Democracy Gone Astray

Democracy, being a human construct, needs to be thought of as directionality rather than an object. As such, to understand it requires not so much a description of existing structures and/or other related phenomena but a declaration of intentionality.
This blog aims at creating labeled lists of published infringements of such intentionality, of points in time where democracy strays from its intended directionality. In addition to outright infringements, this blog also collects important contemporary information and/or discussions that impact our socio-political landscape.

All the posts here were published in the electronic media – main-stream as well as fringe, and maintain links to the original texts.

[NOTE: Due to changes I haven't caught on time in the blogging software, all of the 'Original Article' links were nullified between September 11, 2012 and December 11, 2012. My apologies.]

Saturday, August 25, 2012

Canada Housing Market: Bubble Could Be Poised To Burst, According To Report

As debate about the stability of the Canadian housing market continues to swirl, a new report has come down firmly on the side of the bubble believers.

Rising debt levels, falling personal savings rates and house prices that have become detached from rents signal that a significant correction is on its way, according to Euro Pacific Canada, the Toronto-based branch of the global brokerage headed by Peter Schiff, who gained notoriety for predicting the U.S. housing meltdown. (Schiff also served as economic consultant the the failed 2008 presidential campaign of libertarian-leaning Ron Paul.)

Despite the recent efforts of regulators to cool the Canadian housing market, the report, released on Thursday, identifies several risk factors that bear a frightening resemblance to the factors that preceded the mortgage meltdown south of the border.

In addition to high levels of household debt, the report draws attention to the recent growth in Home Equity Lines of Credit (HELOCs) as a particular concern. Secured against the equity of a borrower’s home and made more attractive by bargain basement interest rates, these loans have exploded in popularity in recent years, up 170 per cent since 2001, the report notes.

While Canadian banks have tightened the strings on risky mortgages, they are continuing to stand behind HELOCs “even after this type of lending helped inflate the U.S. housing bubble,” the report warns.

According to Dan Simon, an investment consultant for Euro Pacific Canada, HELOCs are akin to “using your home a an ATM.” But the real issue, he said, is that “What most people tend to do with the money they pull out of their home is buy consumer-related goods.”

“In essence, it’s increasing consumer debt levels, and that’s what we see as a significant problem in Canada — the rising consumer debt levels,” he said.

The reason for this concern, he says, is what less home equity — and more debt — would mean in the event of a sizeable drop in house prices, which have continued to climb even as the world economy remains on shaky footing.

“Given the extreme run-up in housing prices, there’s a real chance that housing prices can fall back significantly in Canada. That would wipe out the equity people have in their homes,” he said.

After warning about the dangers of HELOCs, The Office of the Superintendent of Financial Institutions said in June that it plans to limit the maximum loan-to-value to 65 per cent, down from 80 per cent.

But Simon equates this and other recent regulatory moves with “trying to close the barn door after the cattle’s gotten out.”

“I definitely feel that there will be a correction in the Canadian housing market,” he said.

Simon predicts that average prices could drop by between 20 and 30 per cent — pointing to the disconnect between house prices and rents in major Canadian cities as a prime indicator of this coming crash.

Based on the recent experience in the U.S., where house prices spiked way above rents at the height of the housing bubble, “We expect that there would be some sort of correction that would bring the housing prices here more in line with rents,” he said.

Not all economists are convinced that these indicators foretell such a dramatic slide, however.

Aron Gampel, deputy chief economist for Scotiabank says regulators are taking strides to avoid a significant correction in housing prices, which could not occur without a significant “trigger,” such as a rapid rise in interest rates, an unlikely scenario.

“The U.S. correction, and ones we’ve seen in other countries occurred during a recession. It was triggered by a financial crisis when the market was already in correction mode,” he said.

“We still have fairly vibrant housing markets here, because the economy is still moving ahead, and we’re still adding jobs, we’re still generating income gains. So I don’t see signs here to expect a significant correction of that magnitude.”

Gampel predicts that prices will come off by about 10 per cent over the next few years, driven by the erosion in affordability in markets like Vancouver and Toronto.

Original Article
Source: huffington post
Author:  Rachel Mendleson

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