If a Tsunami Was Coming Our Government Would Warn us Right?

Last month the Australian Broadcasting Corporation released the findings of the International Monetary Fund's study of house prices in developed nations.

They were ranked by affordability based on income. The worst three countries were Belgium, Canada and Australia.

Australia is specifically mentioned by the IMF's deputy managing director Min Zhu - along with Belgium, Canada, Norway and Sweden - as one of the countries where house prices are out of whack with where history suggests they should be.

When countries are ranked on how they are moving in the right direction, Canada is 26th.

We all know what the housing bubble did to the United States, so we should take heed:

The IMF says boom-bust house price patterns have preceded more than two-thirds of the 50 most recent systemic banking crises. And when you have a banking crisis in a modern, debt-fuelled capitalist economy it is almost impossible to escape a recession.

The ABC suggests that Australia faired better during the 2008 economic crisis because none of their banks failed, primarily because of a government bailout. In Canada our banks also survived because of a 114 billion dollar bailout; one that our government kept hidden, to make themselves look good.

The U.S. also engaged in massive bailouts, but faired poorly because of sub-prime mortgages. This brings us to another Canadian government "secret"; the fact they have also infected our once sound mortgage industry with these high risk transactions.

From a special Globe and Mail investigation, How high-risk mortgages crept north.

New mortgage borrowers signed up for an estimated $56-billion of risky 40-year mortgages, more than half of the total new mortgages approved by banks, trust companies and other lenders during that time, according to banking and insurance sources. Those sources estimated that 10 per cent of the mortgages, worth about $10-billion, were taken out with no money down.

The mushrooming of a Canadian version of subprime mortgages has gone largely unnoticed. The Conservative government finally banned the practice last summer, after repeated warnings from frustrated senior officials and bankers that the country's financial system was being exposed to far too much risk as the housing market weakened.

Canadians continue to lead in household debt and while house prices continue to rise, and borrowing on equity escalates, we could be heading toward a financial tsunami.

Stephen Harper, with the help of a complacent media, and millions of dollars in tax-payer funded ads; has painted himself as a strong economic steward, but it's all smoke and mirrors.

Instead of bogus feel good ads and cautious reports, we need to have a serious conversation about the true state of our economy.

With rumours of an early election, are the Conservatives hoping to get it over with before the you know what hits the fan? Remember during the 2008 campaign, Harper claimed that there would be no economic crisis, despite knowing full well that one was imminent.

In fact, he even went so far as to suggest that there would only be a recession if the Liberals won the election.

How much longer can he mislead Canadians? I guess he's hoping at least as long as another election campaign.

Is the Flaherty/Harper Bubble About to Burst?

In October of last year the Tyee published an article Why Canada's Housing Bubble Will Burst:

What do the mid-recession housing boom and the Harper Conservatives' rise in the polls have in common? Answer: the Canada Mortgage and Housing Corporation's massive sub-prime mortgage scheme that is keeping up the appearance of an economic recovery. Reading the newspapers these days, you have to wonder whether Canada was on another planet when the global credit crisis hit. House prices have actually increased in some provinces and now there is a shortage of houses for sale in southern Ontario. Credit is flowing everywhere.

But what few Canadians realize is that the housing market has avoided collapse (prices are down 32 per cent in the U.S.) because the Harper Conservatives directed the CMHC to change the mortgage rules to effectively make the Canadian government the biggest sub-prime lender in the world. What's almost as alarming as this reckless policy is that no one in the financial media is talking about it, even though everyone knows the facts.

And while the Harper government basked in the glow of their cunningness, a storm was brewing. Canadians were given a false sense of security, spending lavishly, which helped the economy in the short term, but borrowing heavily to do so.

As a result Canadian households have one of the highest debt to income ratios in the world.

And the largest chunk of that debt is in housing. Many who couldn't afford to own a home, or would under normal circumstances fail to qualify for a mortgage, were now entering the market, while others bought houses well above their means. And houses became more expensive as a result of more competition in the market.

... let’s say you have the average Canadian family making the average income – about $70,000. You dwell in the average house, have average kids (1.2 of them), and pay average taxes. That means you have $54,000 left to live on for a year. Sadly, your house eats 48.9% of your pre-tax income, which equals $34,320 – which also means you have about $19,600 left. That’s $1,600 a month for food, clothes, car, vacations, school fees, insurance and your online connection to this pathetic site. Notice I did not include ‘savings and investments’ because, of course, there’s no money left.

And you think this is bad? Try living in a high-cost city like Toronto or Vancouver, where a house eats more than 50% and 65% of pre-tax family income respectively. This is what happens when real estate speculation meets dumbass public policy, driving the cost of shelter absurdly higher. It’s a massive hidden tax on the middle class, sucking off billions which should be finding its way into a better life or a nest egg for the future. Instead, real estate now means sacrifice and debt. And danger.

And of course the scandal is not just "dumbass public policy" but a media that failed to warn Canadians of this danger. Instead they allow the Harper government to thump their chests and sing hallelujah over their handling of the economy.

The Globe did run an in depth early on, when Flaherty allowed AIG to infiltrate our financial sector. The same AIG that helped to destroy the American economy.

And Chris Gallant from Forbes magazine also covered our rosy economic myth:

For all the recent bravado claiming that Canada's supposedly boring yet prudent financial regulations have steered it permanently clear of housing bubble territory, the simple truth is that key causes of the U.S. housing bubble have been sufficiently replicated in Canada.

CMHC: Fannie and Freddie's Canadian Cousin - For example, while it is technically true that Canada does not have its own publicly-traded GSEs such as Fannie Mae .. and Freddie Mac .. to artificially inflate its housing market, it has the next best thing. The Canadian Mortgage and Housing Corporation (CMHC) is Canada's national housing agency used to provide mortgage insurance, which is fully integrated by the federal government ....

(Uh) Oh, Canada! - Since 2007, when the first effects of the credit crunch began to be felt, the Canadian government postponed the housing bubble's burst by dramatically loosening lending standards, allowing CMHC to insure mortgages with 40-year amortizations and 0% down-payments for the first time in history. This of course flooded the market with new, high-risk borrowers, propping up already historically high prices with unsustainable, artificial demand.

From 2007 to early 2009, the total dollar value of CMHC's outstanding MBSs grew from $138 billion to $265 billion, an increase of 92%. During this same time, the total mortgage credit outstanding on the collective books of Canadian banks increased by only 1% to $447 billion. In other words, all the market demand that has been propping up Canadian house prices can be attributed to Canada's version of subprime loans that the free market was not willing to bear the risk of.

And we are now about to wear this fiasco as indeed the housing bubble appears ready to burst.

Even RBC now says there are “red flags” over the Vancouver market. “While the Vancouver market is clearly vulnerable to a price correction, this does not imply that a collapse is imminent because supply (both in the existing and new home sides of the market) is well contained at this point.” What does that mean? If listings rise, of course, it means there will be “a collapse.”

In the GTA: “The deteriorating trend in Toronto’s housing affordability continued.” And the bank cautions that a “wild downswing” in prices was kept at bay only because vendors retreated. Which begs the question of how long that will last. As I’ve told you before, I expect this correction to be followed by a multi-year melt, as interest rates normalize and then those oxygen-sucking, walker-wheeling Boomers start trading houses for income.

And with our high rate of both unemployment and underemployment, we could see a lot of houses come on the market.

And what is our exalted one doing about this? Nothing. Instead he and his Mike Harris sidekick Flaherty, are continuing with the facade of having a steady hand on the economy, while instilling fear of a coalition. Same old, same old.