I don't disagree with anything Jim said however I would like to qualify the last comment about thank god we didn't have that type of aggressive lending in Canada. Agreed on that too and our economy is basically sounder than our neighbors.
But all of the major banks in Canada with the exception of the TD have already taken serious write downs because of their investments in mortgage backed securities from the US. Our lumber sales are flat lining because there is considerably less demand coming from the south. Etc. We are and will continue to suffer fall out from their $$ shenanigans. Finally, while we don't have the same lending practises as in the wild days of a few years ago in the US, we do arguably have a housing bubble here in Vancouver, which may or may not last through the Olympics.
I actually think there's a long odds bet the Olympics won't happen at all in 2010. For some of the above reasons and lots more.
Reddog: write downs are a good thing..at least the ones that have already been taken by some of the Canadian banks, and of course by many of the largest US and European financial institutions...as long as they are able to raise more capital to shore up their tier 1 ratios. From what I've read, most if not all of the banks have been successful in raising more capital by i) issuing more common stock ii) preferred share issues iii) foreign equity investments (from asia and oil-rich investors in the middle east) iv) private placements or even v) bond issues.
As long as the banks and their insurers (the ones who insured all those packaged debt instruments like CDO's, SIV's, ABCP, etc) maintain their AAA/AA ratings, the banks and institutional players will be able to borrow money at reasonable market levels, re-lend it out at higher spreads, and of course, avoid further writedowns..as long as there are no further defaults on some of those Alt-A or pay option ARMS mentioned in my previous post. Yes..the last bit is a big IF...but the US regulatory bodies and senior officials at the big banks are doing everything they can to avoid such a scenario from playing out all over again..or at least lessening the pain...but no one has a crystal ball and one can always keep his fingers crossed
The new capital is critical because for the lenders and their ilk, lending is their bread and butter in terms of profits. Declining short term and long term rates is a good thing for lenders. As long as there is a positively sloping yield curve, there will be money to be made by lenders moving forward.
However, moving closer to home (Canadian market) now, the problem is there is already some anecdotal evidence amongst some local lenders that new residential lending has slowed down significantly. Why? two main reasons: i) because it costs the banks more money to borrow their money and they have to re-lend it out at higher rates ii) banks are no longer able to repackage all those mortgages, car loans, credit card receivables, commercial mortgages, etc. sell them off at a premium and replenish their capital for more new loans. Rather, banks and credit unions are now having to do business the 'old fashioned way' by keeping these loans on the books and having to rely on their deposit base for more money to lend out. Why do you think we're seeing all these high yield 3% or 3.5% consumer savings accounts offers from the banks and credit unions even though the prime rate continues to drop? Yep..they need more money to lend out.
As a result, on the residential lending side, lenders are becoming more 'picky' in who they lend to, how much they lend out and at what rates. If you're a marginal borrower who wants to put 5 or 10% down, your income isn't strong and your credit history is shotty..you're out of luck. However, if you've got a sizable down payment and you've got good solid income..banks will still want to lend to you and at competitive terms.
That last point, is the one distinguishing factor between the Canadian and US markets. Yes, real estate prices are sky high here in Vancouver (many, including you, have said over-inflated)..well I won't argue with that either, but moving forward, and the bottom line is banks are still lending money (albeit at reduced levels) to the strongest of borrowers who have sizable down payments..and I'm talking about the 40%-50%+ range...this should be viewed as a good thing.
As long as there's still buying activity, some growth in RE prices, and this type of responsible lending practice, things can continue to chug along.
Some of the latest housing figures bear this in mind. Vancouver prices have abated somewhat, as the latest stats indicate only a 6.5% rise in prices year over year, while for comparison sake, prices in Saskatoon and Regina have gone up 38%!...Alberta has flattened out, while Ontario has only shown very modest gains (think it was like 3% or so).
Of course, continuing price gains, however small, are dependent on the local economy continuing to roll forward on strength, and as long as there is economic strength, there will be qualified buyers.
Here's the one potential problem I see going forward: new construction. Yes, the big developers are still making money hand over fist on new condo developments and many of these developments are still selling out (eventually). On the surface, this is good because it shows that buyers are still willing to line up to buy what is being offered and of course, as long as there are more projects in the works, the contractors and their trades continue to get paid, and those figures continue to show up in the latest job figures.
However, anyone who's bought a pre-sell unit knows one important thing that distinguishes a pre-sell from a 'hard purchase" such as buying real estate with the intention of moving in within 30 days: cash down payment. You buy a house, you need to qualify for financing, and as mentioned previously, in many cases you need to come up with 40% + to qualify. However, you buy a pre-sell, you put down 10-15% and you don't need to apply for a mortgage until the unit is closer to completion, say in 18-24 months. Well, guess what? something in the order of 55-60% of all pre-sale buyers do not have any intention whatsoever of completing on the purchase. These so-called investors are buying with the sole intention of flipping the unit to someone else at a higher price, book the profits, possibly move on to something else, and of course that buyer has to qualify for financing, if its his intention to move in or rent out the unit.
This is all fine and dandy as long as those who are currently holding pre-sell units continue to find buyers who are willing to pay higher and higher market prices for those units (and qualify for bank financing). Of course, with so many projects that have sold out (circa late 2005; 2006 and 2007) and are in the process of completion...many of these projects are at or nearing completion going forward over the next 12- 18 months. While I don't know the exact numbers, I do know there are many such units.
Over the next 12-18 months, if we begin to see a glut of such units coming on the market and few or no buyers emerge, then the people who are trying to sell these units will have some hard decisions to make: lower the price to entice buyers; hold on to them to rent out; or default.
Whether this situation actually plays out is anyone's guess, but the key factor is how strong are these so-called investors? We already know they are out there in large numbers, but I will keep my fingers crossed that a large enough proportion of these investors are strong enough to be able to complete on their purchases --if they have trouble finding buyers. As long as this situation plays out, then that would be what economists would call a soft landing. However-- if there are many "little guys" who don't have a snowball's chance in hell of qualifying for bank financing if no new buyers emerge (the greater fool theory), then...... that'll be the day of reckoning --the other shoe to drop, so to speak. If that situation plays out, then there WILL be lots of dumping of product from desperate sellers, defaults on pre-sell agreements, forfeiture of deposits, and steep downward pressure on RE prices.
Don't think this situation could play out here? Remember..the US subprime crisis was first triggered by the weakest link in the food chain --the weak or lower income buyers who had no business buying in the first place because they couldn't qualify for conventional financing...but were duped or enticed into buying something they could never afford, by dubious mortgage lenders offering very low teaser rates that were good for only 1-2 years before resetting at much higher rates thereafter...these subprime borrowers existed in large enough numbers to trigger the mortgage meltdown in the US..still don't think it could happen here?
I know...totally different set of dynamics up here, but similar principle..how weak (or strong) is the weakest link and how many are there???
