Canadian Mortgage Changes announced … expect more downside risk.

Canadian Government announces new rules for mortgages in Canada. The headlines all scream “this will keep values up” and “we are doing this to protect Canadian housing”. This double-speak is truly worthy of an Orwellian nightmare.

The Canada Mortgage and Housing Corporation (CMHC) is very much like a combined Fannie Mae and Freddy Mac all in one. This means that the Canadian taxpayers have been on the hook for HUGE downside risks. The Canadian Government is simply pushing more risk to the bankers. The 85% maximum combined with a shorter 30 year amortization maximum will cut out the marginal homeowners and the 5 year qualification requirements will smash the investor speculators.

Expect a price drop now.

Moreover the numbers of people who will examine the situation of paying MORE than their home is worth to the bankers that will happily continue to accept such payments is likely to increase. Why pay for a mortgage that is worth 110% of the homes value? Do you think that the value will return soon? How about ‘in time’ for the refinancing?

The long-term view for house prices is at best ‘stable’, more likely it will drop.

Canadian Residential Home Prices 1988-2010

Canadian Residential Home Prices 1988-2010

This chart shows house prices since the last ‘bubble’ in 1988. Any Canadian investor or home owner that recalls that time period, where it took 7 years to just get back even may want to reconsider getting into any real estate deals right now. The ‘toppiness’ of this market is displaying a classic *Double Top* from a technical analysis point of view. There are some who are saying that this market top, when it drops (not if), will take up to 17 years to recover … I argue if ever!

The demographics are what is at the heart of this fall off a cliff … once the boomers move out from their 3-5 bedroom homes there are at best only 1/2 as many people even in a condition to want to buy those homes. Pretty location, great work opportunities and overall conditions of life will mean FAR MORE in the future than any historical trend line.

So if you discount that argument, simply use technical analysis, the double top indicates the top, the bottom in 1988, this means that a 33% drop is to be expected. However since no market will perform exactly on the line the drop will most likely be 60% or more. With a price drop like that NO, I repeat NO banks will be taking on risk of loans like that. Nor does CMHC want to take on the backstopping of those anticipated losses.

For all those mortgage brokers in Canada that are still shouting “we are different” in Canada, please make a call to your US counterparts and ask them about the lending conditions change in 2008, if you can find any still in the business.

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