Home > real-estate > You ain’t seen nothing yet, Prime-1.00 Variables

You ain’t seen nothing yet, Prime-1.00 Variables

Pettis Law #17: You have not entered into the final stages of a bubble until you hear repeated use of the phrase “You ain’t seen nothing yet!”

via China Financial Markets

That is the concluding remark of Michael Pettis from his rather shorter article on excessive railroad investment in China and (ironically) the growing demand for luxury goods.

I wonder if Law# 17 applies to Canadian housing…given today’s housing affordability report and remarks like these (via Canada Mortgage Trends):

John Bordignon, EVP Strategic Development at Paradigm Quest, says, “Consumers have been asking for adjustable rate mortgages (ARMs) more and more, which in my view is one of the reasons we’ve seen such competitive pricing.”

Let me remind you that one of the biggest reasons why US housing went bust was because of variable rate mortgages or ARM – adjustable rate mortgage as they are called down south.

“In the broker channel at least 65% of the volume has been ARM versus fixed,” says Bordignon. “Historically it’s the other way around—65% fixed, and the balance ARM.

I wonder if there is a way to find out…something akin to MBA (Mortgage Bankers Association) in US. My guess is that CMHC has to have this data.

Anyway history always repeats itself… and we will return to historic norms with or without a housing bubble.

George Hugh, Vice President, Lending Sales at ING Direct, tells us: “We can’t expect much more discounting.” Hugh senses that profit spreads on variable mortgages are near their minimum.

“We’re in very abnormal market conditions. Mortgage pricing is being driven by excess demand for mortgage business from balance sheet lenders (big banks).  For the most part, these needs are being driven by securitization and other debt issuance programs.  In addition, the Big 5 banks still have a ton of deposits where they pay ‘zero’ interest…and they have to put that money to work. This excess demand is causing mortgage spreads to deteriorate. But now we’re pretty well at a floor.”

Again, it was excess demand for securitized products (MBS or RMBS to be precise) that goosed the great housing bubble.

Another cause of the housing crisis for very low mortgage rates… needless to say, rates in Canada are still pretty darn low.

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  1. September 27, 2010 at 11:35 PM | #1

    About three years ago it was the same. In 2005 it was close enough.

    • September 28, 2010 at 5:14 PM | #2

      Thanks Sudip. I would love to get my hands on this data and plot against interest rate levels & economic downturns.

  2. September 29, 2010 at 12:37 AM | #3
    • October 5, 2010 at 1:15 PM | #4

      this is definitely something I can use… thanks

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