Thursday, 9 February 2012

On Immigrants And Housing Bubbles.

Is Canada is in the midst of a housing bubble.  Some say yes, others say no.  I find myself in the camp of the former.  There are several factors at play that cause me to think so.

One is housing prices are outpacing income growth compelling many young Canadians to delay home ownership.  This leaves one wondering where the demand is coming from needed to buoy and inflate Canadian real estate prices since a significant segment of the real estate market - first time home buyers - are being priced out of it.

Another red flag is the low key interest rate issued by Canada's central bank, the Bank of Canada.  A key low interest rate allows Canada's charted banks and other lending institutions to offer low prime interest rates to their customers.  This means cheap money that can be borrowed to finance the purchase of a house and other large ticket items.  And it appears the Bank of Canada intends to keep the key interest rate low at 1% continuing a 16 month trend into the first quarter of 2012.

Low interest rates discourages saving and encourages spending.  This is because inflation decreases the purchasing power of money over time so you're better off spending your money in the short term instead of parking it in a low interest savings account where it will be losing value if the rate being offered is below inflation.  Couple this with stagnant incomes for over 30 years it should come to no surprise to learn that Canadians have reached record levels of household debt much of it found in the mortgages Canadians are carrying.  Canadian household debt levels are even greater than those in the U. S. and the U.K. yet somehow our economy is in better shape than those two countries, or so we're told.

So we have a situation in Canada where housing prices are rising faster than the average Canadian's ability to meet those prices in an economic environment of low interest rates and record levels of household debt while inflation current rests at 2.3%.  This is all feasible, however, so long as interest rates stay low and housing prices keep rising.


We know that's not possible but it's the reason so many Canadians are buying houses they cannot afford.  Thanks to cheap money they intend to buy houses they assume will increase in value at a rate greater than inflation.  It's a better long-term investment than a savings account as well as an attractive short term investment if they intend to flip the property.  However, we know that many young Canadians are postponing home ownership because of sky-rocketing house prices.  So where exactly is the demand coming from that not only keeps house prices in key Canadian markets from falling but continuously rising?  What's driving the market?  Perhaps looking south can help us answer that.

A while back I finished reading a book titled The Big Short: Inside The Doomsday Machine.  It's about the global financial meltdown that originated in the U.S. as told from the perspective of insiders.

In a chapter called "How to Harvest a Migrant Worker" we learn of a Mexican migrant strawberry picker who secured a loan to purchase a U.S.$724,000 home on a U.S.$14,000 yearly income.  We also learn of a nanny from Jamaica who along with her sister was able to own six townhouses in Queens, N.Y.  They were able to do this because the financial system developed into a complex ponzi scheme that could only survive so long as house prices kept rising and interest rates remained low.   

It got me thinking about immigration's role in the financial meltdown and why the U.S. was seemingly reluctant to police its southern border and stop illegals from challenging its sovereignty.  It was because these illegals added to an ever increasing customer base that was essential to keep the housing market robust.  They provided the much needed oxygen to inflate the bubble.

You see, it was quantity not quality that fuelled the U.S. housing market prior to its crash.  It didn't matter how risky the loan was because the originator of the loan had no intention of holding onto it.  The loan was to be hidden amongst a bunch of other risky loans, hidden amongst other loans to be compiled and  repackaged as a mortgage backed security and sold off to investors.  And these investors didn't know how toxic these securities were because the bond ratings agencies - Stand and Poor's, Moody's, and Fitch - gave them triple A ratings declaring them to be one of the safest investment vehicles around.  And the originator of the loan made a commission through the selling of these mortgage backed securities.  The more you sell, the more money you make, the richer you become while freeing yourself of risk by dumping that risk onto unsuspecting clients.

The financial meltdown is more complicated than that but what is important to realize is how it couldn't have reached the magnitude that it did without the help of mass immigration.  Since it was all about volume loan originators needed a steady stream of people to sign their names on sheets of paper that can then later be sold off to some putz investor.  It was a pyramid scheme and in order for it to remain sound you forever need a growing base to keep the structure from toppling in on itself and mass-immigration driven population growth was going to provide it.

The immigrants aren't to be blamed, of course.  They were dupes tricked into signing complicated loans they barely understood but were nevertheless sold on by 1) the promise of continuously rising house prices and 2) low key interest rates set by the Federal Reserve of the United States, the central bank of the U.S.

The parallels here in Canada are striking.  We have rising housing prices with a low key interest set by the central bank.  But for prices to keep increasing the demand must be coming from somewhere and it's undoubtedly coming from immigration, just like it was in the U.S.

Housing prices are rising mostly due to demand driven by immigration along with real estate speculation from Asians and Russian petro-dollars (and allegedly Asian and Russian criminal organisations looking to launder their money).  However incomes are not keeping apace.  Immigrant incomes are low and slow to increase in a time where real incomes have remained stagnant.  Immigrants are able to secure a mortgage because of low interest rates,  liberal mortgage standards, and a belief housing prices will keep rising.  But how long can this last?

In the U.S. a low two year "teaser rate" suckered low income earners into mortgages they could no longer afford once the teaser rate expired.  However as long as the price of the house increased they were able to refinance.  But it was unreasonable to expect this to continue indefinitely and thus the defaults started to role in and the market crashed.  How long can the Bank of Canada keep the key interest rate low?  How many new home-owners, many of them immigrants, will be able to afford the houses they bought once the key interest rate rises?  Remember, Finance Minister Jim Flaherty bought $50 billion in residential loans in 2008 on top of a $25 billion credit backstop which, for some, amounted to a $75 billion bailout of Canada's chartered banks.  Why was this necessary?

But the parallels don't stop there.  As late as January 30th of this year Canada's financial regulator, the Office of the Superintendent of Financial Institutions (OSFI), expressed concern over the "increasingly liberal" mortgage standards being practised by the nation's lenders.  To the OSFI they almost shadow the sub prime loans that were being issued in the U.S. exposing them to "emerging risk."

Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions.
The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show. “Non- income qualified” lending has been added to a list of issues to be considered by OSFI’s “emerging-risk committee,” the documents show.
In response mortgage lending has been tightened for recent immigrants as well as for the self-employed and high risk borrowers.  This begs the question, how long have "liberal mortgage" standards been the norm for recent immigrants?  How many properties have been bought with these "liberal mortgage" standards?  And why is a tightening of mortgage lending to recent immigrants a cause for alarm?  It's probably they have a very good reason to be worried.  It'll mean the party's over.
Those mortgages, usually granted to the self-employed and recent immigrants, “have some similarities to subprime loans in the U.S. retail lending market,” the Bloomberg story says, quoting from documents obtained from the Office of the Superintendent of Financial Institutions.
That concern may be why FirstLine — once the biggest mortgage lender in Canada and often a lifeline for self-employed and new immigrants — has been slowly backing out of the mortgage business for about a year now, brokers say.{...} 
No one is suggesting Canada is anywhere near as risky as the U.S. where some 30 per cent of homeowners were in over their heads as house prices collapsed. That led to the subprime mortgage crisis that decimated the housing market south of the border, Madani said.
Bank and housing experts have estimated far fewer than 5 per cent of Canadian mortgage-holders are at risk.
But there are worrisome similarities on four other fronts, Madani said in a telephone interview Wednesday: Canada has seen a “very sharp” increase in house prices relative to incomes the last few years; substantial growth in ownership rates; household debt has risen to record levels and there are “significant signs” of overbuilding, especially in the condo market, he said.
The IMF along with The Economist have concluded Canada's housing market is over valued and due for a correction.  A recent survey ranked Vancouver as the second most unaffordable city in the world following Hong Kong in the top spot.  But when you appreciate the fact that Vancouver is pretty much a subdivision of Hong Kong, a literal colony of China, and Asians have turned the city into a playground for real estate speculation Vancouver's high ranking makes sense.  When you can't tell the difference between a crack shack or a mansion you get the feeling that the market is out of whack.

Here in Toronto it's no different as average house prices rise above $600,000.  The sky line is littered with cranes erecting condos to supply an over-supplied condo market giving Toronto the lead in high-rise development on the continent.  As 2011 closed Toronto had 132 high-rise developments under-way in comparison to Mexico City which had 88 and New York City which had 86.  This is staggering considering there is no real demand for it.  What is driving the condo boom in Toronto is real-estate speculation encouraged by the investor-immigrant program.  Foreigners, primarily Chinese, are buying their way into Canada, and for their families, via condo projects.  With cheap money thanks to low interest rates they are either funding the projects themselves or are buying multiple units at a time and counting them as "investments" to fulfil their requirement for permanent residency status.  (It's a sham when you consider that once the properties are successfully flipped they get Canadian citizenship for nothing plus a song.)  These people are speculators since there is no guarantee that there will be a buyer for each of the units they're holding onto.  It is these speculators who are not only creating the supply but also providing the demand as they buy multiple condo units they have no intention of living in and no intention of holding onto for an indefinite period because they intend to flip them.  But what if there are no buyers for them?

I guess this is where immigration comes in as news of the most recent census tells us Canada's population grew primarily because of it, providing two-thirds of new citizens and giving Canada the lead among the G8 in population growth.  They have to live somewhere so it is assumed immigrants will provide the demand for new and existing housing keeping prices stable and rising, construction workers steadily employed, land developers and real estate speculators rich, and Canada's ethnic vote pandering political parties and the immigration industry happy.  It's win, win, win, everyone wins.  Why else would the reigning Conservative government keep immigration levels high during a sever economic downturn when real unemployment is in the double digits, steady well paying jobs are scarce, and precarious work is on the rise?

But that's the problem.  What jobs are immigrants doing to pay their mortgages and support Canada's real estate boom?  The stories are legion about underpaid yet highly skilled immigrants doing menial work suggesting we didn't need them here in the first place.  We know that immigrant cohorts of the past decade are faring worse than previous cohorts of earlier decades and taking a lot longer to meet Canadians at an equal economic footing, if at all, suggesting further we didn't need them here and that good paying jobs didn't exist for them.  We know that good paying jobs that supported middle class lifestyles are disappearing (ironically to countries where immigrants are coming from), that low paying precarious work is on the rise, and that income disparities between the wealthiest and the poorest are wide and getting wider.  Canada's economy is primarily a branch plant economy and one of resource extraction, finance, and public service.  You don't need the largest intake of immigrants in the world to support an economy like that.  And finance and public service (the employer of last resort) are currently experiencing job losses.  When the Canadian born and educated children of immigrants can't find suitable work how can we expect immigrants to do better?

So is Canada in a real estate bubble?  Probably, but if so will it crash or slowly deflate?  BMO hopes the latter but saying so is admitting we are in a real estate bubble.  (Also recall is was BMO that was the target of mortgage fraud with "new Canadians" being at the centre of it so take that how you want it.)  If we are in a bubble then we couldn't have gotten here without mass immigration and I think Jason Kenney is keeping immigration levels high with the hope that the real estate mess immigration got us in will help us get out of it.  But if the incomes aren't there, which I don't think they are, then I don't see how you can avoid a devaluation of the Canadian housing market.  Frankly I hope it does slowly deflate since this seems like the less painful way to do it but even so, no matter how it plays out, people are going to lose a lot of money one way or another.  When Canadians born and bred are being driven out of the housing market how well do you think immigrants are going to fare?  And if a devaluation in the housing market fails to occur one thing that cannot be denied is how immigration has made housing costs a lot more expensive for everyone and that contributes to a lower standard of living for all of us Canadians.


Anonymous said...

Right on the money!

777taxes said...

Great article! I just wanted to make one correction - "Russian" money is a drop in a bucket compared to funds flowing from Asia.
Also, the author (along with our highly paid bank analysts) misses one important point: most new immigrants are BIG tax cheaters; they just cannot imagine how they could pay almost 50% to the Big Brother. And they never did that back in their own countries. So the ratios (debt-to-income etc) provided by the Statistics Canada and other Government bodies are, let's put in mildly, pure BS. Immigrants, and specifically immigrants in Toronto and Vancouver, earn much more than they show on their tax returns. But this is what we call "underground economy" - another big topic to be addressed...

PaxCanadiana said...

most new immigrants are BIG tax cheaters

I don't know how big the issue is but tax evasion among immigrant communities is, I suspect, very significant.

I find it odd that Asians would flock to Canada's shores in such large numbers while harbouring an aversion to paying the taxes we do needed to support our Canadian society. My suspicion is they know how to get around paying taxes thus minimizing their contributions to Canada while expecting to extract as much wealth from the country for themselves.

Case in point are the many "cash businesses" like corner stores and laundry mats owned and operated by Asians. Since most of their customers use cash to make transactions they can under-report income generated by the business and therefore reducing their tax contributions.

What disgusts me is they then use tax supported programs like health care. I find the behaviour parasitic.

Habitat Wellington said...

Interesting read. Do you think it's a scenario where there is lack of education or ignorance?

PaxCanadiana said...

Interesting read. Do you think it's a scenario where there is lack of education or ignorance?

Neither. I think it's just pure greed. They know exactly what's going on but have dug themselves so deep into a pit that they have no choice but to keep digging.