Welcome to the second, less frequently-posted decade of RevMod.

Contact me at revmod AT gmail.

Wednesday, February 24, 2010

Dear Olympic attendees who got curling tickets as part of a package instead of events you really wanted to go to:

I'm sure you don't know any better, but this is unbelievably rude. So is this. Would you scream and yell at golfers about to take a swing, or as the first article suggests, ring a cowbell through a figure skating routine?

It's partially the venue's fault for not having someone holding up a "quiet, please" sign. Although if it turns out there's an electronic board that flashes "Make Some Noise", I'm going to have some strong words for VANOC.

Sunday, February 21, 2010

A true test to see if Danielle Smith is as savvy as everyone says - will she say "Thanks anyway"?

My one-time M.P., crazy-ass Myron Thompson, is now sitting on a Wild Rose Alliance constituency association board. So, lucky them.

Friday, February 19, 2010

This has the potential to be interesting

In the face of the Wild Rose Alliance becoming a force in Alberta politics, and watching neither the provincial Liberals nor the NDP (who I continue to dutifully belong to and donate to, barring a better alternative) show any desire to renew themselves after taking an election pounding that was at least partially self-inflicted, I'm ready to hear other ideas.

So is the Alberta Party.

(Thanks to Dave Cournoyer for the heads-up about the twists and turns in the Renew Alberta saga.)

Thursday, February 18, 2010


I'm becoming increasingly concerned about the changes Flaherty announced on Tuesday, so I've been crunching some numbers. I posted large swaths of this in the Edmonton Real Estate blog comments section this morning, but I thought it bore repeating here:

I'm more than a little concerned that the delay before the change will create a bubble all its own, quite aside from any debate about a current bubble. Surely there are some first-time buyers out there who are going to rush in while they can still get more money/debt based on the variable rate. And I'm also sure there are lenders who will happily give them those loans calculated at absurd variable rates while they still can.

At ING's posted variable rate of 1.95%, according to their own calculator:

On a family income of $50,000, they'll lend someone $375,000 with payments of $1233 a month. At their five year fixed rate (still a low 3.89%), payments go up to $1629. At a still historically below-average rate of 6%, this family will now be paying $2120/month, over half of their gross income, on this mortgage.

$100,000 gets me $780,000 with payments of $2567/month. 3.89% raises that to $3388. And 6% takes us to $4409 - once again, over half their gross income, so God help them if one of them goes on maternity leave or long-term disability.

The banks will do this because they have no skin in the game - they're securitising the debt the same way American banks did, and it's all guarenteed by you and I through the CMHC anyway.

So quite aside from any bubble I might currently see us in, we're going to have a hard landing when this pool of mad-rush driven buyers dries up, and another when the rates go up, as they inevitably must.

Tuesday, February 16, 2010


Jim Flaherty has announced a few changes to CMHC rules in the hopes of deflating a bubble that he insists doesn't exist.

Some people may chalk up the timing of this announcement as the government wanting it to be ignored in the face of Olympic fever. I think it shows how quickly we've gone from zero to consensus that Canadians are living with a housing bubble, and that the government wants to curb that talk as quickly as possible, without curbing the market.

Unfortunately, the talk is due to an actual housing bubble, and the market has to curb to end it. Flaherty's changes will only force the people closest to the edge to take a step back, and not much of a step at that. I think we'll see more at the budget, if the talk doesn't slow between now and then.

Edited to add: The CBC article linked above keeps changing as details emerge and reaction is considered. One reaction at the end of the article almost knocked me out of my chair:
"This is a little bit late in telling Canadians we need to be more cautious in taking out a mortgage," Royal Bank chief economist Patricia Croft said in reaction to Flaherty's announcement.

Though she stopped short of calling Canadian real estate in bubble territory already, she said the April 19 date for implementation is actually likely to cause more short-term stimulation of the market, as people scramble to get in under the deadline.

"If you wanted to buy a house, wouldn't you now do it before April?" Croft asked. "It's even more evidence that house prices are going to cool down later this year."
When you hear a banker, for whom profits come from issuing mortgages and securitizing the debt, tell you the market is inflated, run for the hills. Run for your lives. That, or Patrica Croft deserves a medal for honesty in the face of her employer's short-term self-interest. Or, she's hoping to have some deflationary effect herself, better sooner than later in the eyes of even the financial industry.

The last actually seems most likely. It's entirely likely that banks have looked at the wreckage wreaked by the housing bubble and burst in the United States, and would just as soon avoid the worst of that, even at the expense of a few short-term dollars. Consider it a side benefit of having a financial system operated by a tiny oligarchy - they have the luxury of looking beyond the next quarter's profits.

Monday, February 15, 2010

Before the market tanks...

... it's fun to celebrate a little something. Congratulations to Alexandre Bilodeau on Canadian gold!

Tuesday, February 09, 2010

You read it here first

The Wall Street Journal yesterday asks interesting questions about a Canadian housing bubble.

Monday, February 08, 2010

Canadian Economy Death Watch, part 2

In the United States, the inevitable failure of sub-prime lending threatened to pull down banks and insurance companies directly, and the ensuing recession managed to bring the car industry to the brink. In Canada, our banks may be huge sub-prime lenders, but backed by the government via the CMHC, the bubble looks isolated from the rest of the economy (so long as the massive extra government debt paying off the investors in securitized mortgages isn't considered part of "the economy", even though it's inevitable that it'll result in increased taxes for reduced program spending). When it all spins apart, will only the foreclosed-upon, and the Canadian taxpayer, carry the burden?

Well, the construction industry would certainly struggle - no one will be interested in buying a new home in a deflationary market. That would trickle down into the rest of the economy. So would layoffs or wage rollbacks in the public sector, a possible step toward balancing a CMHC-caused deficit. (Never mind that public sector workers had no part in causing the problem, unless that public-sector worker is Jim Flaherty.)

A few extra mortgage defaults, caused by wage cuts or job losses, will add to the snowball. Alberta is already dealing with the highest rate of mortgages in arrears in the country, adding a hundred a month from under a thousand for over two years now, breaking 3500 in November (the PDF really has to be downloaded to be readable). Many more motivated house sellers makes for a weak and even deflationary housing market. Lather, rinse, repeat. Spread the recession around to the retailers of everything from soup to Nutz.

Short of stocking up on gold and guns, and hiding in your bunker trading recipes for squirrel stew, what can we do, individually and collectively, to protect ourselves from this? I don't pose the question intending to answer it. I also don't pose it rhetorically. I'll be spending the coming days and weeks asking some very smart people. I'll let you know if the answers are useful. Do I need to point out that I think selling your real estate, particularly property you don't actually live in, particularly in the most overheated markets, would be an important step?

Thursday, February 04, 2010


So, Mrs. RevMod and I have been doing some househunting, and we were both shocked at the size of mortgage we've been pre-approved for. We've also been wondering why the housing market in Canada hasn't suffered the massive deflation of the American market. Even as we've gotten closer to buying, we've been researching the answers to these questions, and we've reached the point of stepping back from the precipice. Allow me to share what I've discovered.

Former Tory and eventual independent MP Garth Turner is the author of Going Rouge Greater Fool, a book and weblog dedicated to tracking the Canadian housing market as we rush toward what he sees as its inevitable decline. Now, my politics certainly don't match his, but he's spent a lot of time thinknig about the housing market, so he can't be ignored. Further, unlike almost every one of the real estate "experts" that are quoted in the newspaper (presidents of local real estate marketing organizations, bankers, CMHC or government representatives), he doesn't have any particular self-interest (beyond what I expect are investments that reflect his view of the future). He, and others I've found through reading him, have pointed out some problems on the horizon for Canadian real estate:

- Wages have been stagnant through the entire rise of the housing market since the turn of the century, significantly raising the ratio that measures affordability (median house price divided by the median household income) People have been assuming greater amounts of debt to buy these homes, because debt has been cheap and easy throughout the period. They're willing to take on that greater debt because they believed through the boom that geometrically increasing prices on real estate would continue in perpetuity (a falsehood made obvious in the last couple of years), and they believe now that there's something unique about the Canadian market that shelters us from the real estate devaluation that's happened so sharply in the United States and elsewhere (resource-based economy, conservative banking practices, magical Canadian pixie dust).

- Far from being conservative, our banks are lending out absurd amounts of money to most anyone who asks, and then securitizing the debt. Those of you who have paid any attention at all to the American real estate meltdown will recognize this practice - banks would issue mortgages to people at attractive teaser rates, with absolutely no concern about the ability of the borrower to pay it back. They then would repapckage the loans into mortgage-backed securities, to sell to investors who were more than happy to buy a security that was backed by the solid Fannie Mae and Freddie Mac. The banks would then have to issue more mortgages to continue to have debt to package into securities.

The reputation was that these loans were only issued to people on the edge, people who shouldn't have been issued credit cards, much less mortgages, but as we've since discovered, many many people in all sorts of income classes were issued too much debt, and the availability of this seemingly easy money had a rapid inflationary effect on housing prices. That led to the speculative market in housing, which led to overconstruction, and all of this continued to feed prices, so long as no one got off the merry-go-round. But of course, perpetual motion machines don't exist in nature, and neither do they exist in a real economy.

Let me say this again, because it's important. Your bank will lend you money - more than you think, because they'll sell the debt to someone else. The debt is guaranteed by CMHC, an arm of the government, which means when the housing bubble deflates, we're all going to be on the hook as taxpayers to make sure the investors continue to get paid. The bank, therefore has no interest in screening you to make sure you can pay back the loan - they have no skin in the game. This is the very recipe that cooked up a huge bubble in the American housing market.

- The government may see the bubble coming, but it has vey few good choices. If they make outward noises that it's a bubble, they ignite the selling that'll pop it. That goes for more subtle signs that they know it's a bubble, like tightening the CMHC qualifications. They could raise the prime interest rate, but that can also be seen as a warning about the housing market, and it comes with a second problem - a higher interest rate slows growth, which would be a good policy to deal with housing, but a lousy idea in the rest of the economy. The point is that beyond a certain threshold, there's no good way to slowly let air out of the bubble. Really, the government can only leave it be and attempt to quietly prepare and even hedge for the worst (buying up the mortgage-backed securities now might be cheaper than paying them out later, for example), or they can try to keep the bubble inflating in the hopes of passing the problem on to the next government. That's obviously an irresponsible choice, but knowing how Prime Minister Prorougey McAutocrat has behaved thus far, it's the most likely choice.

So, to conclude, Mrs. RevMod and I have decided that this may be the wrong time to buy, that Canada's real estate market isn't immune to the trouble that incinerated the American market, and that it'll do no harm to rent a while longer while we watch from the sidelines and perhaps get other debts out of our way while the interest rate is still so low.

As a postscript, I want to link to the Edmonton Real Estate blog as well. The authors are Edmonton realtors, and don't have the same pessimistic view I have of the long term prospects, but they also don't seem to have the same starry-eyed optimism I've heard from every other realtor or sales centre associate I've spoken to over the last few months. It's worth a read on occasion if you're interested in more detail and in the perspective of thoughtful people deeply involved in this market.

Update, Sunday evening: The Globe and Mail's cover story this weekend uses the dreaded word "bubble", but only to deny one exists. The alarm bells started going off for me reading the sidebar:
Residential mortgage debt as a percentage of personal disposable income has been rising since the early 1980s.

But thanks to lower mortgage rates, the debt service ratio - a measure of how well Canadians can afford their monthly interest payments - was trending downwards until a couple years ago.

And since the banks losses on mortgages in Canada are so small as to be insignificant, they have steadily continued to dole out more in mortgages each and every year.
To recap this with a slightly different spin, for the last couple of years Canadians have taken on decreasingly affordable mortgages, even while interest rates are at historic lows. The government's default insurance exposure is likewise increasing. And, to do the math, on a half-million dollar home, the 5% down payment is $25,000, but a 3.15% CMHC insurance premium is added to the mortgage, making the debt nearly $490,000. It will take very little downward pressure to leave these homeowners with more debt than house, which encourages defaults, which begins the dominos tumbling. I say again, we're headed for a very uncertain and scary time, and Jim Flaherty can try to cool the market come budget time by raising the bar for entry, or he can stay on the sidelines while an entirely predictable crash takes a lot of Canadian futures with it.