The respected and prophetical Tyler Durden (the blogger from Zero Edge, not the imaginary psychopath in a fighting movie) has just posted an interesting blog about a possible upcoming Canadian housing bubble.
His post contains a presentation by Alexandre Pestov, which is available below for convenience.
In his presentation there is some really interesting (and disturbing) informations about how mortgages really works in Canada and exposes some common misconceptions about them. He goes on to explain why we currently have most of the ingredients required for a large scale housing bubble burst.
Here's an quite alarming except;
Over the last 59 years the 5-year fixed rate mortgage rate averaged at 8.8 percent (Exhibit 1.3). At the time of writing of this paper, it stood at 5.49 percent. Assuming that the principal amount is the same, the following three scenarios review different situation pertaining to the possible direction of the bank rate:
- Moderate inflation; bank rate rises to still historically low, but plausible 4 percent
- Average inflation; bank rate reaches its long-term average
- High inflation; bank rate exceeds its long-term average
In the first scenario, the bank rate reaches and stays at a moderate level of 4 percent. From the bank to mortgage rate correlation and historical evidence, the 5-year mortgage rate would be approximately 7 percent, or 2.5 percent above today's level. According to the 9 to 1 ratio discussed earlier, a 2.5 percent increase will translate into approximately 24 percent rise in monthly payments.
The second scenario sends the bank rate to its historical average of 5.3 percent, an increase of 4.8 percent from today's levels. The result of such interest rate surge will be an approximate 35 percent hike in the monthly mortgage bill.
The last scenario deals with a situation deemed impossible in the current environment of gloomy and loud deflationary talks. Without going into a debate about the eventual effects of uncontrollable money-printing by central banks globally, let's assume that the ominous deflationary fears have failed to materialize. Instead, many major global economies find themselves in a desperate need to react to severe inflationary pressure. Under this assumption, being part of the global economy, Canada is forced to raise its rates to the above-average 10 percent.
As a result, under the 9 to 1 ratio, the monthly mortgage payments will rise approximately 55 percent.
The question to ask yourself, can you afford paying 25, 35 or even 55 percent more on your current mortgage?
And here's another gem:
It is worth reminding ourselves that the bubble in Canada did not burst due to the massive intervention by the Harper government. *The intervention was orchestrated by injecting thousands of new buyers - many of whom cannot afford owning the property they purchased – into the market to prop up the prices*. The scheme worked, and the disaster was temporarily averted. However, the problem was not fully or even partially rectified. By postponing the bubble deflation, the bubble was inflated further.
Any deja vue feeling yet ?
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