We all are putting our hopes now on the dark horse. Today AIG announced that they will follow Genworth and CMHC to follow the federal government restrictions to put in by October 15th, to cut back maximum amortizations, and eliminate zero down among other things.That leaves PMI Canada as the last hope to “go it alone”. Wanna bet on a long shot? This is the one, because it is.
With the number of civil lawsuits in the US at around 170 due to the sub-prime meltdown we should have known that someone was going to follow suit in Canada. CIBC is the logical case since they are now at $6 Billion in writedowns and as much as $1 Billion or more to come this quarter. The suit is going after the bank AND it’s Directors and officers. Love to watch this unfold
That is the job of any Central banker in all developing countries. Let’s be specific, The bank of Canada governor Mark Carney has made his point, the question is will he stick to it? Last week he was faced with a difficult decision to raise rates, or leave them where they are, some would argue he could have dropped them too, but that is way out there.Stagflation right now is considerably troubling for the Canadian economy, if he gets this wrong this could really hurt. If he raises rates to curb inflation that the bank itself has projected could hit 4% by early 2009, then the already faltering economy will fall harder. Consider this, the bank is projecting the economy in Canada to increase by a mere 1% in 2008, when you think of the boom in Alberta and Saskatchewan, and to a lesser extent in Newfoundland, and we still nationally only grow by 1% that would mean the rest of the country is experiencing some real difficult times. So what if they decide that this is a more pressing issue and lower rates to spur on economic prosperity as many of the premiers asked him to do this past friday? Well, with inflation out of the bag and NOT at least somewhat under control you can be slammed into a painful and prolonged recession, think of the early 80’s.So, what are they to do then? Exactly what they are doing, wait and see, but keep a laser focus on lean towards keeping inflation under control. Sorry Ontario and Quebec, but there will not be and should not be any more rate cuts, inflation is an ugly animal.
Ok, I have sat on the sidelines long enough I need to comment on the government intervention we have seen this week. In a nutshell I think it was probably the wrong thing to do at the wrong time.In order to really answer this question one would have to wonder what they are really trying to accomplish in the first place? They said that they were trying to protect against a US style housing crash. This is total garbage! I could go on for pages showing how this is not even close to the case but suffice to say that the Canadian mortgage industry operates completely different then the US industry and the main reason that the US are going through what they are is due mainly to poor investment dealers pushing products that they should not have been to unsuspecting investors…period! So what is the real reason the government has stepped into what they admitted an industry that is managing itself quite well? I am not sure right now but time will.Now let’s look a the changes they are making and the likely outcome… You could certainly see that the advent of 40 year amortizations fueled much of the recent boom Canada has had in the past couple of years. One would only have to see that almost 40% of people have taken this option in the past year. Will it make a difference having to go to 35 years. I have heard many people say that it won’t, and for the most part I agree. However if you take the median family income in Canada, according to the last census, at $66,343 then at 40 year amortization, and assuming $3,000 per year for property taxes and heat then at a 40 year amortization the MAXIMUM that family can afford to buy is a $328,000 home. Now at 35 years they can only afford $312,000, a difference of 5%. Therefore I think that initially the removal of this popular feature will bring on a spike in sales financed by the non-banks that did not jump on this bandwagon last week and will hang in there until October as planned by the government. Long term I think there is a better chance this feature being gone will contribute to a drop in average sales price as sellers will have to drop prices to keep affordability in play for those buyers who are on the “new” borderline. I think it will also bring on a decline in demand, although not overly substantial, as some people feel they are “out of the market” due to affordability.Want some positive news? I think that you will see some price reductions in mortgage insurance brought on by CMHC’s competitors as they need to find new ways to compete, as the “boutique” products brought to the market by AIG and PMI will now have to be shelved. They will only be able to compete on price now.Now they may also be able to assist lenders who will have an appetite to securitize new ALT A or B products for those good borrowers with beacon scores of 580-619 that CMHC will not take. This will bring back lenders like XCEED, Home Trust, and other alternative lenders to fill that niche. Again that will only be if they can find investor for it. My guess is they will be able to do it.Therefore the government putting in this restriction is the most mind boggling of all. With our competitive market there will be someone who will cater to those GOOD people with beacons under 620 but unfortunately they will now have to pay more as most certainly their interest rates will be higher. Thanks government.I think that bottom line governments (which includes CMHC really) should not ever be intervening in markets that are performing well. Well functioning open markets with good competition will always self police themselves AND probably more importantly these same markets WILL ALWAYS find a way to “get around” the government intervention, but sadly this almost always result in a worse deal for the consumer, and good for the lender…Wait, maybe there is the reason? It certainly would not be the first time that the banks did not whine to government to make things better for them. You will see this if the banks all of a sudden start securitizing these “new” loans to get around the new policies for higher margin loans…again, let’s wait and see
Reports are everywhere that the meeting that the premiers had with Mark Carney on Friday in Quebec City came with “more of the same talk” from The governor of the Bank.Ontario and Quebec’s premiers both went in with a gun loaded, too bad it was a water pistol. They both wanted to push an agenda that the bank needs to cut rates to bring the dollar back down so their larhely manufacturing economy has a chance.Well honestly they had a snowball’s chance in hell of getting that agenda passed. Mr. Carney made it clear to them and should be clear to all of us, he is focussed on inflation. Therefore rates are CERTAINLY not dropping. In fact they would most certainly be rising if it were not for the stagflation that the government is struggling with )higher then expected inflation, coupled with lower then expected overall economic growth).The governor reiterated his forecast that inflation may hit 4% by the end of the year, and therefore most experts believe he will do nothing with interest rates for the balance of the year. He further forecasted economic growth to improve in early 2009, which may signal the bank to raise short term rates by then.
AIG today announced that they will follow the Finance department suggestions as of October 15th, 2008.
"We view this as a prudent approach taken by the government to support the long-term health and sustainability of the Canadian housing market," said Andy Charles, president of AIG United Guaranty Canada. "We support this direction and will amend our product line-up to reflect the new policy set out by the Department of Finance, commencing October 15, 2008, for all government guarantee mortgage insured loans."
Here’s the latest on the “end” of government-backed 40-year amortizations and 100% financing: I have to admit I was completely surprised when the banks so quickly adopted the governments stance on the changes. This will effectively take those banks out of the market that I believe will see an increase between now and October due to buyers rushing to buy homes prior to the changes taking hold. This is great news for mortgage brokers as they will enjoy market dominance as the only conduit to these products that will be in demand.
After all the bad news lately, particularly in Calgary and Edmonton, I fund a news report that actually shows that home prices will actually rise overall in Canada by 3.5%. Thanks to Saskatchewan and a surprising holding of value in ontario despite their economic woes.Here is the article:
The dramatic rise in Canadian housing prices experienced over the past two years is over, but average prices will still increase 3.5 per cent this year, according to Royal LePage Real Estate Services.
Thursday’s report from Royal LePage report followed the news Tuesday that average house prices in June fell compared with a year ago for the first time since early 1999, according to the Canadian Real Estate Association.
Royal LePage said the April-June quarter was “solid,” with higher prices in most of the country.
While prices are forecast to move higher, the country’s largest real estate company predicts the number of transactions this year will decline by 11.5 per cent to 461,000 units.
It attributed the slowdown to jitters among prospective buyers because of economic uncertainty, along with an easing of pent-up demand.
In the second quarter, the average price of detached bungalows rose by 5.6 per cent from a year earlier to $351,587. Two-storey properties increased 5.2 per cent to $418,943.
“After several years characterized by a persistent shortage of listings, home buyers have felt the pressure of bidding wars and take-it-or-leave-it counter offers ease during 2008,” stated Royal LePage president and CEO Phil Soper.
“Home sellers have had to come to grips with the longer time it is taking to sell properties, but can take comfort in a market that continues to support reasonable price increases.”
The survey of 17 cities across the country found lower prices in two major markets - Edmonton and Calgary.
In Edmonton, the average price for a bungalow dropped 14.5 per cent while an average Calgary two-storey dropped six per cent.
The greatest price increase was in Regina, which has seen home values surge as higher commodity prices have driven the regional economy.
In Regina, all types of housing saw higher prices, even though inventory of homes increased five-fold, the survey said.
Tuesday’s report from the Canadian Real Estate Association said the 0.4 per cent June price decline reflected a slowing economy and a pullback from the huge runup in prices in recent years in Alberta’s energy-powered housing market.
Ever heard of Stagflation? You should as it has been happening globally for a while and finally Canada has caught the virus. Stagflation happens when inflation goes up at the same time as economic growth goes down. Stagflation is a very dicey thing for central bankers to handle and rookie governor Carney has his hands full. What do you do? Increase interest rates to control inflation, that in Canada is expected to reach 3% by the year end, and further hurt economic growth or decrease rates to stimulate growth and have prices and currencies skyrocket? Well when you don’t know what to do you wait and see, which is exactly what the Bank of Canada will do.We will not see ANY rate increase for the balance of the year while the bank gathers more data and tries to figure out a plan that will work in the difficult domestic economy that also is plagued with severe regionalism.Couple this with the continued decline of housing activity and buyers will continue to be well positioned to take advantage of buying a home right now.
There are many news articles abound that suggest that CMHC’s competitors AIG, PMI, and Genworth are poised to announce that they will continue to offer the popular products. You may ask how this could happen if the government has said you can’t.The government only has control over the market in this regard if you insure through CMHC or more specifically if the lender raises the mortgage dollars through the Canada Mortgage Bond which is run by CMHC. The reason the government was getting involved in a market that was performing well remains a bit of an annoyance anyway, but what was really surprising was how fast the main mortgage lenders jumped on this? I think that if the group of competitive insurers is able to pull this off then there will be some very interesting competitive times in the Canadian mortgage industry.Why? The main lenders have played their cards by supporting CMHC. Non-banks like Merix financial, First National will likely continue to offer the products if they can get an insurer which will mean Mortgage brokers will enjoy a competitive advantage as Realtors will know where to get these popular products for their clients. What will happen long term is unclear, but I am sure the government will not like that their intervention in the market is having limited effect. All they do is bring CMHC’s 70% market share down. We will have to wait and see. Personally, I think the 40 year amortization to 35 years is no big deal for most people, but the ZERO down option has been good and not abused, particularly in Alberta where young people have great incomes and ability to pay, but struggle with the time required to save a down payment as they watch home prices steadily increase. Finally the requirement to have a 620 beacon score will likely have the biggest effect as this is high in my opinion. I could see regardless of the government forcing the other insurers to get in line on amortization and down payment, they will not be able to force them on the 620 beacon.Let’s hope the other insurers are successful in finding alternate funding (other then the Canada Mortgage Bond) for their lender clients so they can show the government that intervention in a well functioning market should not be considered by governments EVER and that market forces and competition should be left alone.
