Friday, April 8, 2011

Housing, the most manipulated market in the world

We will describe government manipulation in United States, Canada and United Kingdom.

Here is an executive summary of what happened to the U.S. economy:
  1. Cause of Great Recession:  Collapse of Banks
  2. Cause of Bank Collapse:  Collapse of Housing Bubble
  3. Cause of Housing Bubble:  Massive Socialist Government Manipulation
Socialist Manipulation

Free-market capitalism is a myth, as shown by housing, which is the most manipulated market in the world.

One can argue that the US housing bubble started with the government's socialist policy of enabling every American to realize the American dream of home ownership.  According to this article:
"For nearly a century it has been the policy of the U.S. government to increase American homeownership.  Its efforts include (but aren't limited to) bouts of easy money from the Fed, the mortgage-interest deduction, the exclusion of capital gains on primary residence sales, direct and indirect subsidies from the Department of Housing and Urban Development, and artificial liquidity pumped into the mortgage market via government sponsored entities Fannie and Freddie."
Many policies and programs were put in place to manipulate the market, such as the 1977 Community Reinvestment Act, which required banks to extend loans to high-risk, low-income borrowers.  These borrowers bought homes that they couldn't afford and therefore they eventually defaulted.

The manipulation of the housing market has not only created bubbles, but it has also created huge injustices.

The US government stole billions or trillions from non-homeowners, children (read "stealing from children") and taxpayers to fuel a housing bubble through vehicles such as:
  • Fannie Mae and Freddie Mac purchased and guaranteed $5 trillion of mortgages (half of all U.S. mortgages) which transferred the risk from banks to them (source).  Even the riskiest mortgages were guaranteed.  Consequently, the bailout for Fanne and Freddie were the most expensive (source), so much so, that the bailouts of Citigroup and Bank of America look like chump change.
  • $3.9 billion in CDBG grants to help homeowners in poor neighborhoods.
  • Treasury Department bought shares of Fannie and Freddie's stock to support stock price levels and allow the two to continue to raise capital on the private market (in order for them to buy and guarantee more mortgages).
  • Low interest rates fuel demand for housing.  Fed kept interest rates so low that they had negative real interest rates in 2002-2005 (source) and again in 2008-present.
  • Fed bought $1.25 trillion of mortgage backed securities, to enable more lending to home-buyers and to keep mortgage rates low (source).
  • mortgage interest is tax deductible
  • $10 billion for Cash for Caulkers (source), compared to $3 billion for Cash for Clunkers (source).
  • $75 billion Making Home Affordable program, “a.k.a. mortgage bailout” according to this article .
  • Federal Housing Administration (FHA) guarantees $300 billion in new loans to keep 400,000 homeowners out of foreclosure (source).
  • $15 billion in tax breaks (article).
  • FHA’s Refi program for underwater borrowers (aka the FHA Short Refi Program)
  • HAMP (Home Affordable Modification Program)
According to this video, the government raised red flags in April 2001 stating that the size of mortgage giants, Fanne Mae and Freddie Mac, is "a potential problem" because trouble in either one of them could "cause strong repercussions in financial markets".  In 2003, the government's warning of Fannie Mae and Freddie Mac (government sponsored enterprises) was upgraded to a systemic risk that could spread beyond the housing sector.  In 2005, Alan Greenspan stated:
"...Enabling these institutions to increase in size - and they will once the crisis in their judgment passes - we are placing the total financial system of the future at a substantial risk."
Despite this, socialist politicians, such as Barney Frank, wanted Fannie and Freddie to do more to put low-income people into homes.  According to the above video, in 2005, Senator Charles Schumer stated:
"...I think Fannie and Freddie over the years have done a incredibly good job and are an intrinsic part of making America the best-housed people in the world...if you look over the last 20 or whatever years, they've done a very, very good job."
In 2006, John McCain stated:
"For years I have been concerned about the regulatory structure that governs Fanne Mae and Freddie Mac...and the sheer magnitude of these companies and the role they play in the housing market...the GSE's need to be reformed without delay."
Our housing bubbles are created by huge socialist policies.  Socialist policies have been tried by dozens and dozens of countries around the world.  Without fail, they have always brought prosperity to a pocket of the population in the short run.  Without fail, they have always made the country poorer in the long run.  This record is unbroken in earth’s history.

Politicians, such as Senator Chris Dodd in September 2008, bragged about the government's [false] achievement.  Starting at 3 minutes and 25 seconds into the video on the left, Dodd stated:
"...a great source of wealth creation in this country has been home ownership... Fannie and Freddie…created so much wealth for so many Americans…"
After the bubble collapsed, the fake wealth disappeared and the country became poorer.

Socialists are well-meaning, good-hearted people, but uneducated in economics and myopic.  Essentially, they don’t know how to grow a country’s wealth.  Capitalists appear cold-hearted, however, free market capitalism has been the only system in recorded history, other than killing and stealing, able to generate long term sustainable wealth.

Suggested viewings of Milton Friedman:

Suggested reading:
Socialism vs Capitalism

Canada's Housing Manipulation and Bubble

Canada has a very similar socialist policy with a similar number of money stealing programs to fuel house prices:
  • Home Renovation Tax Credit
  • First-Time Home Buyers' Tax Credit
  • GST/HST new housing rebate
  • Home Buyers' Plan
  • Provincial credits and grants
  • CMHC insures mortgages to transfer risk from the banks
  • Self-Directed RRSP mortgages
  • Capital Gains exemption
To be fair, the government should provide this kind of support to every other industry.  Why just housing and the people that benefit from housing such as construction companies and real estate agents?  Why not provide this support to renters, furnitures, computers, books, phones, clothing, shoes, food, massages, web developers, programmers, janitors, maids, restaurants, etc., etc., etc.?  Are citizens in those industries relegated to second-class?  Why do they have less rights and privileges?  Housing is so manipulated, that it is akin to "central planning" of the economy by Russia and China during their communist years.  As we know from their experience, central planning drove their countries into poverty.

As in the US, money is stolen from non-homeowners and children (read "stealing from children") to fuel Canada's housing bubble.

So, if you sell your over-priced house, you are capitalizing on the stolen money.  If you are a baby-boomer looking to downsize, and if you sell your house to a young couple, then you will be exploiting them to fund your retirement, in addition to the billions that you are stealing from children.

Canada's Sub-Prime Mortgages

TD Bank stated that for a couple of years, Canadian banks were giving out zero-down, 40 year mortgages to people who were one paycheque away from insolvency.  These were Canada’s version of subprime mortgages.  These seemed like a conundrum on the surface.  Canadian banks are very conservative and risk-averse.  Why would they give out so much money to such risky borrowers?  TD explained that they were not taking any risk.  Canadians are, through CMHC, which is owned by the government.  CMHC insures these risky mortgages.  If the borrower defaults, taxpayers would be on the hook.  The banks do not take the risk, but get the reward.  CMHC is Canada’s version of Fannie Mae and Freddie Mac.  MacLean’s magazine now says the same thing in their article called "The CMHC: Canada's mortgage monster".

According to MacLean's magazine:
"The CMHC is a driving force in the housing market.  But critics warn its policies could fuel a U.S.-style meltdown."
As the US has shown, housing can be as volatile as stocks.  Why don’t taxpayers insure the banks to lend us money to buy stocks?

Canada is now more socialistic than China.  The government needs to try a little free-market capitalism for a change.  (Read more on Socialism versus Capitalism)  If governments didn't insure any home-buyers, then we can let the free market decide on how much risk it should take.  As this article concurs, I can assure you that the banks would never have given out zero down, 40 year mortgages if they took all the risk.  Isn't this how it works on car loans?  Isn't this how it should work?  Should taxpayers insure car loans, business loans, and every other type of loan?

The government, via CMHC, is forcing taxpayers to take on these huge risks by insuring these jumbo mortgages.  The government is also forcing children to take on these risks because if CMHC loses billions, the next generation will likely be forced to pay for much of that loss.  Why should taxpayers and children be forced to insure risky mortgages that no sane, private sector insurance company will touch?  Did the government ever consult and get approval from the taxpayers and children on this?

Because every average-income Canadian can take out huge (sub-prime) mortgages (by forcing taxpayers, non-homeowners and children to insure these mortgages), this super-charged the demand curve for homes, which in turn, super-charged the prices.

Political Motivation

Let’s say you’re a politician. You know that:
  • You’ll get re-elected if you:
    • grow the economy, or
    • make your voters feel wealthier
  • Economy will grow and your voters will feel wealthier, if you:
    • boost housing sales and prices
  • Housing sales and prices will go up if more people buy houses
  • More people, even if they can’t afford it, will buy houses if they can borrow and leverage more
  • People can borrow and leverage more if you:
    • reduce down payment
    • extend amortization
    • reduce interest rate
    • enable banks to lend to risky borrowers
  • Banks will lend more, if you remove their risk
  • CMHC can remove the risk from the banks
  • As long as you get re-elected, that’s all that matters. This built up of un-sustainable debt and fake wealth is the next politician’s problem.
What would you do?

Is this why down payment requirements went from 25 to 20 to 15 to 10 to 5 to 0 percent?  Is this why amortization went from 25 to 30 to 35 to 40 years?  Is this why a Canadian politician justified GM’s bailout by saying he wanted to support home prices?

Financial Motivation

Most politicians are likely homeowners and not renters.  Therefore, if they can continually increase home prices, they stand to benefit.

In China, government officials are making lots of money through grafts by helping the developers.  According to this article, one of the largest real estate developers in China stated:
"Corruption is everywhere...No wonder public opinion of anyone who has money equals corruption." 
"We are the number-one hated people in China."
"For the country, I think it's very dangerous." 
"the real estate bubble is disserving the nation…" 
"I happen to know that they don't need it so much. But it still doesn't stop me from producing so long as they are queuing up outside and want the product." 
"there is no apparent need for more buildings"
According to this article about China:
"Corruption is particularly rife in the real estate market.  Officials and developers often obtain choice pieces of property at bargain prices"
This corruption is not limited to China.

This Canadian CBC show called Condo Crunch (3 minutes 13 seconds into the video)) explains how condo buyers are taken advantage of and how the developers have the "ear of the parliamentarians":
(23:10 into the video) Lawyer:  "If you go into a new car showroom and order a specific car with four-wheel drive, power steering, air conditioning, and a whole list of extras, and they deliver you something that has very little resemblance,...the automobile associations, the consumers, the ministers of parliament across the country and in Ottawa, would be up in arms.  You can't do this.  When you buy a car, that's what you're entitled to get…" 
CBC:  "So, why is it okay with the condo…?" 
Lawyer:  "Because the builders are not subject to the same regulations as the car industry" 
CBC:  "Why not?" 
Lawyer:  "…[long pause]…you want this on tape right?" 
CBC:  "Yeah" 
Lawyer:  "Why not?  Because the builders have a lot of sway and the consumers don't.  And the consumers do not have the ear of the parliamentarians who make these laws." 
[scene break] 
CBC:  "We want to talk to the Ontario government about why condo buyers aren't better protected, but like the developer who sold us our condo, they don't want to touch this one either."
Why do "the builders have a lot of sway" with the politicians?

Marc Muzzo, Rudolph Bratty and Alfredo DeGasperis are real estate developers and former owners of Canada Homes and Greenpark.  They are also amongst the richest Canadians (source).  In the 1980's, the Globe and Mail implicated them for bribing city officials by giving a house to an official for three quarters or half price and dropping off baskets of cash in front of officials' homes.  Numerous city councillors were implicated.  The mayor of one of the suburban cities (Vaughan, Markham or Richmond Hill) received a house at a significant discount.  In return, the developers got their land re-zoned ahead of everybody else.  Other land owners were very angry.  One of the mayors had to step down.

According to this article:
"...Muzzo testified that paying bribes was standard practice..."
In the 1980's, Torontonians were up in arms and protesting against the development of their water front.  They argued that it should be park land and the water front should accessible to the public.  Nevertheless, tall condos went up.  Is it possible that the developers gave condo units to the politicians at significant discounts?

According to this article, an Ontario mayor involved her city in a $14.4 million land deal with her son, a real estate developer:
"people "fortunate enough to enjoy friendships" with the mayor have reaped benefits from those ties" 
"If the deal had gone through...[mayor's son] might have made more money than he otherwise would in a lifetime"
Is it possible that developers and the CREA lobbied, befriended, wined and dined or gave incentives to:
  • CMHC executives to insure more and more risky mortgages?
  • politicians to relax the mortgages rules from 25 years amortization to 30 to 35 to 40, and down payment from 25% to 20% to 15% to 10% to 5% to 0%?
Knowing that the relaxation of mortgage rules will fuel housing, did these CMHC executives and Canadian politicians stock up on investment properties before changing the rules?  U.S. Congressmen do insider trading before passing laws (source).  Why wouldn't Canadian politicians?

In the Liberal Sponsorship scandal, suppliers provided condos, furnished with prostitutes, to politicians and took politician wives on shopping trips.  (Read more)  Could the CREA or real estate developers be doing similar things?

CMHC has nine directors on its board.  Seven directors make or made their livelihood from real estate.  Even if they are no longer employed with real estate related companies, is it possible that they own more real estate than the average Canadian and therefore would benefit from ever increasing prices?  These directors are:
  • Dino Chiesa, Chairman:
    "Principal, Chiesa Group commercial property investors...previously served as ViceChair of the Board of Trustees of the Canadian Apartment Properties Real Estate Investment Trust"
  • Karen Kinsley, CEO:
    "Prior to joining CMHC, Ms. Kinsley was Vice-President and Treasurer with two real estate development companies...received the Award of Excellence in 2004 from the Canadian Home Builders’ Association in recognition of service to Canada’s home building industry.  In 2006, she was inducted into the Canadian Mortgage Hall of Fame by the Canadian Association of Accredited Mortgage Professionals in recognition of her service to the Canadian mortgage industry."
  • Brian Johnston:
    "Johnston is the President of Monarch Corporation, one of Canada’s oldest and largest real estate companies. In addition...Johnston is an active member within the home-building industry. a Past President of the Ontario Home Builders’ Association."
  • AndrĂ© G. Plourde:
    "Plourde has been President of Montreal Real Estate Group Inc. since 2001, an important commercial real estate brokerage firm in Montreal."
  • Sophie Joncas:
    "...experience in the public and private sectors, including construction and real estate firms..."
  • Michael Gendron:
    "...Gendron is Chief Financial Officer and part owner of Mancap Ventures Inc., a privately owned venture capital company with majority equity interest in a number of homebuilding and support companies..."
  • Rennie Pieterman:
    "...served eight years on the Board of Directors of the London Home Builders’ Association, including as President in 2003.  She has been a member of the Association’s Renovators’ Council since 1994."
Which of the following would the CMHC directors personally benefit from and be more interested in?:
  • perpetually raising home prices, or
  • lowering prices for first-time buyers
Would they care about making homes affordable for young or future Canadians?

Myth about Canadian Banks

Many Canadians brag about their stable banks and mock the bail outs of the American banks.

According to Murray Dobbin, this is a myth. The Canadian government bailed out their banks and these bail outs were equivalent in size to the bail outs in the U.S., on a relative basis:
"...first, we put up $70 billion to buy up iffy mortgages from the big five banks, through the Canadian Mortgage and Housing Corporation, taking them off the banks' balance sheets. That is almost the exact equivalent the U.S. bailout -- it spent 10 times as much, $700 billion, and its economy is about 10 times as large. 
Secondly, the Harper government established a fund of $200 billion to backstop the banks -- money they could borrow if they needed it."
Money Laundering in Real Estate

In 2011, according to MarketWatch, People's Bank of China (PBOC) publicized:
"Corrupt Chinese officials and employees of state-owned companies have absconded with about 800 billion yuan ($123.7 billion) of public money over 15 years through 2008, much of it making its way to the U.S., Canada, Australia and the Netherlands";
"16,000 to 18,000 individuals have fled the country with ill-gotten funds over a 15-year period".''
This is the equivalent of $6.9-$7.7M per official.  The PBOC asked for help from the other governments to stop this money laundering.
"The PBOC said in the report it planned to work more closely with foreign governments to block the officials from escaping with looted funds. It also said it has increasingly begun to take part in international anti-money-laundering organizations."
Instead of helping, Canada and Australia provided resident visas to the Chinese if they brought over a certain amount of money.  The Chinese brought over a ton of money and bought up hundreds, if not thousands, of expensive pieces of real estate.  Real estate is a multi-billion dollar money laundering scheme.

In 2012, the Wall Street Journal explains how the Chinese are accelerating this money laundering.  The situation has gotten so bad, that the Chinese government is taking matters into its own hands:

Chinese Police On the Ground in Canada Looking for Corrupt Officials
"Police sent from China have been secretly investigating officials suspected of money laundering in Canada, where they are believed to have invested a “staggering” amount into real estate."

"…global outflow of Chinese capital hit a record of $18 billion in 2014, and the amount flowing to Canada – specifically Vancouver – is rising."
If you work for a bank and if you detect money laundering, you must report it to the government.  If you do not, you will be punished.  Who in the Canadian and Australian governments should be punished for not reporting and especially for not stopping this massive Chinese money laundering?

Did the politicians aid and abet this money laundering because they are homeowners and personally benefit from rising prices?  Do they get a higher chance of re-election if they continue boosting home prices for the older homeowners (a higher percentage of the old vote versus the young), at the expense of the young who want to buy?

Double Standard

In the stock market, there is regulation that bans manipulation.  If you manipulate prices of stocks, you can go to jail.  Due to lack of regulation in the housing market, manipulation is rampant and nobody goes to jail.  The culprits are the government, real estate companies and developers.  The losers are the younger generation.

Effect of Manipulation

Due to the massive manipulation, it fuelled house prices, which fuelled the housing bubble.  One of the effects of a bubble is that the rising prices fuel two emotions:
  • Greed  (Speculators jump on the bandwagon in hopes of making money.)
  • Fear  (First time home-buyers panic as they rush to jump on, for fear of never being able to jump on later.)
Americans' household debt to income ratio peaked at approx. 124% in 2007, coinciding with the peak of their housing bubble and fake economy.  After the bubble burst, they have deleveraged down to approximately 105%.

Canadians' household debt to income ratio continued soaring to 150% in February 2011 (according to CBC), coinciding with Canada's housing bubble and fake economy.

Homes in Florida now cost $30 to $100 per square foot.

Homes in Canada now cost $200 to $700 per square foot.

In the 1970's, blue-collar, first-time home-buyers were able to come up with 25% down payment and afford a mortgage with 25 year amortization.  Now, with prices so high, white-collar, first-time home-buyers can only come up with 5% down payment and can only afford a mortgage with 35 year amortization.

What happens to the CMHC if the Canadian housing bubble bursts?  Like Fannie Mae and Freddie Mac, it will lose billions and this loss will be passed to taxpayers.

Now that housing is a bubble, is that good for everybody?  It is for homeowners, but what about non-homeowners and first-time buyers?  The younger generation, first-time buyers will have a lower standard of living because they will spend far more to get the same housing as somebody who bought before the bubble.

What about subsidized, affordable housing?  Now that house prices are so much higher, do taxpayers have to subsidize more affordable housing?

This is like taking one step forward and two steps back.

Read the following for explanation of how the housing bubble will make some people rich and some people poor:
Bubbles - Extreme Maker and Breaker of Wealth 
Real Estate - Ponzi Scheme?
Read the following for explanation of how housing bubbles have ruined countries and screwed the younger generation and made them much poorer.
Housing:  After the Bubble Bursts
Watch this video on CMHC's manipulation.

Speak Out

If you are a first-time buyer or part of the younger generation who got screwed from this bubble (and you did), you should complain to every politician who you can contact.  You can easily find their e-mail addresses or phone numbers on the web, such as:
Contact info for Members of Parliament of Canada
Find your Member of Parliament using your Postal Code
Similar websites can be found for your Member of Provincial Parliament.

If you do not speak out, you will continue to get screwed by the older generation who controls the government and who have been taking your money to fuel their own wealth.

Spread the word and tell all of your friends to complain to their politicians.

Ban All Mortgages?
Update in 2014:

Three years after we first published our article, Globe and Mail is finally waking up to the wealth transfer from the young to the old.  They state:
While older homeowners cheer each new headline about galloping home prices, the news becomes increasingly depressing for would-be first-time buyers. As those who bought into the market before the mid-nineties now sell and lock in huge gains, new buyers are subsidizing the sellers’ profits with prices that have soared to a whopping five times annual disposable income. So the members of the under-30 crowd who do manage to get their own roof over their heads are finding they also have an anchor on their feet. In ROB Insight, Ian McGugan looks at a not-so-great wealth shift that is seeing the older set sell out at the expense of the younger one.
You think?

Some people argue that home prices should go up because of inflation.  Thirty years ago, home prices were 2.5 times annual disposable income.  If prices went up at same pace as inflation, prices would still be at 2.5 times annual disposable income.  However, the young has to pay 5 times annual disposable income.

Despite this, the government has done nothing to reduce this transfer of wealth.  Is it because the government consists of older homeowners and they cater to older homeowners because a higher percentage of older people vote than younger people?

Here are more recent articles about Canada's housing bubble:
Despite this, Canadian politicians and homeowners (who are clutching on to their egregious capital gains) still deny and lie that there is no bubble.  The lying is so profuse, it is almost unbelievable.  Governments should do everything they can to prevent or mitigate bubbles.  Instead, they've done everything possible to create housing bubbles.

As Kevin O'Leary has said, "it's all about money, all of the time".  Make no mistake, the young are getting screwed, over and over again.  Complain to your politicians, otherwise they will just keep screwing you.  Tell your politician to read this article and ask him/her to show faults in it.  You will find that they cannot or have very weak arguments.

In addition to the near zero percent interest rates to push people to borrow and buy, the United Kingdom also has a slew of government programs to manipulate their housing market.  These include:

All of these programs manipulate the market, by driving up demand higher than it would naturally be.  When this happens, price starts rising.  When price rises faster than inflation, then speculators jump on board, which pushes the price even higher.  This prompts other investors and speculators who are later to the party, to jump in, hoping to make money.  Eventually, first-time buyers panic and are told "you better get in now or else you'll never get in".  All of these fuel the housing bubble.

After many years, this results in a huge transfer of wealth from the young to the old.  These is one of the ways that United Kingdom is screwing its young, over and over again.

Update in 2015:

Since the government has priced so many people out of the housing market, the government should not screw these people twice.  The second way that they are screwing them is with capital gains tax.

These non-homeowners now must focus on investing in the stock market.  However, they must pay tax on capital gains from stocks, whereas homeowners do not on their homes.

Governments should eliminate capital gains tax for all non-homeowners.

Besides, capital gain tax is inherently unfair.  For long term investors, a portion of the capital gains is due to inflation.  Therefore, the government is taxing some people even though these people did not increase their wealth.  Of course, this is especially unfair to those investors who are trying to compensate for their lack of home-ownership.

If you are one of these people, you need to complain to your politician about this.  They tend to grease the squeaky wheel and the squeakiest have been the older voters who tend to own homes.


Bubbles - Extreme Maker and Breaker of Wealth

Housing: After the Bubble Bursts


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