# Great Recession = Canada real estate ?



## sags (May 15, 2010)

Some key points from analysis by Muddy Waters on the Great Recession, sounds so eerily similar to Canada's current situation.

_During the “Consumer Age” period from the early 1980s through 2007, much of U.S. demand growth was generated by the rapid growth of consumer spending financed by unprecedented increases in household debt. The unsustainable rise in debt set the stage for the Great Recession.

The unprecedented borrowing of American households was facilitated by innovations in mortgage lending that fueled a bubble in home prices. Rising home prices generated more home equity which allowed even more borrowing.

The housing bubble burst when interest rates rose and refinancing stalled, forcing more homeowners to try to sell. Home prices began to fall. Lenders began to fear default and cut off credit. With refinancing greatly curtailed and home prices declining, over-extended homeowners began to default on their mortgages.

The resulting financial panic caused demand for consumption and new houses to collapse, the trigger of the Great Recession._

https://muddywatermacro.wustl.edu/node/92


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## carverman (Nov 8, 2010)

sags said:


> Some key points from *analysis by Muddy Waters* on the Great Recession, sounds so eerily similar to Canada's current situation.


that's Muddy Water macro....Muddy Waters was a blues artist, so at first glance I was puzzled what he would be doing with a economic analysis of what factors and causes lead up to a recession. 




> The unprecedented borrowing of American households was facilitated by innovations in mortgage lending that fueled a bubble in home prices. Rising home prices generated more home equity which allowed even more borrowing.


That is now happening in larger Canadian cities as well. Vancouver and Toronto to name a couple. With rising house prices fueled by low mortgage rates, consumer borrowing is on the increase, hence the new age of using the equity in the rising value of your home to borrow and pay monthly what you can afford..presumably that is as long as you have a good paying job.
Lose your job and that's it...you have to sell your home or find some other source of income to pay those home equity loans as well as any outstanding mortgages. 

Those "easy credit" TV ads..they make it sound so easy..." own your own home? your approved! in 24 hrs or less",
use your home's rising market value as collateral to borrow even more..that new car, the vacation that you've always dreamed up, the big "fishing boat'..or other things that you couldn't normally afford on your regular salary. That's the upside.....

Now for the downside...a recession starts..companies downsize, you may be one of the ones laid off if you don't have the seniority or working skills still required in recessionary times.

Or possibly the central bank decides to raise it's interest rates, and the charter banks follow suit to raise their rates on mortgage term renewals..now the financially tight operating constraints you had already is no longer sustainable..that extra $100 on a $1500 a month or more mortgage payment is no longer affordable.
Your broke with no savings to back you up. 

Somethings got to give! All of a sudden there is even more pressure on the consumer taking advantage of the times when easy access to credit resulted in over the top consumer spending.... in other words, living beyond your means.
Nobody these days saves for things like our parents used to do, nobody wants to wait for 3 to 5 years to
save for something..they just use easy credit to get instant gratification and pay through the nose..later. 

It will happen, it's just a question of when ...and what triggers the downturn in the economy. 



> The housing bubble burst when interest rates rose and refinancing stalled, f*orcing more homeowners to try to sell. Home prices began to fall. *Lenders began to fear default and cut off credit. With refinancing greatly curtailed and home prices declining, over-extended homeowners began to default on their mortgages.
> 
> The resulting financial panic caused demand for consumption and new houses to collapse, the trigger of the Great Recession.


It happend in Toronto in the 80s..and who's to say it can't happen again. What's currentlng stopping it from happening again?


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## Just a Guy (Mar 27, 2012)

The sad thing about this scenario was that the interest rates stayed low, allowing other people to buy the same properties at the bottom, then resell them a few years later at a higher price. The cycle continues even today and now the prices in the USA have almost recovered to where they were pre-crash. 

It was kind of a wealth transfer in reverse. Those who couldn't afford it originally overpaid and were screwed out of their homes. These were purchased by more wealthy people at a discount, then later resold to people who can barely afford them for a profit. Meanwhile the banks were paid back their losses by the government...

It's the "new" money cycle. Your tax dollar at work, stimulating the economy.


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## birdman (Feb 12, 2013)

I know those days well but the missing ingredient today is the runaway inflation that existed in the mid 80's. It was the inflation which led to the higher interest rates (prime rate hit 22.75%). So, why do we have low inflation? My best guess is that many consumer products (TV's, furniture, household goods, etc) are less expensive due to technology and cheap prices for goods imported from overseas.


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## mordko (Jan 23, 2016)

Inflation has been on a downward trend because of:

- Cheap imports (Mexican farm workers, Chinese factory workers)
- Depreciating oil
- Struggling economy.

Guess what? 
- Protectionism and kicking Mexicans out of the US will make imports more expensive.
- Oil is getting more expensive.
- The economic cycle is finally on the upswing (in the US).


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## Mortgage u/w (Feb 6, 2014)

Really???


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## sags (May 15, 2010)

frase said:


> I know those days well but the missing ingredient today is the runaway inflation that existed in the mid 80's. It was the inflation which led to the higher interest rates (prime rate hit 22.75%). So, why do we have low inflation? My best guess is that many consumer products (TV's, furniture, household goods, etc) are less expensive due to technology and cheap prices for goods imported from overseas.


That is a good point. 

A counter point might be that we didn't feel the "need" for many of the goods that are cheaper these days........way back then.

I pay a ridiculous Rogers cable bill. My dad had an antennae on the side of the house and a home phone.

So are we saving money with cheaper imports or just buying more "stuff" with the savings ?

My thought is that the "equipment" is cheaper to buy, but requires expensive hookups to operate it.

Furniture is cheaper, but doesn't last 50 years anymore. Quality still costs a lot.

Day to day.......cheaper, but long term.....I am not so sure.


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## Nelley (Aug 14, 2016)

mordko said:


> Inflation has been on a downward trend because of:
> 
> - Cheap imports (Mexican farm workers, Chinese factory workers)
> - Depreciating oil
> ...


By dramatically underweighting health care, education and taxation they have arrived at a low inflation number-which is another farce for the stupid sheep to swallow.


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## Just a Guy (Mar 27, 2012)

Here's an article that outlines the consequences of a rate hike...

http://www.theglobeandmail.com/glob...-homeowners/article33324145/?campaign_id=A100


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## tavogl (Oct 1, 2014)

Read this article, the situation isn't looking good

Canadians keep digging themselves deeper into debt
http://www.theglobeandmail.com/report-on-business/economy/canadas-household-debt-rises-in-third-quarter/article33318488/?reqid=0cd833cb-b457-4086-8ee6-8b322f295225


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## lonewolf :) (Sep 13, 2016)

Deflation over the last few thousand years is still intact. It would have taken a lot of man hours of work to buy the steel for a sword years ago compared to today.


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## sags (May 15, 2010)

Debt isn't so bad when the underlying assets are holding up in value, but when the assets fall sharply in value and leave unsecured debt.....we have a problem Houston.

It remains to be seen what Canadian banks would do if home values fall well below the mortgage balance.

In the US, there was a rush to foreclosure which was a big mistake. Millions of empty homes require maintenance and upkeep and their value drops with the deterioration of the homes. Banks and mortgage lenders aren't set up to be landlords or property managers. Many empty homes were stripped of anything of value by scavengers. It created a downward cycle as neighborhoods became war zones and other homes in the area had their value stripped away.

One would hope the Canadian banks would have learned from the US mistakes and allow people to remain in their homes.

Banks have a duty to their shareholders and CMHC regulations require they foreclose and try to sell the homes for market value.

The Canadian government might have to step in with legislation in such a scenario.


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## Just a Guy (Mar 27, 2012)

Unfortunately, there is no real downside for the bank. While true they aren't set up to manage the properties, the US tax payer ultimately bailed them out even when their cmhc equivalents (fanny and Freddy) went bust. While some homeowners lost everything, they were "only those who shouldn't have had mortgages in the first place". The middle and upper class, who bought up the assets at a discount, aren't going to complain since they made a small killing, and prices, in general, recovered because the interest rates remained low.

I expect the same thing would happen in Canada, since a bank failure would affect all Canadians, not just mortgage holders. Of course, next time, the interest rates won't remain low, so the end results will be much uglier. People will demand the government try to regulate things so this "unfettered greed" can't happen again...in the end though, nothing will really change. The banks will survive and prosper, some people will lose everything, some will profit, and everything should return to the historical averages. 

You can't legislate out stupidity, not that people want it when they are making money anyway. Besides, people always find ways around legislation anyway, especially when money is on the line. 

The pendulum may not always swing out as far, but it does eventually return to the middle.


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## mordko (Jan 23, 2016)

Bankruptcy laws in the US are very lenient. People walked away from their houses when the values dropped subsequently below mortgages even if they could pay the interest. I personally know professionals who did this trick. They basically made 100k overnight by going bankrupt, although they did lose the original downpayment. Their credit rating was hurt for 5 years but even so local banks would still lend to them at a normal rate.

I understand in Canada consequences for going bankrupt are quite a bit more serious. This makes the US scenario somewhat less likely, at least in terms of magnitude.


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