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Connecting the Dots – CMHC Housing Bubble

Canadian Housing Bubble

I like candid articles about the economy, an investing strategy or things that should be obvious to everyone but aren’t.

Yesterday I read and article by Ted Rechtshaffen of The Globe and Mail titled, Connect the housing bubble dots: There could be trouble on CMHC’s horizon.

I’ve been talking with a lot of friends the past few years and have been amazed at how far and deep the housing bubble continues to get here in Canada.

Bank of Montreal’s (BMO) recent move to lower its five year fixed mortgage rate to 2.99% signals, to me, the height of the market.

What people need to understand is that true interest rates (set by the Bank of Canada) have not changed; all that has is the margins the banks charge for borrowing money.  They’re moving lower.

Question…when was the last time your bank called you to say, “I’m gonna give you a thousand dollars!”

Never?

Banks don’t like or intend to ever lose money (like me!) and what’s surprising is that the banks are still lowering interest rates on mortgages (lowering their margins) and expanding a bubble that is already too hot.

If you can’t afford a mortgage at 3.50% you have NO business buying one at 2.99%….PERIOD!

I’m calling the top of the market, BOLDY, today.  Anyone who begs to differ is either an idiot or has a significant conflict of interest – wanting the markets to continue to rise.

You never compete on price. EVER.  BMO and the other banks are extending themselves too far at the wrong time of the market and will get burned.

Disclosure: I have no equity positions in BMO

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{ 3 comments… add one }
  • Potato February 2, 2012, 1:44 am

    Well, they’ve increased their margins on variable products quite a bit over the last few months. One could say that by lowering the rates (i.e.: margins) on fixed products, they’re trying to steer borrowers into fixed rates, and longer-term ones at that — it’s only been recently that the 10-year rate has had any publicity/advertising. I haven’t read the fine print myself, but I’ve been told that this particular mortgage features extra restrictions on refinancing, which if I risk over-thinking it, has profound implications.

    • Brad Ferris February 2, 2012, 7:06 am

      Yes, that’s something I left out of the post; variable rate products have increased not only in price but in limitations. Regardless I believe its a slippery slope for the banks to venture into when they know that these fixed rates are not sustainable. Maybe they know something we don’t, but to extend yourself like this knowing the market is already frothy with record low rates set by the BoC I think they’re venturing into the mud and will get stuck!

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