Juggling Dynamite

This segment offers a good overview of the global housing downturn. Rather than thinking of it as a housing “crash” though, realists can see it as an inevitable mean reversion cycle following a massive speculative bubble.

Home Prices across America are DROPPING FAST, according to New Data from Redfin. Metros like Austin, Dallas, San Jose, Denver, and Las Vegas have some of the biggest declines in median sale price over the last 3 months. In total, there are over 180 cities where home prices are declining…

Home prices in countries like Canada, Australia, and Sweden have declined significantly over the last 6 months. This would be the 3rd global housing crash of all time. The previous two occurred in 1929 and 2007. Global crashes are worse due to the contagion effect that occurs.

Looking at data from the last global housing crash – it becomes apparent that prices started declining in September 2006. A full two years before Lehman Brothers occurred. And 3 years before foreclosures peaked. Here is a direct video link.

Recent Canadian mortgage data compiled by the Bank of Montreal gives a glimpse at the rate of change afoot for many Canadian property owners:

• Some 20% of all Canadian mortgages outstanding ($260 billion) are variable rate loans taken out near the interest lows at 1.5% into February 2022. With rates on offer now closer to 5%, many existing payments are insufficient to cover interest costs (never mind reduce principal) and will trigger the need for increased payments, lump sum deposits and/or longer amortization periods to keep the loans in good standing.
• An additional $130 billion fixed rate mortgages were taken out over a 12-month period five years ago at prevailing rates in the low 3% range that will be coming up from renewal over the next 12 months at much higher rates.
• Some $160 billion of secured personal loans (HELOCs) were taken out near cycle lows into February 2022, and those rates have moved 300bps higher since, doubling the minimum payments needed.

Mortgage stress is now a number-one issue raised in political focus groups and surveys, particularly in the counties that experienced the biggest housing debt bubbles over the last decade.

The Reserve Bank of Australia has raised the cash rate for a fifth consecutive month. In the economic data, there are small signs the rate hikes are starting to take effect but it’s being acutely felt by mortgagees especially those riding out variable rates.

It’s fine now for the record number of Australians with fixed rate loans but by the middle of next year, they’ll be in for a nasty surprise. Ashlynne McGhee reports.Here is a direct video link.

Mortgage prison…

As banks impose tougher lending standards and interest rate hikes drive property prices down, more Australians who borrowed at the height of the pandemic housing boom will find themselves in a mortgage trap, unable to refinance their home loans. Here is a direct video link.

Canada comes into this global downturn with a world-leading real estate bubble (property values accounting for some two-thirds of household net worth) and record-private debt levels at a whopping $7 trillion (households and businesses) in an economy tracking about $2.6 trillion in GDP.

A bursting debt bubble in a poorly diversified economy largely dependent on unsustainable demand for housing and fossil fuels leaves Canada among the most rate-sensitive economies in the world today.

Now, inflation-chasing central banks have ignited the greatest rate shock in at least four decades. Moreover, their hikes since March are only starting to move through the economy and will continue to do so over the next two years. A similar multi-quarter lag will apply once central banks move to loosen monetary conditions once more.

In the video segment below, bank analyst Jean hedges his recession call with the hope it will be shallow. I do, too, though I see little evidence to support the hope.

In any event, no historical precedents suggest that a shallow recession would mean shallow losses in asset markets. Indeed, in the 2000-2003 bear market, the US experienced a shallow recession while Canada avoided one altogether. Yet stock markets in both countries halved and took years to recover to previous cycle highs.

Fast forward to 2008, Canada experienced a much milder recession than in America (because our housing market was not yet in a bubble at that time). Still, stock markets in both countries halved, bottomed together in March 2009 and took years (of near-zero rates and trillions in central bank asset buying) to recover. Realism and capital defence are highly recommended.

Jimmy Jean, chief economist and strategist at Desjardins, joins BNN Bloomberg to react to the latest interest rate decision out of the Bank of Canada. He says that it will take 6-8 quarters to see the full effects of rising rates, but the impact on the jobs market will start to show soon. Here is a direct video link.