# Sherry Cooper/BMO Housing Report



## andrewf (Mar 1, 2010)

She forecasts a gradual decline in house prices. I think she makes a number of good points in her report, but I'm not sure I always agree with her conclusions. It is unusual for housing bubbles to unwind gently. She also makes the case that although say 10% of homeowners are highly leveraged, these homeowners are not at a high risk of destabilizing to the market. She also downplays the fact that investment condos are cashflow negative, even at low interest rates. Personally, I suspect the prospect of years of zero or negative capital appreciation will make those specuvestors a whole lot less willing to shovel hundreds of dollars into their 'investment' property each month.

Read the report here. It's only a few pages long.


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## jamesbe (May 8, 2010)

I bought a condo 3 years ago, within the first year the market value climbed 25%. The next two years it has been perfectly flat. This is in Ottawa the only market i follow, seems like its stagnant now to me.


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## ddkay (Nov 20, 2010)

You mean the only people that can afford investment properties soon will be those that can close a deal the same day in cash?


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## drip99 (Aug 27, 2009)

andrewf said:


> She forecasts a gradual decline in house prices. I think she makes a number of good points in her report, but I'm not sure I always agree with her conclusions. It is unusual for housing bubbles to unwind gently. She also makes the case that although say 10% of homeowners are highly leveraged, these homeowners are not at a high risk of destabilizing to the market. She also downplays the fact that investment condos are cashflow negative, even at low interest rates. Personally, I suspect the prospect of years of zero or negative capital appreciation will make those specuvestors a whole lot less willing to shovel hundreds of dollars into their 'investment' property each month.
> 
> Read the report here. It's only a few pages long.


They've been saying this for the last five years..........


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## sags (May 15, 2010)

According to Garth Turner's blog, Sherry Cooper also has a 3 Million dollar home for sale in the GTA.

Her article was a response to a report by CIBC that was foreboding on the amount of debt created by home buyers. Since 2007, 80% of all debt created is in home mortgages and loans.

The report also did a micro study on individual debt, and found out that most of the increase in debt is for those with high debt to income ratios. The conclusion is that people buried in debt.........are borrowing more to service the debt and pay their bills. They are falling farther behind each month.

CMHC just announced they are bumping up against their debt ceiling of 600 Billion dollars. Lenders are using the CMHC to insure mortgages that have significant down payments...........wonder why they are doing that?

http://business.financialpost.com/2012/01/30/cmhc-backing-fewer-loans/

On BNN today, they discussed speculator condo owners in the GTA. They are renting out the condos for much less than the mortgage payments (even at super low interest rates).

It will be interesting to see how the government handles any request by CMHC to bump up their limit, given the fact the liability to the government is already onerous.

For some people, georgraphically located in bubble areas, this won't end well.

For others, who live in areas where there was no significant bubble, they may lose a little.


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## NotMe (Jan 10, 2011)

There's no conflict in her selling her personal property and saying that she expects a gradual unwinding (Anymore than there's conflict in that Garth Turner owns property and has for the last 10 years advised against purchasing it). We don't know why she's selling (divorce? grandchildren moved away?). That said, I have looked and looked at the Toronto market and for single - family homes (not condos, actual houses, especially detached houses) I can't see things slowing down that badly. And I mean Toronto, not pickering, ajax, richmond hill, or the like. I mean Toronto as in not north of even Sheppard and not condos. I look at guava and it just doesn't seem to be slwoing down and the inventory is just not there.


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## Square Root (Jan 30, 2010)

I think her argument is that very low interest rates will slow the inevitable decline. Maybe. But if rates start to rise look out.


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## andrewf (Mar 1, 2010)

CMHC is a fiasco in itself. It is run by a bunch of people from the property industry with little oversight from people who don't have a conflict of interest.

It is another fiasco that it costs the same to insure a property in Vancouver as in rural Ontario. The insurance premiums should vary by region and over time in accordance with the risk. Vancouver might not have spiked so wildly if CMHC premiums had risen (on a % basis) along with skyrocketing prices.


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## kcowan (Jul 1, 2010)

The very notion of insuring mortgages against default and having the taxpayer take the risk flies in the face of banking management. Why not stop at the limit? Why set a limit if it just gets raised when it is exceeded?


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## canadianbanks (Jun 5, 2009)

NotMe said:


> That said, I have looked and looked at the Toronto market and for single - family homes (not condos, actual houses, especially detached houses) I can't see things slowing down that badly. And I mean Toronto, not pickering, ajax, richmond hill, or the like. I mean Toronto as in not north of even Sheppard and not condos. I look at guava and it just doesn't seem to be slwoing down and the inventory is just not there.


I'm noticed the exact same thing, and everything semi-decent sells right away. The thing is that SFH in the good neigbourhoods in Toronto are not representative of the entire GTA market. The prices in many Toronto burbs may go down by 25% and this will only get rid of overvaluation compared to the city core RE.


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## Sampson (Apr 3, 2009)

This all surely is a sham.

The government could easily do a proper risk analysis of this situation in a short period of time.

The numbers quoted in all these studies are worthless.

Biases to these generalizations can easily be accounted for due to the growth of young, new homeowners. Very high debt to income levels. Doesn't mean they are at risk if the income is stable etc.

In fact, Stats can could probably even pull info on peoples careers/fields and cross-examine with the CMHC data to predict job stability, income growth etc.

A bunch of biased people releasing biased information is just plain useless for everyone except for the media.


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## andrewf (Mar 1, 2010)

Statscan takes personal privacy very seriously. There's no way they would share non-anonymized data with CMHC.

kcowan: CMHC insurance makes sense to me, because without an explicit guarantee, there is still the implicit guarantee that if there is a large increase in loan losses, the government will backstop the banks as they did in the US. The only way I could see eliminating CMHC insurance would be to force banks to carry large amounts of contingent capital that could be converted to equity in the event of a housing downturn. Given the strong credit of the Canadian government, it's also possible that society as a whole benefits from the low cost of the insurance.


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## Sampson (Apr 3, 2009)

andrewf- fair enough, but there should be plenty enough data in the CMHC stores (they do have income etc after all) to make a comprehensive study, but as you point out above, all the big players have money involved.


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## Potato (Apr 3, 2009)

andrewf said:


> It is another fiasco that it costs the same to insure a property in Vancouver as in rural Ontario. The insurance premiums should vary by region and over time in accordance with the risk. Vancouver might not have spiked so wildly if CMHC premiums had risen (on a % basis) along with skyrocketing prices.


I totally agree - a policy I've argued for myself several times (I think I sent that idea to my previous MP, I should send a letter to the new one, too). 

Not only that, but changing premiums (or availability of certain LTV thresholds) with valuations would help stabilize the markets: as valuations increase, CMHC insurance gets pared back, which takes some of the fuel from the speculation, preventing a run-away bubble in the first place; as the market cools, more and cheaper CMHC coverage becomes available, helping to bring buyers back and stabilize the works. Makes sense to me at least, though the policy makers don't seem to agree with me. Maybe I'm missing something, dunno.



andrewf;110059The only way I could see eliminating CMHC insurance would be to force banks to carry large amounts of contingent capital [/QUOTE said:


> Well that or force the homeowners to front the capital: 20% down is the rule for getting an uninsured mortgage for that reason. Take away the insurance and you have to put up 20%.
> 
> I'm not following your point about how society as a whole benefits. I'm thinking of the self-defeating nature of CMHC, but I think you may be referring to the stability of the banking sector.


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## kcowan (Jul 1, 2010)

Potato said:


> I'm not following your point about how society as a whole benefits. I'm thinking of the self-defeating nature of CMHC, but I think you may be referring to the stability of the banking sector.


It is a matter of social policy to enable young people without cash to get into home ownerships. While that works in a normal market, it superheats frothy markets. Why would any insurance company charge the same premium in Vancouver and GTA as it does in London and Regina. This is grossly unfair to homeowners in places like London and Regina. Also their rates should go up as interest rates go down because of extra defaults from rising interest rates.

CMHC needs to be run like a business!


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## andrewf (Mar 1, 2010)

CMHC insurance might also reduce systemic risk and lower cost of capital for homeowners and banks. It's all well and good so long as the moral hazard is kept in check with effective and appropriate regulation.


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## Cal (Jun 17, 2009)

kcowan said:


> CMHC needs to be run like a business!



As should most gov't/city departments....


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## Guigz (Oct 28, 2010)

Cal said:


> As should most gov't/city departments....


No!

The goal of a business is to make profits, the goal of the goverment is to provide services to the population and introduce legislation to define the rules of conduct of society. 

These differences are absolutely irreconcilable.


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## Sherlock (Apr 18, 2010)

How can I benefit from all this?


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## sags (May 15, 2010)

In a further story by the CBC, the banks have been getting CMHC insurance on mortages that exceed the 20% down payment.

This allows them to securitize the mortgages and sell them, cleaning up their balance sheet.

It would also appear to offer investors a mortgage derivative that is fully guaranteed by CMHC and the Canadian government.

I don't know what the rates of return would be, or even where to get them.

Perhaps someone can comment.


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## Square Root (Jan 30, 2010)

I believe CMHC issues mortgage bonds to the public. At least they did when I was working at the bank. These are effectively securitized insured mortgages that back medium term bonds issued by CMHC. We liked to sell our mortgages to them because it was a cheap source of funding and reduced our capital leverage requirements. They had to be insured first of course. Banks sometimes insure mortgages that have high downpayments in order to get the capital relief.


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## andrewf (Mar 1, 2010)

Well, securitized insured mortgages = government of Canada debt, or at least debt backed by the full faith and credit of the government of Canada.


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## andrewf (Mar 1, 2010)

sags said:


> In a further story by the CBC, the banks have been getting CMHC insurance on mortages that exceed the 20% down payment.
> 
> This allows them to securitize the mortgages and sell them, cleaning up their balance sheet.
> 
> ...


I think these loans are from the 'Canada Housing Trust'. XSB is loaded chockablock with these bonds. They trade at a very slight premium to government bonds, as they are backed by the government.


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## Square Root (Jan 30, 2010)

andrewf said:


> Well, securitized insured mortgages = government of Canada debt, or at least debt backed by the full faith and credit of the government of Canada.


Agree and prices/yields would reflect this. No conspiracy here.


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