Canada faces ‘significant risks’ from housing, trade tensions, says IMF
A pretty good read of an article can be found by going here: http://www.cbc.ca/news/business/canada-imf-tariffs-trade-1.4690904
With all the noise Trump has caused, the Canadians mortgage and credit bubble hasn’t been making the news, I’m hoping that Trump is able to shake Canadians to their cores, so we never get put in this situation again but that’s only a wish and I’m only one person. Canada’s economy is in a different type of trouble, in terms, people can understand the Candian people that have been financially responsible have nothing to worry about if the Canadian economy crashes or collapses, it’s the irresponsible Canadians that need to worry about this.
However, there’s one thing I hate to mention if the wrong politician is in power when the Canadian economy crashes our economic problems will be prolonged. For example, the main problem with the Canadian economy is the regulations. The government in Canada has gotten too large. You know what’s interesting is one of the freest markets on planet earth is, Hong Kong, however the one area where the Hong Kong government sticks its head into is the real estate market and guess what the end result to this is? Hong Kong has a housing problem.
Think about this for a moment the Hong Kong Government doesn’t run deficits, yet it could cost their average resident up to $1 million dollars for 500 square foot apartment. In your mind, you’d assume that this is because Hong Kong has a limited amount of land right? No, you’re wrong the Hong Kong government limits the amount of land that can be developed, which leads to higher prices(lack of supply). In Canada, our situation is a bit different, in Canada we’ve created a system that incentivizes developers to build condos or housing that is not in demand. Toronto and Vancouver aren’t short of space, they’re short of incentives.
There are lots of empty condos in both Toronto and Vancouver and the reason for this revolves around government incentives. Rental controls are a reality, so when given the choice developers build condos, the thing to understand is that these condos built on Canadian soil have a market, just not a local market, so these condos are often bought and used as individual piggy banks FOR INTERNATIONAL INVESTORS. Now the unfortunate thing is that Canadians don’t seem to know how this game works when people say foreign homebuyers Canadians assume the foreign homebuyers purchase the home in their names, or that the foreign buyers use their condos as vacation homes.
That’s not what foreign home buyers are foreign homebuyers are foreign investors who may invest into an individual domestic buyer whose their mule that purchases the condo, the mule being the domestic real estate investor then tries to make his/her profit by renting the condo out or even using Airbnb or some other scheme. Being that the foreign home buyer isn’t really that concerned with renting out the property and is actually using the property as a safe house for cash or money laundering fluctuations in the housing market don’t matter much as long as the Canadian government guarantees that the housing market won’t collapse.
There are mortgage-backed securities in Canada that are backed by the federal government of Canada. The CMHC which ensures a section of the housing market is a crown corporation. What a lot of people don’t understand is how the CMHC makes this all possible. To explain it simply if 1 person in a condo with 5000 people used the CMHC to get a mortgage the entire condo development is protected from a collapse. Of course in the real world, this is all bullsh*t but this is what got the mortgage boom going. The Canadian government is protecting the housing market with taxpayer money.
Where things get complicated for the foreign investor is if interest rates shoot up, because it’s important to know that foreign investors are often a pool of investors that want assest that they can borrow against. If that luxury of borrowing against a property disappears so do the pool of investors. That’s where a housing collapse can occur because even Canada’s detached housing market is attached with this becaus if the condo market crashes so do the housing prices.
The people that suffer in this scenaro are the actual domestic homebuyers that bought into this nonsense. How they’ll react when their mortgage is worth more than their house will sell for will be interesting, when homeowners no longer have the luxury of home equity that’s when things will get very interesting. notice I haven’t even gotten into Trump yet. Well if Trump continues on his Tariff conquest and Canada doesn’t respond in the right way, Canada and it’s safety nets are internally screwed and everything will happen all at once, which will make getting out of the wreckage hard to do.
Interesting times ahead.