Twiddling my thumbs, waiting for the real estate crash

by JDH on August 15, 2015

Most cities in the USA experienced a real estate crash as a result of the 2008 “credit crisis”.  Canada, with more stringent lending requirements, escaped that fate.

Until now.

In an effort to keep the economic balloon inflated, the federal government, via the Bank of Canada and the Canada Housing and Mortgage Corporation (CMHC), has continued to lower interest rates, and make it easier for borrowers to put themselves under water.

In Canada, the banks aren’t stupid.  They only want to lend money if they know they will be repaid.  So, for high ratio mortgages (where you have a down payment of 20% or less), the government, through CMHC, insures the mortgages.  If you are able to pay your mortgage, great, the bank makes money.  If you default and the bank has to sell your home at a loss, great, the taxpayers through CMHC cover the shortfall, and the banks make money.

Starting this fall, CMHC will allow 100% of projected gross rental income to be used in a loan application.

So now, if you rent out your basement, you can inflate your income by every dollar of rental income you are getting, so you can now buy a bigger house, or pay more for a house to drive up the housing market.

Great.

Mortgage fraud is a big problem in Canada, just like it was in the USA before the 2008 crash.  If you can inflate your income to qualify for a mortgage, and if lenders don’t bother verifying the numbers because it’s all insured by CMHC, why worry?

Of course if you read the news, house prices are going up.  That’s why you get news reports that sales are up 14.4 per cent, or whatever.

Here’s the problem:  40% of houses listed for sale in the two hot Canadian markets, Vancouver and Toronto, have not yet sold.  So yes, the six out of 10 houses that have actually sold are going up in value, but that’s not the full picture.  Unfortunately, this incomplete pictures feeds the buying frenzy.  Potential home buyers believe that if they don’t buy now, they will be left behind.

Unfortunately the  dipshits running in the federal election keep throwing more gas on the fire, promising more home renovation tax credits, because yes, taxpayers should be subsidizing you putting in a hot tub.

This will not end well.

Interest rates will tick upwards.  Liar loans will come home to roost.  The recession will finish off the rest.

So if you ask me whether or not you should borrow to buy a house or condo in Toronto or Vancouver, my answer is no.  Wait until after the inevitable crash.  the crash may not be imminent, but it will happen.

On that happy note, I’m off to the Blue Jays game.  At least they are winning, at the moment.