Forget Subprime Canadian Real Estate Buyers, Investors Crashed The US Market

Forget Subprime Canadian Real Estate Buyers, Investors Crashed The US Market

Turns out middle class real estate investors caused the US real estate crash, not subprime borrowers. A new working paper titled Credit Growth and the Financial Crisis: A New Narrative was published on the US National Bureau of Economic Research (NBER). In it, the distinguished researchers pour over thousands of credit and mortgage data points, to analyze housing during the real estate boom. Subprime mortgage debt didn’t explode in growth, and these borrowers didn’t default at a higher rate. Middle class “investors” and home flippers caused the bubble, and collapse. Now that we know this, Canada’s real estate market might actually look a lot like the US before the crash.

Credit Growth In The Prime Segment

It’s a commonly held belief that mortgage debt experienced huge growth in the subprime market. Turns out that’s bulls**t. Authors of the paper argue that subprime borrowing actually stayed relatively constant. Looking at their chart, we can see that as prices climbed during the home price boom of 2002 to 2006, primary homeownership actually declines. What picks up instead? People with more than one home. People that saw their net-worth increase from homeownership, decided having extra homes would lead to even more gains. This growth is strongest in those with middle credit scores.

Forget Subprime Canadian Real Estate Buyers, Investors Crashed The US Market - investors

Credit scores are divided by quartile, with quartile 1 being the lowest credit score (a.k.a. subprime borrowers). Source: Credit Growth and the Financial Crisis: A New Narrative. 

Middle class investors that built their modest wealth from their primary home, decided to start a buying frenzy. Mortgage balances held by people with more than one home grew from 20% to 35% between 2004 and 2007, for those with middle credit scores. By early 2004, 10% of borrowers with good to excellent credit scores accounted for owners of multiple homes. In 2007, that number hit 16% for those with middle credit scores. Those with the very best credit did see a jump during this period, but they only grew to 13%. Investors with the worst credit accounted for 6% of mortgage balances, and grew to 8% during the same period. In case you didn’t get that, middle class investors saw more growth than poor and rich investors combined.

The Rise In Foreclosures Were Real Estate Investors

The authors also note that when shit went sideways, the rise in delinquencies were “exclusively accounted for by real estate investors.” During the real estate boom of 2002 to 2006, foreclosures were “similar” for both investors and non-investors, in all segments of credit. During the crisis however, investors foreclosed at a substantially higher rate. Middle class investor foreclosures actually jumping by a “factor of 10.” Which makes sense, since primary homeowners actually need their homes to live in. Needing somewhere to live is a powerful motivating factor to ensure those bills get paid on time. Investors on the other hand, can better afford to lose their second, third, or fourth home.

Forget Subprime Canadian Real Estate Buyers, Investors Crashed The US Market - Delinquencies

Forclosure rates by credit score, with Quartile 1 representing the lowest. Source:  Credit Growth and the Financial Crisis: A New Narrative. 

Don’t get this wrong, subprime borrowers are still risky. In normal market conditions, they’re more likely to account for foreclosures. In the US, subprime mortgages accounted for 70% of all homes foreclosed during the housing boom (2002 to 2006). However, during the crisis they accounted for only 35% of all foreclosed homes.

What? How Did That Happen?

Middle class investors need more leverage, and have less incentive to keep an investment property. Unlike wealthier homeowners that have access to capital, middle class investors need to tap the money tied up in their primary home. In order to do that, they need to maximize leverage by tapping the home equity windfall they received during a housing boom. Researchers of the paper note that people with middle credit scores would maximize leverage by going to alt lenders, and switch to variable rate mortgages to buy investment properties.

When the Great Recession came, primary homeowners had more tools to protect their home. Mostly the ability to go to bankruptcy court, and have unsecured debt discharged. This allowed them to keep their home, and not have to give it up to foreclosure. Investors however, don’t get the same privileges. The system is designed to ensure that primary homeowners don’t end up in the street when things turn. Not to protect highly leveraged gamblers from losing money by playing condo roulette.

This. Changes. Everything.

Now that we can see conditions and default factors were very different from what most experts “know,” this changes everything. Canadians are actually showing many of the same factors that led to the US housing bubble, and eventual collapse. We don’t track this kind of data in Canada (shocking, I know), but we can find quite a few data points that warrant studying this further. We do know that mortgage credit growth is disproportionately concentrated to those with good credit scores, there’s significant leverage against home equity, and multi-homeownership is exploding in at least Toronto and Vancouver.

Let’s start with mortgage credit growth, which isn’t very high for those with the lowest credit score. Equifax data obtained from the Canada Mortgage and Housing Corporation (CMHC) show that 5.3% of mortgages in 2013 Q1 are to those with poor credit scores across Canada. That dropped to 4.6% by 2017 Q1. In Toronto, we went from 4.6% in 2013 Q1, down to 3.2% of mortgages in 2017 Q1. Even Vancouver, where money has little correlation with buying activity, went from 3.5% in 2013 Q1, down to 2.6% of mortgages in 2017 Q1. The quality of credit is getting better, but that’s not necessarily a good thing.

Source: CMHC, Equifax, Better Dwelling.

Canadians with good credit might be leveraging up, as home equity is used for a huge number of loans. The Bank of Canada this week, estimated that up to 40% of Canadian mortgages have a home-equity line of credit attached. Canada’s federally regulated banks now hold $248.95 billion in loans secured with residential property, a jump of 6.91% from last year. Most interesting, Toronto, Montreal, and Vancouver are seeing tens of thousands of residential homeowners withdrawing 10% or more of their equity. What they’re doing with that debt is anyone’s guess, but there’s a lot of flipping and second homes these days. Speaking of second homes…

Source: OSFI, Better Dwelling.

The number of people buying second homes is getting pretty high. The Ontario government warned that 121,000 people in Toronto and the surrounding area now have at least one other home in the same region. Earlier this year, we also determined over 7% of Toronto homes were bought and sold in less than a year.

It also looks like the same issue is hitting the West Coast. Vancouver Realtor Steve Saretsky, recently did an analysis where he concluded that over 10% of Vancouver condos were bought and flipped in less than 24 months. We also found that 10% of Vancouver homes for resale were not lived in, as identified by the listing agent. Investor driven home hoarding is alive and well in Canada, we just don’t want to accept it.

These issues definitely require a deeper look, and more data collection to confirm that we’ve hit the same environmental variables. We’ll dive deeper into each one of these segments as we collect more information, but isn’t it fascinating? The very things we thought made Canada’s real estate market different from the US, are actually the things that caused their crash. Experts were just wrong about what caused the US housing collapse in the first place.

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  • Morty 6 years ago

    Holy shit. As someone in the mortgage industry, this is actually some scary stuff. Poor people barely making their payments on their house aren’t extending leveraging, they won’t qualify. HELOC and alternative products are booming though.

  • Dave Calhoud 6 years ago

    Nice comparison, and really interesting read. Keep up the work, always a pleasure to read your articles.

  • Millie 6 years ago

    Your darn right a primary homeowner isn’t going to default if they don’t have to. I bought recently, and the payments aren’t comfortable – but I can make them. I would sooner default on my car, student loans, and file a consumer proposal before I flush the payments I’m making on this place down the drain.

    Many homeowners that can just afford to make the payments view it as both a retirement fund, and a place to live. We can’t just walk away when things get tough. Investors are a different case.

  • Ham 6 years ago

    Publication facts for those who care about the source: nber receives funding from conservative alignment foundations (small government, anti-regulation, etc), the paper is published in a journal with low impact rating (means not many peer reviewed papers cite the articles from this journal. Implies lowerr quality of articles with less vigorous peer review – meaning that its easier to push through contents that do not necessarily represent scientific consensus). Read at your own risk.

    I will be giving the paper a thorough read with particular attention to their scientific methods.

    • Go To Hell With Your Arrogance 6 years ago

      Giacomo De Giorgi, from the US FEDERAL RESERVE, is one of the authors. I think they have a pretty grasp on whatever crappy academic institution you’re at.

      I tend to trust someone that shows me data, over your shitty attitude. Canadians have his sense of superiority because they wrote one or two research papers in college, but never actually accomplish anything. I don’t know what you do for a living, but I guarantee a paper from NBER is much more reputable than anything you’ve done.

      • Lessdenadalla 6 years ago

        By far, my favorite comments this week …

      • Ham 6 years ago

        Sure, I wrote some papers. I learned some things chief among which is to question every publication with scepticism – been there done that. I don’t think you understand that this experience did not grant me sense of superiority but gave me an appreciation of how there are so many untrustworthy research publications out there – you sort of feel worse having been through it. So that’s that.

        I thought reasonable people come here to discuss all things realestate. I’ve learned a lot from this blog so I tried to return the favour by pointing out the part of publications that often get overlooked. If you already consider all these things when reading articles, good for you. If not, hopefully you will consider the true intent of my comment.

      • Rick Abrams 6 years ago

        Not so fast there. The entire paper is BS — The idea that the Fed is reliable is a myth.

        • Werry 6 years ago

          The US Fed, the OECD, the Bank of Canada, the World Bank, the IMF, and more people are wrong. The only people that know the real estate market are lower middle class homeowners that borrowed a down payment, to buy a second home. You know, the people that *really* know the secrets of money and capital. 😂

          • Ham 6 years ago

            Werry, you also should understand Giacomo De Giorgi, while being a senior economist in Federal reserve NY since 2014, did not write this article on behalf of Federal reserve.

            His name is second in order on the author list – usually means he didn’t write the paper himself but has contributed to it some way. How significant? We do not know.

            Furthermore, this paper being not representative of Federal reserve freely allows him to express his personal bias in the publication as long as this is in alignment with NBER’s goals – NOT Federal reserve’s goals.

            I am not trying to discredit him, I’m sure he’s a smart guy. But we all have our political alignment and we are free to participate to causes we identify ourselves with. He decided to participate in NBER paper and allowed his name be put on the co-author list. The bottom line is that this paper will have bias toward the goal of NBER and its funding source. In case you didn’t know, NBER is NOT a public entity, it’s a private not-for-profit organization with clear goals and motivations of those who fund it.

    • Alistair McLaughlin 6 years ago

      If anything, letting sub-prime borrowers (i.e. the poor) off the hook as the cause of the crash does not seem like a biased right wing viewpoint. I’d suspect right wingers of the opposite bias. They’d be more likely to lay the blame at the feet of the poor than the investor class.

      If you only read “consensus” papers, you’re missing the challenges that come along every so often that can prove the consensus wrong. I would never call economics and finance “science”, but even science itself is not conducted by majority vote. Challenging the consensus is the responsibility of every good researcher. Encouraging consensus thinking politicizes research and makes it useless. Research driven by groupthink is not research.

      • Ahmed 6 years ago

        I’m with you, Allison. Challenging narrative is the job of a good researcher.

        The only evidence we have of subprime borrowers is the collapse of subprime lenders. They linked the higher default rates with that and built the narrative. That could have easily been undercapitalization at these lenders, or lending to prime borrowers for a second home.

        Segmenting people by credit quality is a much better way to look at it, especially with the default rates. The original NBER paper must have taken years to write.

      • Ham 6 years ago

        A very well thought out and valid point! Thank you.

    • Trader Jim 6 years ago

      You sound like an academic. If you were any good at analyzing markets, you would be handling real money and making more money as a trader.

      You’re not, so you take refuge in your ivory tower, and judge people by where they get their money. Private industry researchers do a hell of a lot better work than those at universities, when it comes to money.

      • Ham 6 years ago

        Jim, wouldn’t it be prudent to know where the money is coming from and the potential biases that may introduce? I mean, you are a trader, you know to trust the numbers but you also know that there are many ways to analyze the same numbers. All I’m saying is to understand the fact that the funding sources could have introduced biases that you should guard yourself against. No foul intentions included.

        Research results generally follow the money – it doesn’t matter private or public. Just look at the publications funded by tobacco and sugar industries.

        I read many of your comments and I respect them, but this one was a bit mean spirited.

        By the way I’m not an academic.

    • Ham 6 years ago

      Wow I never expected so much emotional response here. I was just trying to explore all of the facets that come with this article. I apologize if I sounded condescending. But these are all the things you should take into consideration in your analysis, aren’t they?

      • Rick Abrams 6 years ago

        Your instincts were correct. The paper is worse than worthless; it is fraudulently misleading. US Banks and Blackstone are trying something similar with the securitization of home rental incomes as they did with the securitization of mortgages. Mathematically, they are dooms day explosions with a long fuse.

        The entire business model is defective unless you are among the the crooks who are orchestrating the frauds. The secondary market for mortgages and rentals cannot become the primary purpose to make a mortgage or to rent an apartment. When people look to the resale market as the source of income, they have stepped into a Ponzi-esque world where they forever need more home buyers or more renters to keep the cash flowing from the secondary market. {Just as Equity Funding needed more and more life insurance policies] WS then bundles these mortgages and/or rents and sells them as sound investment vehicles.

        Since the world market for these investment vehicles is greater than what the local housing markets can produce, people soon turn to frauds in order to keep the cash flowing from the secondary and tertiary markets.

        When the bundles show a higher default rate, the tertiary market complains so WS then sells “insurance” on the bundles. Then, the buyers believe that they have a win-win situation and they pay a little extra for their “insurance” on their bundle. Unknown to them, the Wall Street executives are also buying “insurance” [Credit Default Swaps CDSs] on the bundles. When the bundle crashes, the investment house has to pay not only the purchasers of the bundled mortgage and/or rents, but it has to pay off all CDSs of the executives who manufactured the defective bundles. Thus, WS executives make more money with a higher an faster default rate — which requires the Fed to bail the investment houses out as the investment houses are soon wiped out.

        It is a form of Accounting Control Fraud designed to loot the investment house and now to loot the Federal Treasury. Google William K Black

        • Alistair McLaughlin 6 years ago

          You seem to be missing the point of the report. You’re talking derivatives while the rest of us are talking about what happened on Main Street. On Main Street, it was middle class homeowners and speculators who thought they were investors who saw the biggest spike in defaults during the bust. Not sub prime borrowers.

          • Rick Abrams 6 years ago

            You missed everything that I said. I was here and I saw it. The report is hog wash. The people they are calling middle class investors were not investors with decent credit ratings. What part of Liar Loans do you not understand? Near the end, there weren’t any home buyers or even homes behind the mortgage. None of the frauds would have existed without the tertiary market. Main Street was the first step in the frauds which were orchestrated by WS executives.

    • Common Man 6 years ago

      If you have a better explanation then show us. Don’t come here to act smart you are a S***T. This is the only forum where we the normal/ common people get to see, learn and understand the real issues with the state of the economy. Unless people like YOU have already created this unaffordable housing bubble for middle and hardworking population and believe that data is only for elite that too for sale at the premium price. You guys are the reason Vancouver belongs to Chinese investors, turning it into a ghost city and exclusive for the rich kid’s playground, jumping on papa’s black money.
      Better Dwelling is making the data available in understandable to common man. Thank you guys for great work. Hope you guys will be always awesome like this and will be allowed to act transparently.

      • Ham 6 years ago

        Wait a minute. I am not disputing this article. But shouldn’t you look at everything you read with healthy sense of scepticism? It would be in your best interest to verify everything you read.

        I also don’t know what makes you think I have anything to gain from the realestate market..

    • bluetheimpala 6 years ago

      Ham: Please do. All opinions and analyses are welcome. If the data is not trustworthy then that is the biggest issue. If the source is legit and irrefutable but the opinion is biased then it is our job, or your job, to read between the lines or attempt to. Methodology? It looks like secondary via established gov or ngo. Not sure what’s got you in a tizzy.

      I do agree with the other comments: if this was a conservative leaning organization they would be putting the blame on the poor and immigrants. Not the middle class.

      • Ham 6 years ago

        You bring up great points and I agree with your observation. My main point with the Conservative leaning funding was that this article is being used to fast track the deregulation that the current US administration is pushing.

        My main worry was the risk we run taking the paper at the face value and applying it to Canadian context while the paper could have been written to achieve not the dissemination of accurate data that will help us but to advance the current political agenda.

        An investor would be irresponsible to not consider this about the source and the journal.

    • Ham 6 years ago

      Better dwelling admin, please delete this comment. I never meant to start a flame war. Just wanted to introduce a healthy warning regarding the biases that may have been built into the article.

      • Alistair McLaughlin 6 years ago

        Relax son. This isn’t a flame war. This is a pretty standard conversation on the Interwebz. 🙂

      • Common Man 6 years ago

        Ham, Take it easy. This is a sensible people forum. Don’t just fire blank shoots and run away. Give us the link if you have better references and list them, we will be happy to read. But just don’t express mistrust, support your statement with data or reference.

  • bluetheimpala 6 years ago

    …this sort of data doesn’t belong in the shadows. Thank you for bringing the light.

  • Yyz 6 years ago

    Thank you. This is exactly what I experienced in US 10 years ago. I lived in a nice middle class suburb neighourhood where one of my neighbor kept bragging about how he made some quick bucks by flipping houses or rent out. Until one day the market starting to tank. And then i see people in my neighbourhood bailing out one by one. At the end, half of the neighbourhood went foreclosed .

    Back in the day, i had a heated discussion with my friend where he thinks invest in real estate is no brainer. He has a nice job with decent pay. And he maximize his credit and bought many condo and rent them out. He said historically real estate never fall. In the end he declare bankruptcy because he is so underwater in his condos. It is a amazing to see people includes my friends and families in Toronto today having exact thinking, doing exactly the same thing and having exact argument with me.

    People often said if they can afford the payment, they will keep paying even if they are underwater. And Canada is different because we have no subprime. In reality is that when the market drop past certain point. People will become irrational. They want to stop the loss and bail out. Why will I want to pay a mortgage for years that will cost me so much more while I just declare bankruptcy and restart after 7 years. It sounds ridiculous, but I see so many middle class folk end up that way.

  • C 6 years ago

    And I’m reminded of the scene in The Big Short, when the stripper admits to owning multiple homes……multiple homes she can’t afford.

    My last House has sold twice in the last three years. The current owner tried to flip it, and bragged that he owned 5 other flipped homes in the horseshoe area. He said it was for his daughter, but she never lived there, no one did. He bought it for 255000 and tried to sell it for 400000 a year later. Roof 12 years old, windows 30 years old, siding 15 years old, and the basement leaks. I know it leaks because I’m still friends with the next door neighbours and he went on a screaming rant that it was their fault.

    It didn’t sell, and now it’s a rental–an empty rental, because no one wants to pay the rent he’s asking.

    And if it had sold, I’m sure it would have been listed as his daughter’s house, so no capital gains.

    I wonder how his payments are going on his 5 or 6 or 7 houses????


    • Andre 6 years ago

      Flippers that add value, mad respect. Flippers that just try to add a middle man markup, they can go to hell.

    • JasonB 6 years ago

      Wait till interest rates start rising.

  • JasonB 6 years ago

    Something weird is happening in Windsor, Ontario. All the GTA folks driving up property prices here are now jumping ship. So many for sale signs.

  • Jack 6 years ago

    I knew immediately Stephen Punwasi wrote this article, because he always curses in his articles. I like the content, I just find the use of swear words diminishes the professionalism of the writer and this site (even if it’s just optics).

    • Alistair McLaughlin 6 years ago

      Personally I like the curses and hope he keeps using them. They add a nice bit of personality to the articles and make me feel more comfortable swearing in the comments section. Fuck yah! 🙂

  • bob 6 years ago

    Fascinating, connects a lot of dots and fills in gaping blanks in a situation that has eluded explanation.

  • Justin Thyme 6 years ago

    A refreshing viewpoint that explains the drop in prices of good middle class houses during the housing melt-down, not the houses you would expect in sub-prime territory.

    But the involvement in asset-backed portfolio shopping and leveraging leading to banking failures can not be discounted. What would be germane to know is how much of this asset-backed paper failure was due to poor performance of mortgages by investors, not actual principal home owners. That is, mortgage lenders over-extending mortgage portfolios to investors who used the investment income to help qualify for another mortgage. This would inevitably show up as sub-prime. Strip away the investment income, and the net income would not warrant such a high mortgage.

    But in Canada, there is a factor I would suggest you look at, that differentiates the American market from the Canadian market. Perhaps it is not middle-class investors who are involved in second and third home buying up here.

    Perhaps you should look at the Bank of Mom and Dad, where the middle class parents are using the equity in their homes to buy homes for their children. On paper, these would look like second non-owner-occupied houses, but in reality they would be co-mortgaged homes instead. The children are living in the homes, but the parents are on the mortgage documents and even perhaps the deeds as co-owners.

    • MH 6 years ago

      Where is this thing of The Bank of Mom and Dad is coming from? I am genuinely interested. This argument has been floated around a lot lately but I haven’t seen a single number that supports it. Though there are numbers showing that many people have not much saved for retirement.

      On the other hand I have read that real estate industry is lobbying the changes allowing parents to deep into their RRSP accounts to finance real estate purchases for their children. Yes, everyone has to part with their savings now so we can keep this party going (nobody said it’s gonna be easy). Unless there are credible numbers supporting this Bank of Mom and Dad theory it looks more like a new narrative that they are trying to fix.

      Last but not least, it doesn’t change much. Parents or not, you still end up with overleveraged people buying multiple properties.

      • Justin Thyme 6 years ago

        Here are statistics from England.

        “The so-called bank of Mum and Dad has become, for many millennials, the only route into home ownership. A report from Legal & General predicted that parents will lend more than £6.5bn in 2017 to help their children buy a home, a 30% increase on last year. All in all, the “bank” will support the purchase of £75bn worth of property, making it the equivalent of a top 10 mortgage lender; the average amount of money provided is set to rise to £21,600. The Social Mobility Commission reports that 34% of first-time buyers had help from their families, an all-time high.” from

        And from Canada

        ‘A whopping 76 per cent of Canadians with kids aged 18 and older say they stand ready to provide some financial oomph to help them buy a house, pay for their wedding or reach other life milestones.

        ‘And most parents are quite generous. The average intra-family donation is $24,000, but those with incomes above $100,000 generally give over $40,000. As many as 25 per cent of those surveyed reported gifts of over $50,000. ‘

        Google ‘The bank of mom and dad’ and you will get statistics galore.

        It is no longer nuclear family income that is leveraging mortgage buying, but extended family income, even into the grandparents.

        The family home, mortgage paid off, parents in a secure well-paying job, and their children looking for a home. Mom and dad take out a mortgage on their home to provide their kids with a down payment. In Vancouver, the parents sell their family home for a million or more, and divide the proceeds between their children for a hefty down payment. They retire to Victoria. Parents dip into their retirement fund for down payments for their kids, hoping that investing in their children will bring bigger dividends.

        The bank of mom and dad is very much a factor in house buying today. Millennial parents with huge equity in their homes, large investment portfolios, with net worth in the millions, are dipping into their pockets to help out their children. It is driving the housing demand in new house construction. You generally look at flipping – buying and selling existing housing stock. Or you look at new condo sales. But prices are being driven by developers – the ones building new single detached and town houses. They drive the market, and they are not being bought by investors. They are the ones targeting millennials outside of the main cities.

        You want statistics, then look at the number of first-time new home owners. Spend some time in the sales office of a new home subdivision. Where are these millennials getting the down payment to purchase? From mom and dad. Either their parents are down-sizing, and the kids get the equity, or the parents are taking out a mortgage on a house already paid off, and using it to buy for their kids. Or they are using the parents income as co-owners to help meet the eligibility criteria.

        But that is the point on the over-leveraged bit. Kids are factoring in their parents’ income as well in the mortgage calculations. Mom and dad, steady dual income in high-paying secure jobs, very high net worth, supporting their children’s’ mortgages. Not at all over-leveraged. The parents are not about to let their kids loose their houses.

        And this bunk about not saving for retirement? Maybe in the lower pay scale, but look at the payouts for defined benefit retirement packages. Payments for life, indexed to inflation, at a substantial portion of their employed incomes. Who needs retirement savings in such cases? Most large corporations, the government sector, teachers, nurses, executives, even politicians all have defined benefit plans and don’t need huge retirement portfolios. They have a steady income until they die, without ever having to work again. This income is looked at as rock solid by the banks and mortgage lenders. Seventy year old retired pensioners can get substantial mortgages based on it, and on the mortgage application for children and grandchildren, it is gold, The well-off are not retiring into an incomeless void, they are retiring into a pension-income-for-life utopia. Retirement portfolios are so old school. Forget freedom 55 investment schemes, just get a job with a defined benefit pension plan.

        Any pundit looking at the housing market and trying to understand it is missing a significant part of the puzzle by ignoring this aspect. It has a huge economic impact.

        A simple google search on ‘the bank of mom and dad’ might be well worth your effort.

        • Justin Thyme 6 years ago

          Here are more statistics from Canada

          ‘Bank of Montreal conducts annual surveys of first-time home buyers, and has found in recent years that nearly half of young potential buyers expect a loan or gift from family. This year, the bank found that 44 per cent of millennials expect to depend on parents or family for some or all of their first home purchase.’


        • Justin Thyme 6 years ago

          And another.

          ‘The CMHC released numbers this week showing that nearly one in five first-time homebuyers in Canada got money to help with their downpayments. It’s a stat that’s not that surprising. “The bank of Mom and Dad” is a phrase that gets thrown around a lot in cities like Vancouver and Toronto, cities that have seen real estate prices balloon over the last few years.’

          • MH 6 years ago

            It’s all good then… bring the champagne…

            All these words do not change the slightest bit this leverage thingy… Leverage is all rainbows and butterflies when things go up. When the tide turns, not so much… No amount of googling is going to change that.

      • Justin Thyme 6 years ago

        I accept that in the American market, it became common for middle-income Americans to buy a second home as income property, using the equity in their primary home as a down payment. Then, they rent out that property to pay off the mortgage. They build up equity in the second home, and use it to buy a third. And so on and so on. We all knew this was happening, just not the extent of it. It was popularized in get-rich-quick schemes, and everyone and their uncle came out with a book espousing it. Sub-prime mortgage lenders encouraged it, even actively promoted it. I remember well the huckster talk. Every newspaper ran articles on the phenomena. If you had an income property, getting someone to lend you money for another mortgage on an investment property was a given. Everyone wanted to get on the bandwagon. They made money wholesaling their mortgage portfolios, to leverage even more capital to lend out and stoke the frenzy. The pyramid house of cards starts to collapse when rental income drops off.

        First, rent becomes very competitive. There are only so many renters. I suspect you would find that average rents took a beating as available rental properties increased. Rent income no longer covered the mortgage costs. It was cheaper to rent than to buy. Landlords lost money on each rental unit, but hoped to make it up on volume.

        Second, in a recession, renters dry up. They loose their jobs, move, get evicted, or just disappear in the middle of the night. They have no equity – no motivation to stick around. Landlords either drop the rent further, or end up in deep cash flow problems. The mortgage holder wants their money, but there is insufficient rental income to cover it.

        Third, with falling house prices and foreclosures the former renters can now afford to buy a house using a sub-prime mortgage, so they buy instead of rent. The investors are stuck with mortgages that the property value no longer covers, and no income to cover it. They can not sell at a price high enough to cover their mortgage, so they just walk away. Foreclosures flood the market, making their position even more untenable, and the thing snowballs quickly. Banks that were too quick to play games with asset-backed paper, got caught short. There are only so many foreclosures the market can handle, before the banks run out of cash flow.

        Yes, it happened in Canada as well. I am aware of several acquaintances that did it. But they had some good business sense. First, they generally stuck with purpose-built rental properties – duplexes, apartment buildings, high-rise condos. Second, they tended to start with larger down payments, so the rent did not have to cover over-leveraged mortgage payments. Third, they stopped buying into hyper-inflated markets. They know that you don’t make a profit buying high. They looked for bargains, not money pits, Now, their past purchases are on the market, in a round of controlled profit-taking.

        Canadians by far have a much better business sense than Americans. It is only the two markets in Canada – Toronto and Vancouver – and a few satellite markets, like Hamilton – that are really a problem. And Canadian banks are much bigger and much more money savvy. They tend to not over-leverage by wholesaling their portfolios. They can get their money in other ways. Canadians may not be great savers, but with the proliferation of direct deposit paychecks, the banks have access to a lot of cash flow. In Canada, very little money is in wallets, it is in the banks. It doesn’t need to be in savings accounts. It just needs to be in the banks for at least part of the cycle. And Canadian banks are BIG. TD now has more branches in America than they do in Canada, and only three banks in America are bigger than each of the big 5 Canadian banks, and not by much. In fact, Canadian banks generally individually make more in PROFIT than the majority of American banks have in total assets.

        Will there be a housing market crash in Canada in general? No. A cooling-down correction? Definitely. And certainly not for the same reasons as the crash in America. We will not see banks collapse. Will there be a housing market crash in super-heated me-too markets other than Toronto and Vancouver? Absolutely. It is now happening. But these limited markets are, in the grand Canadian scheme of things, small potatoes. Developers have already abandoned them.

        The Toronto and Vancouver markets are NOT Canadian markets, they are INTERNATIONAL markets. Anything can happen. They respond to events happening on the world scene, not the Canadian scene. But in the overall banking portfolio in Canada, these markets just don’t have the clout to take down the Canadian banks.

        Private lenders, maybe.

        In the alternative mortgage market, driven more by greed than economic sense, people will probably loose their shirt. The money behind them, the depositors, are not insured. GIC’s are only guaranteed if the trust behind them is solvent. They apparently are acting more like American banks than Canadian banks, over-leveraged to the hilt.

  • EO 6 years ago

    It is prudent to take in ALL analysis and make a decision based on that. You can always find an argument to suit your purpose. There are a lot of highly paid people that make these studies their jobs, why would we not listen to them? It was not one thing and it never is one thing that results in a down turn. Simply put based on all the data that has been published over the years since 2007 investors, derivatives, fraud, easy money, banks, government, Wall Street, sub prime lending, house flippers, consumer debt, et al, contributed to the Great Recession. In Canada, we are in the exact same boat the US was before 2007 based on pretty much every data analysis out there including those from this website. What will be the straw that breaks the camel’s back is what we are all trying to figure out but the general consensus is that The camel’s back will break!

    Great work BD. Please keep bringing up all the different data sets and opinions. I for one appreciate it and find it useful.

  • Justin Thyme 6 years ago

    New statistics say that the top 10% control 50% of the world’s wealth.

    As if the top 10% is just a small clique.

    The top 10% is seven hundred MILLION people.

    That is one third of the total world population in 1900.

    That is a lot of buying power.

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