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Credit Junky Nightmare – Credit Cycles Effect on Housing Market (Part 1 of 3) March 25, 2008

Posted by DustinRJay in Calgary real estate, mortgages, risk spreads, supply and demand.
Tags: ,

When house prices are increasing, if a homeowner’s mortgage is delinquent they have the option to sell and preserve their credit rating.  However, in a falling real estate market, the homeowner will often end up foreclosing due to lack of an option.  Therefore credit risk typically only appears when house prices are falling. 

Credit has become easier in Canada over the past few years and that has affected the supply/demand balance.  The following three posts will cover some aspects of how the credit markets are changing and how risk to the mortgage markets only appears after house prices have started falling.

This rudimentary diagram shows how the credit cycle has positive feedback during the upward cycle:

Credit Cycle - Upward Spiral

And this diagram helps describe how the credit cycle unwinds:

Credit Cycle - Downward Spiral



1. mohican - March 26, 2008

Nice graphs. Scary message.

You asked about how I got the long term CMHC data for the Vancouver area and the simple answer is that I paid for it from Statistics Canada. It isn’t expensive (couple bucks) and it would be really interesting to see what you discover about the Calgary market if you end up getting the data set.

2. Janet - March 26, 2008

There is a fundamental flaw in your diagrams Radley77. House prices ALONE will not cause default rates to up. There needs to be an economic shock or slowdown in the economy (which will come to Canada in Q4 of this year if not sooner). Default rates arise from the inability to make payments on debts – which precipiates usually from loss of employment. House prices may fall all they want but if people are still employed, these “dumb” people will still make those hefty mortgage payments even though they are upside down on their mortgage. Keep up the good work though!

3. Noemo - March 26, 2008

Another fundamental flaw ; )
Lower graph should go counter-clockwise i.e unwinding.

4. Rational Exhuberance. - March 27, 2008

To comment #2, I don’t agree with you fully. You are right that not everyone “underwater” on a mortgage will default, but it makes sense that some people will default, simply because they are underwater.

Therefore, falling prices will cause default rates to increase. The question of how many people are underwater depends on how much real equity (skin in the game) people have. With the proliferation over the past 2 years of zero down and 5% down loans among many first time home buyers, they are the most likely candidates to bolt during periods of falling prices. It makes logical sense to walk away from a debt that is higher than the value of the asset than the debt is servicing.

5. Aaron - March 30, 2008

Suggested reading:

The New Road to Serfdom (pdf)

6. David Kim - April 4, 2008

The housing marktet of Calgary and Edmonton of Alberta is a bubble that is going to burst by the end of 2008 or perhaps even earlier.
Canadian economy relies on the US too heavily. Don’t be fooled by

7. justin - April 17, 2008

i want to see part 2

8. joe - April 17, 2008

me too!

9. MisterKurtz - April 24, 2008

Are you there?
Heloooooooo ….. ?

10. spam - April 25, 2008

Maybe he bought a house?

11. Crabman - April 25, 2008


If anyone is still here to read this!

Rational Exhuberance makes a good point. One other thing to remember – when peoples mortgages need to be renewed, they can’t get financing when their equity falls below the mortgage balance.

12. Where's Radley? - April 25, 2008

I’m starting to suspect that a Realtor ® or perhaps a cabal of Realtors ® has made him disappear…

13. Karl - April 26, 2008

I think he made the plunge, so this blog is probably dead. From the other site:

Radley77 said:
I’ve been bearish on Calgary real estate for the past year, but am currently in the process of purchasing a place with a possession date of tommorow. It was a property that has been on the market for a significant amount of time, with asking price reduced by $70G already, I was able to negotiate a further $65G off ask price for a total of $135G off original asking price.

The place was affordable, as in three times household income, perfect location, and a lot of features we loved. It had a competive price per square foot compared to similar product on the market. I think we were tracking 100+ properties at one point.

I have to say though, that the price to rent ratio is not investment-grade but satisfactory for a longterm investment horizon.

For people that are looking at the market now and still seeing it as overvalued, I’d recommend the possibility of watching for properties that fit your lifestyle needs that have been on the market for extended periods of time and then offering prices much less than the asking price.

It worked for us.

14. worldclass - April 27, 2008

Eventually all of us “bears” have to buy. I am a home owner free-and-clear and yet I am still bearish on the market. Radley got a great deal for the current time. In the next few years these types of blogs will disappear as more and more bubble-bloggers buy into the market at ever-cheapening prices.

15. Condo - April 29, 2008

Abbotsford real estate is still doing good.

16. rencontre transexuelle - June 2, 2016

Rencontre une trans simplement a paris

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