Sunday, September 12, 2010

Housing bubble to burst says Jarislowsky

Stephen Jarislowsky has been warning people for years that the Canadian housing market is in a bubble and he is "convinced" its going to burst eventually. Jarislowsky is chairman of Montreal-based investment adviser firm Jarislowsky Fraser Ltd. He says the housing bubble is fueled by Canadian government measures that encouraged consumers to take on debt and mortgages they can't afford.

So for example if someone buys a home in a Toronto suburb for $600,000, but can't afford it they eventually renege on their mortgage its the government which takes the hit because they've basically written banks a blank cheque by insuring mortgages. If a thousand such mortgages go bust, the bank then has to sell the homes at a reduced price during a bad real estate year (ie. they sell the homes for an average of $500,000) and the government ends up with $100,000 times 1,000 in losses = $100 million. And that is just for a thousand houses if the bubble bursts and people renege on mortgages... what if 50,000 people lose their homes? Or 100,000? And what if prices slide a lot more than 15%? In the worst case scenario, lets say 100,000 people lose their homes and the average value lost is $200,000... that is $20 billion that the banks/government are on the hook for.

When the bubble burst in the USA over a million Americans lost their homes in 2008.

“They have basically encouraged people to buy houses based on cheap mortgages,” says 84-year-old Jarislowsky. “That has created the opposite effect of what was desirable.”

While Canadian home prices and resales grew during the Spring this year, the sudden drop in sales during the Summer shows Jarislowsky is probably right about the bubble bursting. The big Canadian banks are also in panic mode and they know there is an economic roller coaster coming. Even Canadian Prime Minister Stephen Harper is running for cover, trying to blame other people for his economic failings.

“I am convinced there is a housing bubble in Canada,” said Mr. Jarislowsky in February. His investment fund owns shares in Canada’s four biggest banks and they stand to lose tens of millions when the bubble bursts.

Jarislowsky is one of Canada’s wealthiest investors with a personal fortune worth $1.85-billion according to Canadian Business magazine.

Meanwhile Canadian Finance Minister Jim Flaherty claims there is “no clear evidence” of a housing bubble in Canada, according to Flaherty's spokesman Chisholm Pothier.

Jarislowsky says the government should have put more stimulus money into boosting infrastructure, not household spending. Stephen Harper's temporary tax credit for home renovations was limited to first-time home buyers and encouraged cheap mortgages from banks, but this only inflates the housing bubble even more by making too much available credit for home buyers. Worse that tax credit has already run out and the bubble bursting could potentially rob anyone who bought a home in the last 8 months and can't afford it

“I conclude that the prices of housing today in the U.S. are cheaper than they should be, and that the prices in Canada are far more expensive than they should be,” says Jarislowsky. “Excess spending by the consumer and going further into debt was the worst thing that they could do, and that is what has happened in Canada.”

Jarislowsky isn't the only one predicting a bubble bursting. See Also: Tea Leaves for Toronto Real Estate

Burying your head in the sand isn't going to change the earthquake happening around you.

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