced affordability dramatically and led to a dramatic decline in [house] prices," says the CIBC`s Mr. Tal. "Today we do not have the affordability trigger since rates are still relatively low. In fact, it`s still about 20 per cent cheaper to carry a house today than in the early 1990s."
In the current Toronto market, Mr. Tal sees prices falling by between 7 and 10 per cent by the end of next year before levelling off. "When you double the value of your real estate in the past few years you`re not panicking with even a 10- or 15- or 20-per-cent decline," he says. The blow-off that started six months ago in the West will, he believes, extend for another six to eight months, hitting close to 20 per cent in Calgary, Edmonton and Vancouver.
http://www.theglobeandmail.com/servlet/sto...=jennifer+wells
Keith