I accept that in the American market, it became common for middle-income Americans to buy a second home as income property, using the equity in their primary home as a down payment. Then, they rent out that property to pay off the mortgage. They build up equity in the second home, and use it to buy a third. And so on and so on. We all knew this was happening, just not the extent of it. It was popularized in get-rich-quick schemes, and everyone and their uncle came out with a book espousing it. Sub-prime mortgage lenders encouraged it, even actively promoted it. I remember well the huckster talk. Every newspaper ran articles on the phenomena. If you had an income property, getting someone to lend you money for another mortgage on an investment property was a given. Everyone wanted to get on the bandwagon. They made money wholesaling their mortgage portfolios, to leverage even more capital to lend out and stoke the frenzy. The pyramid house of cards starts to collapse when rental income drops off.

First, rent becomes very competitive. There are only so many renters. I suspect you would find that average rents took a beating as available rental properties increased. Rent income no longer covered the mortgage costs. It was cheaper to rent than to buy. Landlords lost money on each rental unit, but hoped to make it up on volume.

Second, in a recession, renters dry up. They loose their jobs, move, get evicted, or just disappear in the middle of the night. They have no equity – no motivation to stick around. Landlords either drop the rent further, or end up in deep cash flow problems. The mortgage holder wants their money, but there is insufficient rental income to cover it.

Third, with falling house prices and foreclosures the former renters can now afford to buy a house using a sub-prime mortgage, so they buy instead of rent. The investors are stuck with mortgages that the property value no longer covers, and no income to cover it. They can not sell at a price high enough to cover their mortgage, so they just walk away. Foreclosures flood the market, making their position even more untenable, and the thing snowballs quickly. Banks that were too quick to play games with asset-backed paper, got caught short. There are only so many foreclosures the market can handle, before the banks run out of cash flow.

Yes, it happened in Canada as well. I am aware of several acquaintances that did it. But they had some good business sense. First, they generally stuck with purpose-built rental properties – duplexes, apartment buildings, high-rise condos. Second, they tended to start with larger down payments, so the rent did not have to cover over-leveraged mortgage payments. Third, they stopped buying into hyper-inflated markets. They know that you don’t make a profit buying high. They looked for bargains, not money pits, Now, their past purchases are on the market, in a round of controlled profit-taking.

Canadians by far have a much better business sense than Americans. It is only the two markets in Canada – Toronto and Vancouver – and a few satellite markets, like Hamilton – that are really a problem. And Canadian banks are much bigger and much more money savvy. They tend to not over-leverage by wholesaling their portfolios. They can get their money in other ways. Canadians may not be great savers, but with the proliferation of direct deposit paychecks, the banks have access to a lot of cash flow. In Canada, very little money is in wallets, it is in the banks. It doesn’t need to be in savings accounts. It just needs to be in the banks for at least part of the cycle. And Canadian banks are BIG. TD now has more branches in America than they do in Canada, and only three banks in America are bigger than each of the big 5 Canadian banks, and not by much. In fact, Canadian banks generally individually make more in PROFIT than the majority of American banks have in total assets.

Will there be a housing market crash in Canada in general? No. A cooling-down correction? Definitely. And certainly not for the same reasons as the crash in America. We will not see banks collapse. Will there be a housing market crash in super-heated me-too markets other than Toronto and Vancouver? Absolutely. It is now happening. But these limited markets are, in the grand Canadian scheme of things, small potatoes. Developers have already abandoned them.

The Toronto and Vancouver markets are NOT Canadian markets, they are INTERNATIONAL markets. Anything can happen. They respond to events happening on the world scene, not the Canadian scene. But in the overall banking portfolio in Canada, these markets just don’t have the clout to take down the Canadian banks.

Private lenders, maybe.

In the alternative mortgage market, driven more by greed than economic sense, people will probably loose their shirt. The money behind them, the depositors, are not insured. GIC’s are only guaranteed if the trust behind them is solvent. They apparently are acting more like American banks than Canadian banks, over-leveraged to the hilt.

Werry, you also should understand Giacomo De Giorgi, while being a senior economist in Federal reserve NY since 2014, did not write this article on behalf of Federal reserve.

His name is second in order on the author list – usually means he didn’t write the paper himself but has contributed to it some way. How significant? We do not know.

Furthermore, this paper being not representative of Federal reserve freely allows him to express his personal bias in the publication as long as this is in alignment with NBER’s goals – NOT Federal reserve’s goals.

I am not trying to discredit him, I’m sure he’s a smart guy. But we all have our political alignment and we are free to participate to causes we identify ourselves with. He decided to participate in NBER paper and allowed his name be put on the co-author list. The bottom line is that this paper will have bias toward the goal of NBER and its funding source. In case you didn’t know, NBER is NOT a public entity, it’s a private not-for-profit organization with clear goals and motivations of those who fund it.

It’s all good then… bring the champagne…

All these words do not change the slightest bit this leverage thingy… Leverage is all rainbows and butterflies when things go up. When the tide turns, not so much… No amount of googling is going to change that.

And another.

‘The CMHC released numbers this week showing that nearly one in five first-time homebuyers in Canada got money to help with their downpayments. It’s a stat that’s not that surprising. “The bank of Mom and Dad” is a phrase that gets thrown around a lot in cities like Vancouver and Toronto, cities that have seen real estate prices balloon over the last few years.’

http://www.huffingtonpost.ca/2017/06/09/canada-real-estate_n_17020902.html

Here are more statistics from Canada

‘Bank of Montreal conducts annual surveys of first-time home buyers, and has found in recent years that nearly half of young potential buyers expect a loan or gift from family. This year, the bank found that 44 per cent of millennials expect to depend on parents or family for some or all of their first home purchase.’

from https://www.theglobeandmail.com/featured-reports/bank-of-mom-and-dad-sees-more-withdrawals/article30163201/