The Globe and Mail's subprime envy

Today's G&M has what purports to be an exposé on subprime mortgages in Canada:

Canada's dirty subprime secret: Since the subprime mortgage meltdown in the United States, Canadian leaders have assured the public that a similar tidal wave of foreclosures can't hit here. They have cited the prudence and market dominance of Canada's five most prominent banks, the conservatism of Canadian consumers and the tiny, 7-per-cent market share of subprime lenders, which is much lower than their 22-per-cent market share in the United States. Just four days ago in a speech, Prime Minister Harper said: “We have avoided the extreme of the unregulated, or barely regulated, financial and mortgage industries that has caused such grief around the world.”

However, The Globe's investigation shows that while Canada's real estate sector hasn't suffered as much as its counterpart in the United States, the Prime Minister and others have grossly underestimated the impact of that small portion of subprime lenders.

Huh? I've read through the piece several times now, and it shows no such thing.

Firstly, let's look at the scale of the problem. For some reason, the G&M story pays inordinate attention to subprime mortgage foreclosures as a share of total foreclosures, but what matters more is the actual number of foreclosures.  According to this sidebar, there were at most 10,000 foreclosures in Alberta and BC in 2008 (the data are incomplete, and I do sympathise with the authors' difficulty in tracking down the appropriate numbers).

Is 10,000 foreclosures a big number? When you compare it to what happened the previous year, it might be. But when you compare it to the number of houses - 1.8 million in 2006 - it works out to something like one house in 200. And if we want to make direct comparisons with the US - and apparently we do - 10,000 foreclosures is less than what California sees in a typical two-week span.

Secondly, let's think about why subprime mortgages are a problem. In the US, too many banks had too many assets purchased at too-high prices. When these assets turned out to be toxic waste, it led to a crisis of solvency in the banking system, and since banks play such a crucial role as financial intermediaries, the effects on the rest of the economy are dire indeed.

If the Canadian subprime mortgages were being issued by Canadian banks, then this story would indeed be a source of worry: it'd be a signal that maybe we'd be in for a home-grown credit meltdown. Happily, that's not the case: the people issuing those subprime mortgages were not Canadian banks, and their failure will not shut down credit markets.

I can't understand how this non-story became the main item of a Saturday edition of Canada's Newspaper of Record. Now that I've wasted a perfectly good Saturday morning, I'm in a sufficiently snarky mood to suggest that the Globe has succumbed to a nasty case of Headline Envy. "Look at all these eye-catching stories coming out of the US! We wants them, we wants them, we must have them!"

Comments

[brendon]

It's also important to note the role of the CMHC in Canada and the absence of anything similar in the US.

[Chris]

When I saw that article (when someone mentioned it on Twitter last night) I literally had to bang my head on my desk. I hope that it's a tiny box buried in the middle of the paper, but I know they probably ran it on the front of a section. I've got the feeling that this is less about the news and more about bolstering their falling readership.

[Stephen Gordon]

It was the main story on page 1, complete with a two-page spread in the front section...

[Dee]

Brendon; CMHC is involved when deposits are less than 20%. There were other insurers involved in Canada during the 0/40. AIG ring a bell? The 'subprime' they're referring to is a secondary lending market with little regulation. It was one of the factors, in my opinion, that exacerbated the housing froth here in Canada.

Foreclosure brings down property values in the neighbourhood. We have 4 homes for sale within a one block radius and the owners keep dropping the asking price. They are hurting neighbourhood property values. Homeowners who bought at peak will be suffering negative equity. Not good if you try to refinance or sell your home in a down market especially if you've just lost your job.

Perhaps the article is alarmist but it shouldn't be dismissed. There is a cause for concern. These things tend to snowball. Right now it's the secondary market, next the primary market/chartered bank mortgages. As I mentioned previously, it may be difficult to refinance a home for more than it's market value.

[Stephen Gordon]

Sure, but that's a characteristic of *all* recessions.

[Dee]

Sure, but that's a characteristic of *all* recessions.

I remember what the 80s one was like and except for the rapid inflation this recession 'feels' like that one. I barely felt the flap in the ones to follow.

Hard to believe the StatsCan numbers match the reality of what's going on in certain communities.

[just a yob journalist]

Gosh, Stephen, you seem to be in a preternaturally foul mood.

I think the Globe should be congratulated for ferreting out the first half decent numbers I've seen on foreclosure proceedings in Canada. One of the great problems in reporting on this area is the lack of any publicly available stats on mortgages in distress---for some odd reason, the banks seem loath to share them.

I would suggest that your bile would be of more use if it were directed at the lack of good stats in this area, rather than at the people who set out to provide them.

Beyond that, do you seriously mean to suggest that a doubling of the foreclosure rate in Alberta over the past year doesn't qualify as news? Sounds like a pretty good story to me.

And your comparison of the Western Canadian foreclosure rate with that in California (a state with about four times the population of BC and Alberta) seems a bit glib. Another way to view the matter is to say that the foreclosure rate in those two provinces is about where California's was 18 months ago. It's entirely possible that it's on the same curve, headed to a similar destination.

Time will tell, of course. But I've been struck by your rather, um, impassioned defence of the Canadian real estate market in this and other posts. I'd welcome a bit more on your reasoning. Canadian home prices have soared faster than inflation, faster than rents and faster than household income over the past couple of decades. So why are you so sure that a 20% to 30% correction isn't in the offing? Or am I misinterpreting your position?

[Stephen Gordon]

If foreclosures in Alberta had gone from one to three, would you think that a headline to the effect of "200% increase in foreclosures" would be appropriate? If you have a small base, it's easy to generate large per cent increases.

I'm not defending Canadian real estate markets; I'm attacking lazy comparisons to the US market. The 'Canada is following the US with a lag' meme is a particularly egregious example. Unless there's a story of *why* that story makes sense, then it serves to reduce public understanding. I'll grant you that it does generate eye-catching headlines.

But the fundamental point is *why* subprimes are even a potential story. In the US, the effect of subprime defaults was to wreck the banks holding those mortgages. That's not going to happen in Canada, because banks weren't issuing them.

We have real, home-grown problems. Imagining non-existing ones and putting them on Page One isn't helpful.

[westslope]

LOL! Headline envy. I sometimes wonder if that is what drives the high rates of property crime and violent crime here in western Canada. Envy with all the exciting 'action' and drama southside.

Fortunately, most BCers, for instance, agree to keep the conditions intact that drive this over-the-top violence. Should be making work for idle, fearful RCMP officers and providing headlines for years to come.

[bob]

westslope,
out of curiosity, what are those conditions in your view?

[westslope]

bob, It would be tough to do the subject justice in just a few lines here. Many of these factors are admittedly not unique to BC.

BC can viewed as a collection of disparate sub-cultures that mutually despise each other.

BC is a young, resource dependent colony with a strong tradition of open-access-style entitlement that puts resource user groups of the province in constant 'bun-fight' mode.

There is a strong tradition of first-come, first-serve, get-rich-quick, boom 'n bust economic growth. It means that people migrate in and out of the region very quickly contributing to lower levels of Social Capital. Sure, diverse people "get along", they just don't talk to each other much. I don't expect high rates of immigration or boom 'n bust economic cycles to moderate anytime soon.

The relatively balmy climate attracts counter-cultural and lifestyle types along with the party-till-you-die lumpenproletariat. Social assistance is generous and easily obtained. Illegal narcotics use is high, probably among the highest rates in Canada. Marijuana use is popular and widespread and carries little stigma with it.

The resulting de facto decriminalization of narcotics consumption along with the continued criminalization of production and trade guarantees healthy profits for black market sectors that inevitably enforce property rights with violence. Small-scale marijuana grow-operations are a common occurence; so are so-called 'grow rips' which I suspect are often a young man's first introduction to machetes, hand guns and sawed-off shotguns.

The police, particularly the RCMP, can behave in a deplorable 'corporatist fashion', almost as if they had a vested interest in the violence.

The perpetrators of the violence are often young, sometimes juvenile, and appear to entertain extremely short decision-making horizons.

Juveniles are released 24 hours later no matter how serious the weapons offense, to violate release conditions and often commit more violent crimes thanks to insufficient monitoring; adults are sometimes released on bail to expensive and apparently ineffective police protection.

Some west coast sub-cultures--university educated, materially comfortable and most certainly well meaning--appear to live in neighbourhoods where they apparently believe themselves largely immune to the violence. They support generous notions such as hiring more social workers will solve these problems, or that 'decriminalization' of prostitution and narcotics is an acceptable status quo.

The law and order crowd wants longer, stiffer sentences but are not interested in dealing with core causes or directly addressing the myopic decision horizons that characterize many violent offenders.