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WE SHALL NEVER SURRENDER.
Canada's housing affordability problem too big for governments to solve alone: CMHC report
'The scale of the challenge is so large that the private sector must be involved'
MAJOR CRISIS IN THE MAKING
The scale of Canada’s housing affordability problem is too big for governments to solve alone, according to a new report released Monday by the Canada Mortgage and Housing Corporation.
“The scale of the challenge is so large that the private sector must be involved — governments cannot do this on their own,” the CMHC argued, suggesting solutions that vary from financial support and more construction of social and affordable housing for those with lower incomes, as well as increased supply of housing aimed at the market.
The report, authored by the agency’s deputy chief economist, Aled ab Iorwerth, cited statistics showing Canada has experienced the second-highest rate of growth in house prices among a range of developed countries over the last decade.
Since 2010, the price of housing in Canada has skyrocketed by 105 per cent — just behind New Zealand’s 111 per cent growth — the report released Monday said. By comparison, prices in the United States have grown 47 per cent over the same period.
BANKS' LEVERED RISK EXPOSURES TIGHTENS HOUSING AND RENTAL MARKETS
With Canada’s scorching-hot housing markets getting summarily cooled by the central bank’s efforts to dampen inflation, the Big Six banks will face a crucial test to their resilience, according to a new report from DBRS Morningstar. Drawing on data from Statistics Canada and the Canadian Real Estate Association, the report noted that national home prices have dropped for three straight months, with June representing the steepest monthly drop since 2005.
“Although the magnitude of the impact of monetary policy tightening on the housing market is still unclear, rising rates will continue to erode housing affordability at current price levels, further depressing demand and putting downward pressure on housing prices,” the report said. In all, this leads us to reiterate the global economic concerns/factors we reported a month ago as evidence that the Canadian Banks and the economy are also being swept under the rug by the terrible economic conditions in global housing, food, energy and interest costs.
Here is a summary of critical global factors that can be tied to the fact that the planet is reaching its limits to growth. Meaning that we have reached the tipping point that cannot be reversed with local band aid approaches. If we do not address these global factors - then the outlook for global society beyond a few more years is highly speculative, at best.
As a consequence of this variable equation, there are 50 countries now facing severe economic difficulties breeding social unrest and shortages of living essentials. As they collapse the interdependent global economy will add more countries to the list as both supply chains and currencies disappear from existence. Regional conflicts will therefore run the risk of quickly spreading as nations become desperate. to maintain civil order.
The underlying cause for all this economic decline and turmoil relates to the historic teachings of surreal and fictitious Salvadore Dali type economic theories and beliefs espoused by top schools, universities and institutions. Teachings and ideas that failed to understand that the world economy is a quantitative system with limited absolute physics-based materials and minerals available; powered by depleting finite energy reserves.
Banks more vulnerable to economic shocks due to decline of government-backed mortgage insurance, Moodys finds
Wind-down in government stimulus support expected to result in uptick in mortgage delinquencies
Canada’s big banks have become more vulnerable to losses from economic shocks after increasing exposure to red-hot real estates markets in Vancouver and Toronto at a time when the level of government-backed residential mortgage default insurance was declining, according to a new report from Moody’s Investors Service.
Another contributing factor is the winding down of COVID-19 government support programs such as the Canada Recovery Benefit, which have been keeping households solvent and helping to maintain high overall credit quality, the ratings agency said in the report to be widely released on Wednesday.
TOP ECONOMIST WARNS
' We Are In Debt Trap...'
“Our view is that there will be an uptick in residential mortgage delinquency once all support measures are exhausted,” said the report’s author Jason Mercer. “Mortgage losses will likely rise as stimulus wanes.”
The ratings agency noted that the supports including income supplements put in place to offset the economic impact of COVID-19 pandemic restrictions are disappearing at a time when fewer residential mortgages are insured.
Every month the staff members at WOODGREEN TENANTS' ASSOCIATION now awards a special tribute and recognition to one its top members/followers/readers who contributes the most to the betterment of the planet, biosphere and the human condition.
This month's winner is a well-known ambassador of goodwill and hope to all who believe in the wonders and magical powers of laughter, learning and wisdom.
Are we headed for very high energy prices? Or, are we headed for a financial system that starts falling apart? The whole economic system may change remarkably. For example, what many people thought was money, or a promised pension plan, may not really be there when the time comes to get value from it. Shelves in stores may be empty when it comes time to make a purchase.
Most people do not understand that the world economy is a physics-based system, powered by energy. If the energy is suddenly much less available, there will be a huge problem. The world economy has been powered by a rapidly growing supply of energy for over 200 years.
Figure 1. World energy consumption by fuel based on Vaclav Smil’s estimates from Energy Transitions: History, Requirements and Prospects (Appendix) together with data from BP’s 2011 Statistical Review of World Energy for 1965 and subsequent. Wind and solar are included in Biofuels.
My concern is that the current attempt to bring inflation down will lead to falling energy supply and a world economy that is rapidly changing for the worse.
Figure 2. Energy amounts for 2010 and prior equal to those in Figure 1, with a corresponding amount for 2020. Future energy for 2030, 2040 and 2050 are rough estimates based on the observation that the world is now reaching extraction limits for both coal and oil.OH MY! WHAT IF WE RUN OUT OF OIL?
Everything I can see says that world leaders are not able to face the possibility that the world is already running seriously short of oil and coal. Future supplies are likely to be much lower, and much more expensive, if they are available at all. Other energy types (including natural gas, nuclear, hydroelectric, wind and solar) are simply add-ons to a system built using coal and oil.
Current world leaders do not realize that the energy situation is very much like the water level in Lake Mead. Looking at it from the top, there still seems to be water there but, in fact, the required depth is lacking. Water for watering crops will soon be exhausted. The world’s energy supply is not a whole lot different. The supposedly proven reserves do not tell us anything at all. It is the amount of fossil fuels that can be affordably extracted that is important. We have already exceeded the amount that can be affordably extracted. If central banks cut back future energy supplies using higher interest rates, we can expect to encounter major problems going forward.
THIS ANALOGY TO LAKE MEAD IS BEYOND BELIEF
In this post, I will try to explain some of the issues involved.
[1] The amount of energy the economy requires depends very much on population. The greater the world population, the more oil is needed for food production and transportation. Non-oil energy is a bit more flexible in quantity than oil, but the total quantity of energy per capita needs to keep rising to prevent very adverse outcomes.
[2] Recently published data through 2021 indicates that energy consumption growth is not keeping up with population growth, similar to the situation of the 1930s. This says that the economy is doing poorly. Supply lines are broken; most jobs don’t pay well; many goods that normally would be available aren’t available.
[3] We can look back and see how rising interest rates were used to slow the world economy in the 2004 to 2006 period, and how different the economic situation was then compared to now. Even with the rapid growth the economy was making at the time of the interest rates increases, the result was still a deep recession in 2008-2009.
[4] The trend in fossil fuel supplies is concerning. Both oil and coal are past peak, on a per capita basis. World coal supply has been lagging population growth since at least 2011. While natural gas production is rising, the price tends to be high and the cost of transport is very high.
[5] Governments and academic institutions have gone out of their way to avoid telling the world how important energy of the right types and in the right quantities is to the economy.
[6] Once the economy starts heading downward, it is not clear that the economy can ever “catch itself” and start back on an upward path again, even for a short while.
Christmas lights are viewed from the Galeries Lafayette department store, with the Eiffel Tower in the background, amid an energy crunch, where in public and private buildings people are encouraged to save on their electricity consumption, in Paris, France, December 7, 2022
European house prices may be on the verge of declining as the economic environment deteriorates and the commercial real estate sector is also at risk, the European Systemic Risk Board, the EU's financial risk watchdog, said on Thursday."The real estate cycle in several EU countries might be reaching a turning point," the ESRB said in a statement."Transaction data and forward-looking household survey responses showing a decline in intentions to buy or build a house suggested that the probability of prices declining in the near future was rising." - Reuters, Dec, 2022
So what is behind all this global financial turmoil? The gist of it all ties back to the fact that interest rates were too low for too long. Ignoring the real economy and its salient factors, we are feeling the effects of the monetary easing that was necessary to bailout the BIG banks and financial system back in 2008-9. Under the hubris and premise of - Quantitative Easing - that was conjured up by Ben Bernanke - the Federal Reserve Chairman - interest rates were permitted to drift to historic lows of 1% or less. Indeed, at times they were even recorded and provided at negative rates at the Fed's borrowing window to help save the BIG Banks? Meaning they were actually being paid to borrow money???
As a consequence, record levels of currency were being printed by the Treasury building up an inflationary monster that loomed in the background ready to pounce on unsuspecting economies and financial markets. Inevitably it would be woken to wreak havoc on all of us; many will personally lose everything, while economies will and are being severely disabled under its battering assaults. Lebanon,Sri Lanka, Argentina, and even the UK are a few examples of the terrible economic, social and human outcomes.
At this point, however, it serves little purpose to debate the merits of whether the monetary policies chosen were appropriate. It is what we now have to deal with - no matter what. What is important to understand is the Mathematical Trap that these policies created and what will be their potentially devastating outcomes - to the point of collapsing a vast number of national currencies and economies. Nonetheless, while the ravaging domino effect upon poor and developing countries is beyond determination, it will lead undoubtedly to further geo-polictical tensions and conflict.
So what is the Mathematical Trap? Using simple mathematics, assume you put a 100% mortgage on a property valued at $100,000 with an interest rate of 1%. Over 12 month you would pay interest totaling $1,000. Suddenly interest rates spike to 2% and now one will have to pay $2,000. A problem occurs because buyers can still only afford to pay $1,000 and thus the property price needs to be adjusted downwards by 50%; so any potential buyers can afford to carry the property mortgage at the previous rates.. Fortunately, mortgage interest rates are not all immediately adjusted and the problem is deferred to the end of their respective mortgage terms.
To conclude, as rates go up: asset values will decline in accordance with this axiomatic proportionate algebra . This deflationary impact will affect all primary asset classes, and moreover explains the sizable decline in the value of stocks, bonds, currencies and private equity financings witnessed over the past nine months. Highly levered nations, companies and consumers will also fail under the stresses of higher interest rates lasting years.
Still, there is no utter guarantee such higher rates can cure an inflation caused by the Real Economy's trend to the lower production of goods and services per capita as global resources are rapidly depleted. That said, what's in store for the future? Well, if rates continue to rise; then asset values will decline sharply while nations, businesses and consumers will fail and default on their borrowings. Hence, leading to; as both Buffet and Munger predict, an Economic Depression much worse than the 1930's.
Unfortunately, in all probability, the writing is clearly on the wall - but it is not a good story to either read or watch.
Terrance A McNeil
Executive Director
BERKSHIRE HATHAWAY INC.
Warren and Charlie relaxing.
What do you think? No arguments in 62 years.
December 10, 2022
EU Watchdog Warns of Real Estate Risk, Up To 90% Overvalued
A global real estate bubble was brewing, and regulators are only now catching onto why it’s an issue. This week notes from the General Board of the European Systemic Risk Board (ESRB) annual meeting were released. The notes reveal members are concerned that inflated home prices present a systemic risk to the EU economy. Steep valuations and weak demand have the Board concerned that prices will begin falling soon, and it’s a long way down to fundamentals.
BILLIONAIRE INVESTOR RAY DALIO ISSUES DIRE WARNING
AFFECTING ALL GLOBAL ASSET CLASSES
The EU’s Financial Watchdog Sees Housing As A Systemic Risk
The General Board recently discussed the systemic risk that could result from a home price correction. “Members saw increasing evidence that the real estate cycle in several EU countries might be reaching a turning point because of the pronounced rise in mortgage lending rates since the beginning of the year and the deterioration in the macroeconomic outlook,” explained the ESRB.
Steep prices and rising financing costs have households hitting the pause button on housing. The Board cited falling transactions, and household survey responses that show falling intentions to buy or build a home. “[this]… suggested that the probability of prices declining in the near future was rising,” the Board warns.
EU Real Estate Markets Are Overvalued By Up To 90%
How overvalued is EU real estate? It depends on the model and country, but the Board separately provided range data. At the high end of overvaluation is Luxembourg, which their model shows can be up to 90% overvalued. Even their more elaborate demand-based model pegs the country at nearly 40% overvalued, which is a high “conservative” estimate for any market.
FED WILL CONTINUE TO RAISE RATES AND FIGHT INFLATION
EU Over/Undervaluation of Residential Real Estate
The over/undervaluation of national residential real estate markets across the EU.
Source: European Systemic Risk Board.
Larger EU economies with significant overvaluations are likely to present the biggest risks. The most concerning overvaluations in the group are Germany (~15-50%), France (~10-30%), Netherlands (~15-30%), and Sweden (~25-70%). Since these countries also represent significant economies when it comes to output, the issue of overleveraged households is compounded for the whole region.
The global cheap credit bubble is quickly unwinding, and it seems like regulators everywhere are concerned. That’s a good start, since it means they’re looking for ways to address the issue. However, the detachment is so large, and the growth so rapid it’ll be difficult to unwind home price inflation without any losers. Either inflated prices are maintained, meaning first-time buyers will have to sacrifice consumption, and the economic benefits to leverage up, or real estate owners will have to take a substantial loss.
