Despite persistent and false memes to the contrary.
When a housing downturn gets big enough, there will be a mortgage crisis, and it will hit banks, shadow banks, and mortgage insurers no matter what the mortgage laws are: that’s what the US mortgage crisis has demonstrated. Yet many industry organs and media outlets in Canada, Australia, and other places with acute housing bubbles are trying to hide behind a false meme about US mortgage laws. What happened there cannot happen here, they say.
So we’re going to debunk this meme.
“Jingle mail” was a phenomenon during the US mortgage crisis when homeowners and small-scale investors, unable or unwilling to make mortgage payments, abandoned the place, figuratively mailing the keys to the bank. This phenomenon took various forms, such as homeowners who stopped making payments but continued to live in the home, sometimes for years, because the foreclosure process was hopelessly bogged down.
All this became a problem only after home prices dropped substantially below the amount people owed on their mortgages, which made it impossible for them to sell the home and pay off the mortgage.
This is rarely a problem in a rising housing market. Default rates are minuscule because it’s easy to sell the home and pay off the mortgage. And during these times, lenders hide behind these low default rates. But these default rates are only low because home prices are rising.
But when home prices drop sharply, after years of low-down-payment requirements and thus little equity cushion, suddenly soaring defaults are a problem that “came out of nowhere.”
Over the years, the meme spread that the US mortgage crisis happened because people could legally just walk away from their mortgages because banks could not pursue homeowners beyond recovering the collateral. Much of the commentary on why a US-style mortgage crisis cannot happen in Canada or Australia is based on this. And this is wrong.
In the US, each state has its own mortgage laws. In terms of residential purchase mortgages – not counting refinance mortgages – states fall into two categories: “recourse states” and “non-recourse states.”
A recourse mortgage allows the lender to foreclose on the home (the collateral) and then pursue the homeowner in court for the difference between the proceeds from the sale of the home and the outstanding mortgage amount (plus interest, fees, etc.). Armed with a deficiency judgment, the bank can go after the former homeowner’s assets, garnish wages, and the like, until the homeowner pays off the deficiency, settles with the bank, or seeks protection in bankruptcy court.
A non-recourse mortgage limits the bank’s recovery to the collateral. Once it has foreclosed on the home, no matter how large the deficiency, the bank has to swallow the loss and move on. And the homeowner has gotten rid of a big debt.
There are only 12 “non-recourse” states.
These are the only states where homeowners can walk away from a residential purchase mortgage without fears of being hounded by a bank (in some of these states, lenders may have recourse with other types of mortgages, such as a refis).
- North Carolina
- North Dakota
But 38 states and DC have “recourse” mortgages:
In the remaining 38 states and the District of Columbia, lenders are allowed to seek a “deficiency judgment” on residential purchase mortgages for the difference between what the property sold for and the outstanding mortgage debt, fees, interest, etc.
Hence, the vast majority of US states are recourse states. Of the big four states, New York, Texas, and Florida are recourse; only California is non-recourse.
There a numerous other differences between how states handle mortgage defaults. Florida has a “homestead exemption” that complicates matters for banks. Also, the property, especially an investment property, may be held by a dedicated LLC with no other assets, which limits recovery efforts by the bank.
States also vary in how much recourse the allow lenders. There are many nuances that blur the lines somewhat between “recourse” and “non-recourse” states. Note I’m just summarizing here. This is not legal advice. For legal advice, get a lawyer.
But what it boils down to is this: The mortgage crisis in the US was just as harsh in the 38 “recourse states,” including Florida, as it was in non-recourse states. Mortgage laws and the right to hound defaulted homeowners for their last dime have done nothing to slow down the housing crisis or the damage to the lenders and the mortgage insurers!
In Canada, mortgages are full-recourse except in two provinces that have non-recourse mortgages but with big limitations: Alberta and Saskatchewan. In Australia, the full-recourse mortgage is standard.
So Canada and Australia, with their majestic housing bubbles, face the same scenario that the US faced: when home prices drop sharply, some homeowners will abandon their mortgages because they’re unable or unwilling to make payments on an underwater mortgage or a money-losing investment property. This becomes a huge issue when people they lose their jobs.
If there are just a few cases, the banks may do what they can to get deficiency judgments. Even then, as in the US, people can seek protection by filing for personal bankruptcy. Usually, there is nothing left for the bank to recover. For banks and mortgage insurers, these are costly processes with minimal or no payoff at the end. So they often decide they’re better off not throwing good money after bad.
But under a tsunami of mortgage defaults, as in the US, lenders and mortgage insurers are totally overwhelmed and are even less likely to pursue defaulted homeowners for deficiency judgments.
In terms of a deterrent to commit jingle mail, so to speak, recourse mortgages are nearly worthless, as the mortgage crisis in the 38 recourse states has shown.
The Spanish fiasco.
For an even more drastic example on how draconian mortgage laws fail to deter defaults and thus fail in halting a mortgage crisis, look at the Spanish housing collapse, starting in late 2007, that eventually caused the Spanish banking system to implode, with numerous lenders going under, and with others getting bailed out.
Spanish homeowners borrowed under a draconian law where the banks, after the eviction, saddle ex-homeowners with the debts for life that continue to grow with fees and sky-high default interest that can eventually exceed the amount of the original mortgage. These people could not ever shed this debt. This draconian law was designed to protect the banks by being a brutal deterrent to potential mortgage defaulters. But this is precisely what it failed to do.
Clauses in this mortgage law have since been ruled “abusive” by the European Court of Justice, and Spain has changed the law.
So we know: even draconian deterrence doesn’t deter homeowners and investors from defaulting on their mortgages. A mortgage crisis happens because people at the margin – the most vulnerable 10% — along with people who’ve gotten in over their heads during periods of irrational exuberance, and investors throw in the towel, regardless of any theoretical rights that banks have in chasing after them. And this is why a US-style or Spanish-style housing bust and mortgage crisis can happen in Canada, in Australia, and other over-inflated markets.
As banks pull back from mortgage lending amid inflated prices and rising rates, “shadow banks” have become very aggressive. Read… Next Mortgage Default Tsunami Isn’t Going to Drown Big Banks but “Shadow Banks”
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I don’t think a Aus or Canadian bust would be as bad as the US housing bust in 2008.
1. Aus/Can lenders never got anywhere close the wild west nutty-ness of USA lending from 2002-2007 (no income documentation, horrible credit, zero down, crooked appraisals). Most people still put a decent down payment down. Maybe there was some low down payments, but NOTHING like the USA where at one point 70% of all buyers were zero down AND no income doc! 70%!
2. Inventory – from what I understand Can/Aus just do not have a lot of housing inventory and I imagine its difficult to add more fast. Inventory is key in housing busts. Need supply.
But that is only my opinion. I think they could have healthy downturns, but not like the USA in 2008. They would need some serious widespread unemployment to get there.
Also, foreign Chinese and other foreigners have probably become “permanent” buyers in the Aus/Canada housing markets. So it’s not just a Aus/Can market for locals anyore, its also China’s “local market”
Here we go again… What happened in the US cannot happen in Canada. It’s like the national anthem or something — supported by all kinds of wild, often cited, but false claims about the US (history) and Canada (now). Amazing :-]
Wolf, I’m not saying their can’t be a decent downturn. I just think it won’t be as severe as the USA bust do mostly to lending. And prices could be more “sticky” on the downside Aus/Can. But just my opinion, you could be right. I am humble and I have been wrong often:)
The USA mtg lending leading up to the bust was really a “once in 100 years” type of caaaraaazy IMO. They were giving $600k zero down loans to janitors and waitresses with “no income doc” and bad credit. And those same people were also buying 10 rentals in Vegas. And they we doing it A LOT.
Yes, there was some of that. But a major part of mortgage defaults were investment properties (investors walking away from multiple properties). And we have been reporting on all kinds of stuff happening in Canada, from a surge in subprime loans to mortgage fraud… along with borrowed down-payments and the like. All the stuff we saw here, we’re seeing there. It’s still a little harder to see at the moment because it hasn’t collapsed yet, and the US misdeeds mostly came out during and after the collapse. But we’ve already seen a lot of this stuff in Canada, and we’ve been reporting on it over the years.
One thing is certainly true: the scale of Canada’s housing market is about 1/10 of the US housing market. So globally, the consequences will be much smaller, and there is a lot less to worry about in terms of a global meltdown triggered by Canada. When the US catches a cold, the world catches pneumonia. That’s not the case with Canada, thankfully.
There’s a recent article on this site that addresses this: there’s a difference between a subprime borrower and a subprime loan. But both are subprime. See https://wolfstreet.com/2018/06/15/canada-has-a-subprime-real-estate-problem-you-just-dont-know-it/
At least in southern California there has been many boom and bust for different reasons
2009 was not the only one
2008 triggered global contagion. If we assume that any one of these markets on it own were capable of that we should all retire to our bomb shelters
Dude, have you ever been to Southern Ontario? You will see MTA folk buying up investment property like there is no tomorrow paying outrageous sums of money for houses and land worth a fraction of the prevailing prices. There is no land or inventory shortages in Southern Ontario, just a stagnating economy, so the bubble continues to inflate and MTA suckers are born every day.
Part of the problem in Canada is a lack of credible and informative information in the mainstream media regarding the dynamics of the Canadian housing market. I see better articles on CNN or FOX than I do from any Canadian news outlet. THAT, is not only surprising but scary considering what I think of either of those news organizations.
Then there is the usual patriotic BS you see with Canadians. Somehow our government is less corrupt, our housing laws a little less wishy-washy, and our banks a bit healthier compared to the yanks; so a housing crisis will never happen. Let’s see what happens to Canada’s housing bubble which Canadian take so much pride in when interest rates crept back up to 4.5% and with a current inflation rate is well above 2%
Anyone who wants to play delusional about Ontario and B.C housing collapse as well as Ausie are just that and refuse to accept what is looking them straight in the eyes. Blatantly obvious to anyone who has a clue. Nothing in Toronto, Canada’s econ justifies homes being 1 2 3 4 million everywhere. Nothing. If wages were anywhere near the U.S then maybe, but they never have and never will be. All jobs I have looked at in the US pay more and are in USD and the craziest houses are 1 to 2 m at best in major cities, while taxes are lower so u keep more income to pay for housing expenses! Same jobs in Ontario or B.C pay 2/3rds in Cad but a garbage home is going for a prayer at 1.4 m which realtor tells me was 600 4 years ago and 1.6 last year. Pure pure pure pure bubble. DUHHHHHHH, The real price of that home is 750 at best and it will get there. Rocket Science over here. I am also seeing homes go from 3.5 reduced to 3 to 2.5 on Zolo.ca saint andrews toronto, and no one will touch them..unless they want to buy them and loose their life savings in less than 1 year. everything in Toronto is overpriced by 50% and people just got greedy and stupid. Lots of people will be bankrupt this year. Watch! And no more fob money to leech on to, to ponzi up prices. Canada is trying to wear shoes that do not fit. It is not a luxury heaven, Monaco, kind of place, it is working class with some marginally well off immigrants who bought into the housing scam. That is all, and those immigrants after some time in Canada get real poor, because it is 10 times harder in Canada to make money in business than it is anywhere else. In the U.S you can buy a business for 500-600 k that makes 250k legit and there are thousands available. In Canada there are like 10, 7 of which really only net 90 or 60k after tax…..
Canada is a pro-immigrant nation. We attract 300,000 of the best and brightest from around the world every year…Canada has the pick of the litter. We also let in around 40,000 refugees. Canada’s population surged by a record 1 million in just over a two year span. —- but this still isn’t enough, due to aging demographics even more immigrants are needed. This has led to successive building booms and housing shortages. Canada also has lightly regulated big banks…hence they’ll get bailed out if there is a crisis.
“We attract 300,000 of the best and brightest from around the world every year.”
Your best and brightest don’t have 2 nickels to rub against each other; and given in Canada so many of taxi drivers have college degrees, that’s what awaits the more educated ones who immigrate to Canada; the less educated ones will be on welfare for years to come, and occasional part time jobs. Stop spreading false propaganda. Oh, I forgot, that’s how you lure them immigrants to hell hole which is Canada.
‘Canada also has lightly regulated big banks…hence they’ll get bailed out if there is a crisis.’
Lightly regulated? Well for one thing there are a lot less to regulate. Six majors account for the majority of the banking with a dozen or so runners up, e.g. Laurentian that many have never heard of.
The US, ten times our size has close to 5000 FDIC insured banks. I don’t know how many people work for the US regulator but unless it’s a hundred times Canada’s they are more lightly regulated.
Back in the 80’s Clinton buddy McDougal bought a bank in Arkansas with about a million up front or about the cost of a McDonald’s today. It soon acquired a major new client, McDougal, but the regulator was unhappy with its real estate financing of land (no rent) and it did go bust.
There has never been a Wild West of banking like that in Canada.
One of the ongoing gripes about Canadian banks has always been how conservative they are. Maybe too so, but no one lost a dime in a Canadian bank during the Depression when the better part of ten thousand US banks went under with their deposits.
Now I agree that there has been some a lot of low down payment mortgages in the past, but those were only when insured by the government insurer CMC or whatever its calling itself at the moment. Most of those were taken out before the run up in prices. It’s harder to buy with small down now, hence the growth of shadow banks (not the big banks) who aren’t going to get bailed out under any circumstances.
I think we can agree on one bank that could be in for a hit: the lightly, sometimes stupidly regulated Bank of Mom and Dad.
Didn’t know that we are getting scraps here in Murica. Does anyone know what these “best and brightest” are doing for Canada’s economy other than doing things such as bringing Nortel Networks + RIM to bankruptcy and shoveling potash?
As an accountant in Canada, I can attest to some of the insanity including false (inflated) evaluations of security, the use of child tax benefits as “income” for purposes of financing and a lot of FOMO. I’m surprised it lastest as long as it did but money laundering, foreign hit money and speculation can keep hot air in a bubble.
IT already happen in Canada, late 80’s and early 90’s, when we had the last housing collapse. People were walking away from their houses because some mortgages were double the house values. People have short memories and history repeats itself.
Greetings from Oz! You might want to check out the Royal Commission on Banking, etc. Yes, the Banks down here in the “Lucky Country” did go absolutely as crazy as the banks in the US, along with all the fraud, corruption, collusion, forgery, etc. Fully 1/3 of all mortgages have a DTI >6x (58% have >4.5x), and those incomes are almost to a mortgage fraudulently inflated, at one bank less than 3% of the applicants income was verified, “NINJA” ring a bell? In some areas of Sydney and Melbourne these DTIs are >8-10x…on fake income! And those 20% deposits you speak of, the great majority of them are backed by the equity of some other property (namely the Bank of Mom and Dad). Oz’s “Minsky Moment” is here and now!
Yep, what Pavlovshouse said mirrors my (past) experience of the Oz market as well. Not to mention the 120% mortgages! A guy I used to work with used one of them to buy his house and cover all legal costs. I thought he was nuts, esp. as he gave some “creative” financials to the bank in the first place. Another couple with kids have more than AU$1M in mortgages across three properties (two rentals) with less than AU$200K total equity. They used Property 1 to borrow for Property 2, then used 1+2 to borrow for 3. If one of them loses their job, their entire economic livelihood is toast. But hey! yay for negative gearing, right? /sarc
This kind of “portfolio building” is endemic throughout Oz and the entire house of cards is due for a stiff breeze. Then again, I’ve been saying that for the past 12 years and the market has proven me wrong. What do I know?
LOL…….I went right to the comments cause I wanted to see how far down I’d have to go before I got to the “it’s different here” comment……turns out to be the very first one.
It’s always different until it’s not.
interesting – yeah, that made me laugh too. First comment, and so sure of himself. Probably a realtor.
A lot of people here in Canada don’t recall the housing busts of the 80’s in Alberta and Toronto. Yes, it can and will happen again. One thing that is left out in your analysis Wolf is how much Canadian savers and pensioners rely on Canadian bank stocks for dividend income and fat capital gains. If real estate goes, so go the Canadian banks, and down go the boomers. The bank of Mom and Dad will not be there to bail out the kids condo…Also, there is Chinese money around, but it is drying up fast. Lots of people speculating in property, too many people working in residential construction, NAFTA in doubt, a national government run by children (ie Justin Trudeau) add in our Canadian smugness that “weeeze smarter than those Yanks” and well that spec on the horizon might just be an Iceberg….
US dollar a reserve currency; NY is the financial center of the world. On top of that all these huge companies such as Google, Amazon, Facebook, Boeing, Microsoft, etc. dozens of which I can cite in any industry are in US and provide jobs.
What do Canada and Australia have in comparison? Australia sells iron ore a.k.a. dirt to China, and Canada squeezes oil out of sand.
Are you people just out of your mind? In both Canada and Australia probably 25% of your jobs are based on real estate; once real estate collapses, you’ll be another 3rd world country. Canada has had huge underemployment going back to 90s which was never resolved; they are just good at hiding everything. Huge population of young in both Canada and Australia have no jobs and no prospect of a good job or good life in this life time. Get real people, and stop singing your national anthem for us.
By the way, I’m not saying US is not on fast track to financial crash; what I’m saying is that if US is heading 180 miles per hour towards the crash, Canada and Australia are heading there at 300 miles per hour.
‘you’ll be another 3rd world country’.
Many people in Canada consider much of the US third world now.
Many US metros have computer controlled microphones to locate the source of shots being fired.
Canadians seeing the boarded up streets of say Toledo can hardly believe their eyes
Most common cause of individual bankruptcy: medical expense
I could go on but why waste each other’s time.
There are 3700 planes and 5000 rail vehicles built by Canadian maker Bombardier operating in the US.
Medical establishment in US is a scam, and so is in Canada. The only difference is that Canada taxes its citizens to death, and then shovel most of that money into the pockets of a bunch of doctors who scam they system like there is no tomorrow.
I personally know doctors in Canada who have never opened a book in the last 30 years, and yet are making a killing by scamming your system. On top of that any doctor or dentist who loses his/her license in US goes right over the border and opens a practice Canada.
Finally someone with some brains. Very well said.
One little more thing to add, Ontario provincial government gets about 50% of their revenue from real estate transactions such a land transfer taxes, average building lot has about $200,000 in levies/taxes before a shovel goes into the ground etc so that will be interesting when that dries up. Also you have suppliers from lumber, shingles, plumbing, electrical and even furniture stores which are going to get hammered.
This Canadian agrees wholeheartedly with the article, with one additional POV as an add on. You can’t get blood from a stone. In a mortgage crisis there will be Canadian jingle mail. That’s a given. However, there will also be a growing public outcry against the ‘big bad ugly banks’ and the ‘system’. Look for a population raised on participation awards and expectations of granite counter tops in starter homes to mobilize, and do so loud and clear. There is full recourse in most provinces, however, look for accomodation and forgiveness for homeowners, somehow and some way.
Perhaps this is what should have happened in the US 10 years ago? In hindsight, (at least for non-speculators) QE for consumers would have worked out far better for the economy than bubble blowing free money for the shady banking industry and the 1%.
Remember, Canada is a country with single-payer health care and Govt funded elections with strict campaign spending limits. They won’t put people out on the streets unless they are beyond foolish. The landing will be cushioned. We tend to look after people here as well as corporations. Placing corporations and banks in the front of the line won’t fly, regaradless of what pension plans own, or what the 1% feel they are entitled to.
Just one opinion, and maybe other Canadians will disagree. :-) Have at it with gusto!!
What you are saying DID happen in the USA after the first wave of foreclosures in 2008 Fed gov’t and states put in new laws making it more difficult to foreclose. And banks let homeowners sit in their houses for years and years not paying ANYTHING (no property taxes, no mtg, no inst). So the banks would not have to recognize the loss on their books. This strategy of keeping inventory off the market worked, and helped push prices back up. My guess is the lenders will learn from this next bust in USA.
Also, there were a TON of loan note modifications in the USA where borrowers were allowed to stay in their house with a lower payment and possible principle reduction. Can/Aus lenders will probably modify loans and try not to foreclose because they will lose more $$$ if the over all market prices plummet and they have to take the homes back and sell as bank owned inventory.
Household indebtedness in Canada is around 170% according to this:
Let’s say that interest rates were to continue to increase. There’s going to be a point in time when your income = interest payment. At that point, for some people will find that it makes far more sense to sell your house to relieve yourself especially given the high housing prices. If all that selling were to happen at the same time, it does not take a recession to cause an avalanche.
“Perhaps this is what should have happened in the US 10 years ago?”
It did, on a massive scale. I personally know a couple that lived mortgage free for 48 months while the bank paid the property taxes. This story played out a lot and some of the people with half a brain banked all that cash. Once the property was finally foreclosed they had a big fat down payment (not the morons I knew who are now divorced BTW) and were able to go buy another home (how they could do that with a foreclosure on their record is another question)….they even had a name for these people. boomerang buyers.
It sure make me feel stupid for playing by the rules.
Your comment is quite correct. But… in 1981-82 mortgage interest rates headed past 20% in Canada, and homeowners were given neither assistance nor relief. The problem was simply too big for indebted governments to even consider helping out. So they didn’t. We’ll be in a similar position this time. No, rates won’t be high, but a housing crisis will be far too large for indebted governments to deal with. They’ll be forced to let the chips fall where they may.
Also, QE for rich people is done because it doesn’t cause obvious inflation – at least not the kind that shows up in the flawed CPIs. QE for the masses means that “helicopter money” is immediately in circulation and buying goods and services, which means the inflation cannot be hidden in financial markets. Therefore, QE for the masses will not work and will not be done. (It didn’t really work giving it to the rich either, except for the rich themselves, but that’s another topic altogether.)
Want some popcorn, I have extra and will gladly share. Come Oct. 17th I will have more than just popcorn to share.
I would also suggest what happened in 2008 can happen again in the US. Unfortunately some people have short memories and believe in fairy tales.
No it can’t. Murica is especial ;)
2008 is so passe. Next time it happens, it will truly take down the economy. So in that sense, it’s not going to be 2008, it’s going to be worse. We’ll have a TRUE credit crisis then.
My true definition of a credit crisis: you have a perfect Fico score and your interest rate is 25%. Everyone else, just die already.
Yeah. That will happen in what? 20-30 years. when most of the commenters on here will be dead or close to die by then.
I guess, the way Trump is running the economy, the crash ain’t going to happen before 2024.
Nah, it will be faster than that I am betting. I myself don’t care since I don’t have any children and I am not planning to. Handing off global warming and a shit load of debt is not my way of saying “Daddy loves you”, but it sure is to many people here I am betting !!!
Muppets!! Goldman Sachs, you know what to do!!
Outside of (ugly) Toronto, (beautiful) Vancouver and (wouldn’t-go-there) Montreal, there really hasn’t been much of a bubble (okay, maybe Calgary had one, and Edmonton, too). Look at the house prices in Windsor, Ontario (that I’m familiar with) and you just don’t see bubble prices: https://www.kijiji.ca/b-house-for-sale/windsor-area-on/house/k0c35l1700220?ad=offering&price=10000__175000
I know that there are people who THINK that their homes are worth high-six figures because somebody else paid for one similar in (ugly) Toronto, et al, but that’s it–they like to dream of winning the R.E. lottery.
In Windsor prices were flat until a few years ago. For 150,000 cad one cold buy a well kept house from the fifies or sixties in an average neighborhood with a goid sized yard. Those deals are gone now. Halfway decent priced hoses sell in less then two weeks now; something that was unheared of not long ago. Compared to Toronto prices are cheap but rising significantly.
Gunther, yes that’s true, but prices are still affordable until one of the auto plants close. Then who knows what’ll happen. I used to live there and never saw the prices escalate there, the way they’ve around the metro areas.
Also, a lot of Cdns have made good money on the stock markets and/or capitalized on their primary residence (tax-free gains) are feeling pretty cocky and so are looking for something smaller.
“Also, a lot of Cdns have made good money on the stock markets and/or capitalized on their primary residence (tax-free gains) are feeling pretty cocky and so are looking for something smaller.”
What tax-free gains? Canada taxes even the air people breath. “have made good money on the stock markets?” Stock market gains are gains only when you sell them not if you are holding them while you are 300% leveraged. Canada’s household savings rate is 3.3%.
R2D2, just a heads up, as it sounds like you’re from Merica. Capital gains on personal residences in Canada are “tax free.” Unlike in the States, where only a portion of your gain is tax free, with a tax above the threshold ($500K for couples), in Canada there is no tax whatsoever, and that tax benefit can be utilized many times in a Canadian’s lifetime (with some minor limitations). Canada doesn’t allow write offs for mortgage interest like in the States, but the capital gain exemption is a much bigger benefit and hence many Canadians use their homes as their retirement savings plan.
maybe the problem with Windsor is that is just across the river from Detroit?
Funny you use Kijiji and cherry pick a low number for listings, expand housing prices and you see the real picture that reflects more of what Realtor.ca shows. 38 reasonably priced homes and hundreds of inflated ones. Kijiji listings = 193, realtor.ca = 565. Use the bigger pool for better results.
Where I live we have no effect on the national scene, but when speculators gamble in my neck of the woods they experience the belt tightening pain first. A lot of people bought multiple houses during the boom cycle and rented 2 or 3 places to pay for their first mortgage. Now all rentals are empty, with increased property taxes and bills adding up.
When the belt tights around the burbs of major metros expect this bubble to leave egg on a lot of faces.
I don’t agree. I was just in Ontario and outside Toronto house prices are high and rising. People are retiring, selling their inflated Toronto homes, buying a cheaper home outside the Metropolitan area, banking the rest, and enjoy a quieter life. They are of course jacking up prices in all the rural areas, small towns and smaller cities around southern Ontario. Lots of people outside Toronto, where my family are from, are complaining about people from “Hog Town”, driving up prices so they can’t afford to buy a home anymore in their own area. I’m also in Alberta, the oil bubble is over but we have a NDP-Government bubble…. the provincial government is deficit spending to the tune $2,500 for every man, woman and child in the province….oil investment has collapsed….when the government money comes to an end, houses and condo’s are coming down hard….along with all the phoney employment….
Lol the us market is higher than ever with foreign money/Fed buying- no common hard working couple can really make it. The young are being harvested thanks to our socialist utopia.
Unless you go on the system then your fine…
A free market would prove devastating to a world market hence why there isn’t one anymore.
Imagine free market interest rates on bonds, the rate would sky rocket
Patience – “A free market would prove devastating to a world market hence why there isn’t one anymore.”
Yep, in 2008 a “free market” would have brought down home prices around everybody’s ankles and interest rates would have shot up. Insolvent banks would have gone under, along with homeowners.
They have absolutely no idea.
They seem that though don’t, but it may be willful ignorance due to them being on the take.
It’s really just another subsidy for that generation.
I hope when the bloated pensions burst there isn’t another bailout to keep them flush with cash.
It isn’t due to anything but not wanting this socialism to transition to communism in which history shows us kills many many people.
Free the free market!
If it’s anything like the U.S. in Canada and Australia, leveraged speculation is the principal cause of the bubble and their defaults will be the principal cause of a banking crisis. They have little skin in the game, so when prices fall they will rush the exits leaving banks holding the bag.
Any banker who writes a loan on a non-owner occupied residence should have his head examined.
From down here in Oz again…don’t know if most people know this but ~60% of all AUS mortgages are “investor” mortgages. And a large amount of these are “interest only” (gee, that sounds familiar, ARM anyone?) that are now re-setting to “interest and principle” and increasing the monthly payment by ~40%. These rollovers are just starting now and will increase over the next 2 years. And don’t get me started on the whole “negative gearing” tax scheme, basically the legalization of a nationwide systemic Ponzi scheme. All it is going to take, and it is happening now, is for the rate of mortgage debt to decelerate and the whole thing blows sky high. Oh, and don’t forget, the Big 4 Banks have ~80% market share: if one goes, they all go. They are already tightening, they can see the storm on the horizon, their costs of overseas funding is going up, customers getting pinched by slow wages, etc. Don’t think “She’ll be right” this time…
The next two years in Australia will be fascinating. It’s the weirdest market I’ve ever seen, where there’s near consensus its overvalued but the disagreement seems to be the outcome; stagnation or crash. 2019/2020 are the years to really watch as you say with all mortgages rolling over think one bank has nearly 120 bill just in 2020.
It boggles the mind the growth in the condo market, even in my little city of Ottawa. I suspect this will be the centre of the mortgage bust, Some would be difficult to sell given the high monthly condo fees.
what impact will this have on the RE industry in CA?
There are just under 8,500 empty or under-utilized homes in Vancouver, according to the city’s Empty Homes Tax.
The figure amounts to just under one-third the 25,495 unoccupied or non-resident occupied homes the city identified in a report to council last summer, using census data.
In the 80’s the Principality of Monaco decided to slap an extra property tax on empty housing which was chiefly owned by big money types to have residency for fiscal reason.
To decide which houses were empty and which inhabited the government used utility bills, in the specific water and electricity.
They reasoned that as these people were so rich they would have no problem paying an extra for the privilege of saving a lot of money on income taxes. Plus the government needed the money to pay off the large debts incurred over the previous decade for land reclamation projects.
How wrong they were!
Turns out supposedly empty houses have high or even extremely high water and electricity consumption… especially when the owners instruct the caretakers to turn on lights, oven and television for at least six hours a day and to let the taps flowing, even when they are racing in F1 half a world away.
I wouldn’t be too surprised if Vancouver is exactly in the same league…
As Wolf said in the article…. this isn’t legal advice, but I wanted to add something I read about Washington foreclosures. The vast majority are non-judicial and thus non-recourse. However, Washington does allow the option of a judicial foreclosure
If folks in WA are trying to play the game of buying an overpriced house with massive leverage while still having significant assets in other places, they might be surprised to find the lenders can go after them! They usually do not, however. Not worth the risk in my opinion.
Interesting read. I assume another housing crisis in the US would once again tank the world economy, but do you think there are other housing markets that could do something similar?
As you indicated, the Canadian and Australian markets might not be big enough. I wonder what shape a crisis in China might take. I would assume comrade Xi would do everything in his power to avert something like this, but that’s one place where a bubble might actually tank the world as well. It would likely throw China into utter chaos.
Hey, don’t leave London out of this. The “China buyer” mentioned as a support for markets could actually turn out to be the trigger. The BoE cites how safe the UK is now because so many of the transactions are “cash” transactions and therefore not impacting banks….not in the UK at least. The reality is that developer roadshows in the far east have been extensive since the financial crisis – distance provides opportunity for quasi fraud and mis-selling. (Overseas buyers have been making up more than half of purchases on new build flats in London) And it is noteworthy that an essential part of the team making up these developer roadshows is the finance companies. I can’t help but think that for instance, UK banks have subsidiaries overseas providing loans on UK properties. Central Bank sleeping on the job again.
There’s VERY aggressive selling of esp. London RE throughout Malaysia and Singapore as well. I see it in the papers every weekend.
The so called “cash” may be borrowed money from whence it came.
Besides, London is going down the plughole, big time. Gradually even the posh parts will get worse.
Many native Brits never want to go there again.
What are the chances big investors sell high in strong markets to take advantage of the crisis and eventual recovery in those other regions — a global rinse & repeat? I’ve heard hot shot investors think on an international scale. Not much upside left around the strong markets.
Someone told me the US is no longer seen as the place to be. The top brains in Asian/Euro countries are beginning to stay put closer to home. In essence, we’re not getting top tier talent anymore.
Wolf, it’s off-topic but I wondered if you have anything to add about the troubles at Deutsche Bank wrt the counter-party and systemic risks. Thanks.
Mention of ‘borrowed down-payments’ caught my attention. Is this a lending industry? What purpose could it serve except to undermine the fundamentals of a legitimate mortgage industry?
Remember signing mortgage papers in which I had to attest that any money I may have received from another party toward down payment was a gift and not a loan. So in other words, borrowing the down-payment would have been fraud.
Anyone familiar with how this works? Secured? GSE mortgages?
In Canada, we have a law that says you can borrow up to 65% of your home value, to do whatever you want. When interest rates were low people took the equity out of their homes and gave them to private lenders promising returns of 8% to 10%.
As prices for homes increased, people had more equity in their homes and that 65% of the amount you can borrow, got larger, retail investors were lending more money, subprime borrowers were taking more and speculators and flippers started getting interested in making quick steep profit in a short period of time and also started borrowing money to buy investment homes.
Most banks knew the people coming to them were getting the down payment from family credit lines or these private lenders, but mortgage brokers working on commission and had sales goals to meet or risk being fired. They pretended that the down payment was the buyers of the homes to make sure they qualified for mortgage insurance or pretend the downpayment 20% or more to qualify the buyer for lower mortgage rates than someone who has 2 or 3 mortgages to buy one home.
It wasn’t until prices started increasing double digits every year, and the media around the world wanted to know how a large country like Canada with lots of space and very few people living there had trouble creating affordable homes, did the bank regulators close some loopholes preventing subprime borrowers from borrowing their downpayment at a high rate and then borrowing the rest of the mortgage at a lower rate.
Subprime borrowers can still get 2 or 3 mortgages to get the amount of money needed to buy a home but it won’t be at a cheap rate nor as much money as it was in the past as lenders have to prove the borrower is not likely to default on the payments.
I bought residential foreclosures from 2012 to 2015, all in the southwest US. Most of them had sat vacant for about 3 years before they were put up for sale. This is how it plays out. Lots of stalling for all kinds of reasons. I think Nevada even created new laws to let people stay in their homes for years.
When rats leave the boat, is about to sink. But who are the rats in this situation?
Rats would be smart money. Warren Buffet is sitting on $116 billion cash; you can be sure many other top investors a.k.a. sharks are sitting on cash and waiting for blood on the street.
They never “sit” on cash, because cash always tends to lose value in the middle and long term. They most likely sit on gold, silver and FED treasuries. In fact is a good idea to sit on FED treasuries this year at the very least.
In Florida, a recourse state, when the mortgage defaults exploded they developed the ‘short sale’ an agreement between the lender and homeowner to accept a price lower than the amount owed.
This kept the property from becoming derelict and allowed the bank to put the property in stronger hands. I assume a similar arrangement would take place in other states and nations where a borrower could no longer make his payments.
It’s amusing to watch the MSM permabulls cling fixedly to the “Everything is Awesome – buy moar stawks!” Narrative (and engage in logical contortions) when even our Soviet-style statistical fakery cannot conceal the fact that most Americans are falling further behind in our financialized, oligarch-looted economy.
In the U.S. we have a peculiar tax code that favors real estate speculation. Depreciation, tax-free capital gains, and deductibility of expenses mean that the real estate business pays zero tax in the U.S. Rents cover expenses while they hold until harvesting lucrative capital (asset price) gains.
How is the situation in Australia and Canada?
– In Australia a taxpayer can become an (private) investor in real estate. Then all expenses related to that “investment property” are tax deductable. Keywords: “Negative Gearing”.
– In Australia taxpayers pay – like in the US – a “Capital Gains Tax” e.g. on the profits made with shares/stocks and real estate. But since 1999 those investors only have to pay 50% of that tax when the profits were made with real estate and shares. As a result A LOT OF (wealthy) australian taxpayers have used that “Capital Gains Tax Discount” to lower their tax bill by investing in real estate. They have used it as an tax shelter.
– But the flipside of these 2 tax arrangements is that the price of australian real estate has gone through the roof after the year 1999.
– But what A LOT OF people overlook is that these 2 tax deductions are in fact a subsidy for the …….. LENDER(S). In this particular case, the australian banks.
That’s not exactly accurate; what are you referring to regarding “tax-free capital gains”? Can you expand on this?
Also; depreciation is a write-off, however, look up depreciation recapture of when you sell the asset.
– Off topic: I want to show that the tax deduction for mortgage interest payments are a subsidy for the LENDER and NOT for the borrower.
– An example with the tax deduction:
Mortgage debt: $ 300,000
Interest rate: 2%
Gross interest cost: 2% of $ 300,000 = $ 6,000 (= income for the creditor/bank).
Taxdeduction: $ 2,000
Net interest cost: ($ 6.000 – $ 2,000 =) $ 4,000
– Now an example without a taxdeduction. The basis for this example is the assumption is that the net interest costs for the mortgage holder remain at $ 4,000 (see above):
Mortgage debt: $ 200,000
Interest rate: 2%
Interest cost: 2% of $ 200,000 = $ 4,000 (= income for the bank/creditor)
Tax deduction: $ 0
Net interest costs: $ 4,000
– Conclusion: With the taxdeduction the mortgage holder can afford a larger mortgage debt and that means the bank/creditor has a larger income.
– But this taxdeduction means that the IRS has a smaller income. And the IRS/government will be forced to increase taxation to pay for that deduction.
“A man’s view of the future depends on how much debt he is in”…
You’ll NEVER get anyone who’s vested in a bubble to admit it – they have to believe otherwise; that the market they are in is supported by some ‘fundamental’ that sets it apart from other asset bubbles in human history,
That’s why it’s ‘always different in my town for reasons a,b,c…z’
It never is.
Brace for impact.
Why bother? Everyone knows socialism is coming. In the end, all these irresponsible monkeys will take money away from responsible people.
Prepare? What a quaint idea.
I think we might not be far off from another bust here too. Prices are just too high and the kids cant afford to buy and honestly nobody else can either the way its going. Now this internet tax deal and all the rest. Bothers me. Uggghhh
Forget to mention stated loans and teasers which are back, but not advertised and kept quiet.
“Stated loans” are not back. There are bank statement loans for self employed owners that use the deposits over 12-24 mos as income; but, those require good credit and sufficient equity/down payment.
The lending environment is NOTHING like it was 10 yrs ago; don’t spread mis-information.
People are pigs, yes they are focused on getting as much as they can for themselves and others be damned. Don’t for one minute think anyone is altruistic. The idea that someone is honest because they are in government , or business, or some non profit pursuit is just false. And you can usually tell their level of simplicity by how high their moral preening.