Saturday, November 21, 2009

The bubble model

The bubble model for home buyers in Alberta goes something like this:

A reckless financial illiterate buying simply for capital appreciation using the loan which allows for the minimum monthly payment.

For example this is from Garth Turners blog about how to tell you are in a housing bubble:
When the number of people taking 35-year amortizations explodes higher. Overall, these loans have doubled as a percentage of all mortgages in two years but that does not tell the true story, since today 5/35 buyers constitute an absolute majority of new originations. Of course, 35-year borrowers pay off virtually no principle for years and years which makes this akin to renting money. No equity means no ability to withstand a market correction.
From this mortgage market report 53% of new purchases are for amortizations 25 years or less. 29% are for 35 years or greater.

Another snippet from Garth's same post.
Some observers, bless their good hearts and large stones, had the courage to warn recent buyers with mortgages in the 2-3% range they could be in deep financial trouble before too long. But you know that. The reasons why have been beaten to death on this blog already.
To be fair in this case he didn't say that 2-3% variable rate mortgages are the norm. But going back to the mortgage report 5-year fixed mortgages are the most popular.

-73% of mortgages held by 18-34 year olds have terms greater than 4 years.
-71% of mortgages held by 18-34 year olds have fixed rates, 9% combination

Of new mortgages within the last 12 months shorter terms do appear more popular, but not the majority. 56% have terms greater than 4 years.

Of course there are a significant number of mortgages over 30 years at a variable rate and these will most likely cause some amount of turbulence during the next leg down. The model that typical Canadian buyers have been recklessly overbidding $300,000 for a shacks in downtown Toronto or Vancouver using a 35 year VRM makes for good entertainment but does not reflect reality.

6 comments:

piccaso said...

Wow, 30% sub prime now!

Garth said...

Nice cherry picking. You ran a comment of mine answering a query about a report you then used to refute the answer to the question about the report. Good work.

For the record, the Dinning report is based on highly questionable data, and was prepared for a mortgage lending body. My sources, trust me, are a lot fresher. And there is no question the vast majority of new originations are for 35-year ams. Ask a banker.

Garth Turner

BearClaw said...

The quotes here were from the main post where there was zero mention of the Dunning report.

Buried in the comments section DaBull brings up the same report. I suppose this is what you are talking about.
http://www.greaterfool.ca/2009/11/17/when/#comment-50540

As for the report I don't know why CAAMP would fudge the statistics for length of amortization as they do not even consider 35 year amortizations as negative. The fact that 40 year mortgages were down to 6% makes sense because they we cut off in October but had lingering pre-approvals.

Anyway until I see specific information to the contrary I hold this report as being more credible than Garth's unnamed sources.

Garth said...

Do some research for a change. Won't kill ya.

Garth

buff_butler said...

Ouch,

One would think a person in politics would know the difference bettween constructive comments and comments that don't really contribute to a conversation but 'feel' good to say (typically mean).

This is one of the better blogs on housing for alberta and finds some very creative data sources every once and a while. Also, not blindingly biased in one direction. hmmmm.....

The Lorax said...

Garth, your responses are really poor. Bearclaw has sources, cites information and reports.... you cite that you have "your sources"... that does not hold ANY water in an argument if you can't deliver.