One of the great indicators of an economy and its general health is housing. Now that doesn't just zero in on housing starts but has to be considered on a much larger scale. Housing starts are a great symptom or indicator, but they are only part of the equation and, they are usually indicative of other issues such as mortgage terms, lending rates and inflation. All figure prominently.
The American housing/credit crisis is far from over and bankers are not just worried about holding real estate that they know they are going to take losses on, but more concerning is the real cost of mortgaging.
Consider that if one takes the actual borrowing rate and subtracts the inflation rate, the cost of borrowing is actually lower. This is actually a good thing if you factor accruals into the equation. However, of more concern has to be the actual price of housing. If we add the net of borrowing minus inflation to price declines, the actual cost of the mortgage has increased. This is because the borrower is paying for a property that has declined in value. This has US bankers more than concerned. The subprime crisis has spread exponentially.
Now the real problems begin because credit has been tightened to an almost choke hold so that purchasers are not only less likely to jump into the market but the lenders aren't likely to make that commitment without significant equity investment up front. In short the down payment is going to increase so that the ratio of loan to equity is reduced. This is a good thing from a business standpoint because the risk is reduced; in a good economy.
The US Federal Reserve has had to make commitments to save the two largest mortgage lenders in the country; FreddieMac and FannieMae. The previously stated reasons are definitely major factors. Homeowners without significant equity even though they can afford their mortgages can easily walk away and hand over the keys in default adding to the pressures already created. Dropping housing values (deflation) are the main culprit and no one can put an end to them.
Canada is not yet in this position but very well could be into the future and some of it will be a spillover from the US markets.
Canada's Finance Minister and the Governor of the Bank of Canada have both stated Canada is in a relatively good position to weather the impending storm. They may be right in part because the oil industry will prop up the Canadian economy but that doesn't help the manufacturing and other sectors. Even agriculture is affected due to increased domestic energy costs. It is unrealistic to ignore regional economies and needs with an overview of the country. There is no bubble here in Canada but there are warning signs and some of them are hidden in the forests. The signs are there but for some reason they are being overlooked.
Canada has an aging population and it is increasing. That is a fact. We are not replacing people with youth either through increasing birth rates or immigration. As the baby boomers retire and pass away, the homes they occupied will become sell able by their inheritors who will already have homes of their own. Who can they rent them to? Who can they sell them to? What will happen is deflation in the housing market. Prices will fall and in turn increase the actual cost of borrowing. This is hardly the end of it either. Inheritance taxes may not be able to be met because the liquidity of estates will drop with the assets. If government is counting on a windfall from inheritance taxes, it may find itself in a bind because of these and other economic factors at large. As our population dwindles so too does standard of living and people's financial buffer from savings.
The US situation is dire but it should also be a wakeup call to our own banks and governments to act now. Failure to do so could create an economic mess down the road that no one will have considered and one that could very well destroy the Canadian economy; such as it is.
Harold Hotham
http://www.comparevillage.ca
harold.hotham@comparevillage.ca
