Inflationists need a Rally

The Economist ranks Canada's housing as the second most overvalued in relation to both rents and income. This is not news to the readers of these pages who have seen the various Demographia posts and have lived through the faux appraisals untethered from fundamentals.

Our only remaining question is why do high net worth individuals expose themselves to such great risk by continuing to swap cash for negative returns? 

We know why the retail buyer has bought the farm; the government has been subsidizing credit to anyone via CMHC. Ironically that's us taxpayers; we have been blowing up the balloon. Cheap credit has masked the outrageous principal amount before interest that glib marketers tout as affordable. The granite and stainless steel may be fashionable at the moment, but at these prices when you look back from the future, you are buying a hovel.

My case study demonstrates the futility of Vancouver as a port in the storm and now that we have "real" yields breaking out, mortgage lenders are getting ahead of the curve by raising rates to mitigate term risk and not waiting around for the Bank of Canada who is still betting on shorting cash via ZIRP.

CMHC is YOU Tax Payer

The Globe and Mail reported August 12, 2013 that "Three-quarters of all Canadian mortgages are insured by the federal government, up from only 30 per cent in 1988." ... "Ottawa guarantees a total of $900-billion worth of mortgage insurance." ... "It has been a no-brainer for the banks." Lenders have used up nearly 80% of this year’s available government guarantee by July 31, 2013.

In the Globe & Mail article, the author Barrie McKenna points out:

• 1990s, CMHC minimum down payment went from 10% to 5% 
• 2006, CMHC introduced 0% down-payment and it extended mortgage insurance to cottages and second homes.
• Early 2000s, the creation of government-backed mortgage bonds and CMHC removes the $250,000 cap on the size of mortgage it would insure. (Ottawa would eventually reimpose a cap of $1-million).
• 2005 government lengthened maximum amortization period from 25 years to 30 years
• 2006 amortization period lengthened to 40 years (it has since been set back to 25 years).
• The final incentive to expand the availability of mortgage credit was the insured mortgage purchase program, which enabled banks to sell their government-backed mortgage bonds back to CMHC at a profit.

No Risk means No Due Diligence eh Canada? 

Corporate bond manager Canso Investment Counsel Ltd. of Richmond Hill, Ontario estimates:

Subtract 50% off of average Vancouver SFD house prices from the peak and you get $532,499 which puts it right into the PLUNGE-O-METER target zone. 50% off of Toronto (GTA) peak average SFDs and you get $338,398. 50% off of Calgary peak average SFDs and you get $263,581.

In Canso's June Newsletter is a chart showing the comparison of housing as a percentage of GDP between Canada and the USA. Canada is overdependent on residential investment. So was Spain.