Mortgage, Money and Dream – Our thoughts on Canadian Mortgage Market
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CMHC today reported that the number of multiple starts (mostly condos) was higher last month in Toronto. The builders are still hoping for a nicer future. Their predictions are generally reliable; those tend to come from more grass-root level than many other analyses.

In 2008 we saw many builders stuffed their incomplete foundation walls with hay and waited out the bad time. Many builders have the financial strength to withstand a mild to medium market correction.

Bank of Canada’s last week’s warning got attention from many as it talked about condo bubble – sort of. The problem with the blame game is that it takes our attention away from the real problem and we become busy with digging in the past.

The central bank keeps talking about demand and supply and the irony is that the sole purpose of the bank itself is to skew that very fundamental economic force. In last TREB stat we saw a 25% drop in GTA area condo re-sale. Surprisingly the prices went up by 2.5%. This is not in line with the theory of demand and supply. Therefore the inference to that law of economy is useless as the price part is synthetically bloated by the low interest rate.

Let us be practical, we all knew that this correction is coming. Now pointing fingers to ourselves or others will do little good. It is likely that a major part of the population can take a bit of belt tightening. Democracy is always about the majority voice.

If there is a price correction in condo market then who gets hurt first? Obviously the speculators. They are business minded people and understand the risk. There aren’t many speculators out there – we can only hope.

After them there will be condo owners who want to sell their condos. How many of them will have a mortgage is questionable.

After that there will be banks. As the mortgages are baked by real asset and if the prices fall then the backing is gone. The effect will take some time to reflect in their balance sheet – as they have to wait for the next renewal of mortgage term. Where they may see some immediate effect is in the bonds backed by mortgages.

Last in line are the insurers, CMHC, Genworth et. al,. Probably by that time the market will be improved.

Last but not the least – How much is the real exposure of the banks in condo market? Not all of them disclosed that stats but CIBC said that 74% (of $2.7B) of the developer loan was undrawn.

Similar story was from TD. So far TD have about $8B in un-insured condo mortgages.

Condo bubble should not be inspected with a microscope as it only helps to make it bigger than it actually is.

We all acknowledge the fact that the condos are good for environment in many ways. Modern cities should grow vertically rather than horizontally (IMHO). Unfortunately that philosophy is kind of unpopular.