Housing Bubble Inching Towards Its Peak

The low interest rate policy really worked well to keep the Canadian economy going on for so long. However, creating a mad frenzy where the buyers constantly kept heading out to purchase a house in hurry - was not really pretty.

Psychologically driven panic 'home buying spree' has always been magically convincing the first timers to participate in joy riding the bandwagon.

Yet, one of the most disturbing issues looming over the minds of many Canadians today is the overheated housing market, which has continued to drive higher due to easy credit facility, low interest rates and encouraging government tax breaks.

In some cases, there were multiple offers on resale properties, which were sold with ease way over the asking price. Surprisingly, every new location attracted extraordinarily long line ups, as if the houses would be given away almost free of cost. This of course was an invitation to the sellers to keep raising the prices and in some cases on daily basis. The buyers unaware of the gimmicks including catch 22 situation, usually ended up as the biggest losers. Actually, purchasing a house at lower price and paying higher interest rate is not different than buying a house at the higher price and paying lower interest rate. Manipulating the first timers worked really to the vendors’ advantage.

In fact, lowering rates was more beneficial for the speculators and the experienced buyers, who enjoyed flipping properties knowing the market psychology. Most of the credit goes to the new immigrants who kept such a market going on for so long. Under a scenario, when the rental payments are more than total monthly payments of mortgaged house, the tendency will be buying rather than renting.

Moreover, home buying spree due to temporary affordability creates a furious demand leading to the reduced inventory of available new and resale homes. And the Real Estate experts do their professional convincing in selling under the rules. Overpowered by emotional factor and the convincing factor, the new immigrants are easily pushed into a mental state where they are made to believe to “buy now or never.”

“Buy now before it's too late” actually creates panic among the potential buyers. However, there are negative signs due to fat inventory of homes and the reduced demand caused by many factors including recent government efforts to tighten lending rules, decreased number of employed youths, the retiring baby-boomers.and the reduced immigration. Difficult economic situation has been impacting the potential buyers with frozen incomes. Resultantly, the house prices are on their way down to hit Canadians really hard. Thus, the housing market has been cooling off since last summer reflecting 30% drop in larger cities.

In Canada it has been so easy to get mortgages with only 5% down and payments amortized over 35 years. More than 65% of Canadian mortgages are fixed for five years, but now the Canadians face more stringent renewal terms and most likely higher interest payments under newly announced rules. Government data shows that the average Canadians with a two-story home are spending almost 50% to 70% of their combined household income on mortgage servicing, thus, affordability level is still within a safe range in Canada.

The federal government plans to control borrowing and is currently focused on the condominium sector, with new rules in the works to make it harder to qualify for a loan on a high-rise apartment. Most probably, the government would add 100% of condominium fees to the list of expenses that is measured against income to decide whether a buyer can afford a mortgage. Whereas only 50% of the fee is currently considered. This means that there is a great potential of thousands of consumers to be out of the market soon.

Last April, new mortgage rules went into effect forcing consumers to qualify based on a higher interest rate. It also required all housing investors, as opposed to people who use a home as principle residence, to have a 20% down payment which mostly affected the condo industry.

Now, the prices are way higher than they were before the recession, and construction activity has been healthy. But home sales are now under pressure from the threat of higher interest rates, and Government’s latest move to curb 35-year amortizations is actually aimed at kicking a number of potential buyers out of the market.

Finance Minister Mr. Flaherty’s main worry is the Canadians are concentrating on too much long-term debt. Therefore, the government would no longer insure mortgages that are amortized longer than 30 years to pay off. Tightening the rules for existing homeowners who want to refinance their homes is also part of new policy. The maximum amount available for refinancing won’t exceed 85 per cent of the property’s value.

Since Canadian household debt has reached the enormous discomfort level and major portion of that debt belongs to real estate, so mortgage tightening is the answer, yet there is a risk of triggering a broader housing correction that is likely to hurt both consumer spending and the economy.

On the other hand, a number of Canadians are in a state of denial saying that the country's housing market is unlikely to have much of a correction of inflated prices.

Luckily, most mortgages were written under tighter regulations. And, sub-prime mortgages accounted for only 5% of the mortgages taken out in Canada, compared with 25% of those obtained in the United States. This indicates that Canada’s sound financial system provides some security for now.

Resale home prices are headed downward and are expected to drop by 7% on the average in the next 12 or so months. When almost a thousand boomers are turning 65 every day in Canada, what can you expect? Naturally, they are dumping their houses creating an oversupply into the market - not having enough buyers. Hence, the added inventory is likely to increase the downward pressure every day causing an economic chaos unless the government and the consumers remain vigilant enough to take all appropriate actions just in time. Otherwise, the declining home value would be gradually followed by painful level of diminished equity in the property hurting the home owners.

Without exaggeration, quite a large number of younger foreigners are needed desperately to replace the rapidly retiring Canadian population right away. An important key factor still remains an action by the federal government to enhance immigration quota from all around the world on equality basis in order to regenerate the lost economic activity leading to stable markets, sooner the better.
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Will Pakistan Ever Heal?

Better late than never, the government finally realizes that a smaller cabinet with lesser ministries is the best option to begin breaking the ice initially. A gradual rightsizing has begun with the immediate elimination of five federal ministries while another five will be chopped off in February, and it is likely that downsizing will continue for some time to come. This is a step in the right direction. Trimming the fatty ministries should have been done long time ago.

Painfully, the last three years have been severely rough and tough for the vulnerable masses that are facing yet another round of price hikes and a country wide food shortage. The economic stability is nonexistent. The patience of suffering population has already exhausted.

Despite the World Bank’s approval of $250 million loan and a $35 million grant to support recovery efforts in the Khyber Pakhtunkhwa (KP) province and Federally Administered Tribal Areas (FATA), there are other economic issues of immense national importance that haunt the nation day and night. Most likely, the government will have to borrow from the State Bank of Pakistan with all its adverse consequences for the economy and the people.

Indeed, the bitterest reality is the ongoing pile up of heavy foreign debt load. Whereas the poor governance, zero economic growth, a missing financial sovereignty, and the nonexistent foreign investor’s confidence have been hindering Pakistan’s recovery – is extremely disturbing and thought provoking of course.

Unfortunately, the evil of falsehood dominates in Pakistan, which is responsible for blind folding the naive masses about horrible consequences of prolonged political instability and economic stagnation. Unless Pakistan comes out of the “never ending cycle” of misfortune, ignorance and poverty, there isn’t any hope for betterment.

Politically motivated economic decisions made by the politicians with respect to allowing multinationals virtual monopolies, permitting corporate farming, building new dams, power plants and education system always lead to non justified actions.

Shameful sabotage of gas installations has not only disrupted the supply of Sui gas to the nine districts in Baluchistan, but the gas supply to some parts of Sindh, the whole of the Punjab province and other parts of the country have also been severely hampered in deed. Nevertheless, the responsibility has been claimed by a militant nationalist organization. Yet, similar attacks on the gas supply system have been carried out successfully in the past. Unfortunately, it is virtually impossible to protect every inch of the pipes that stretch out from the gas fields in Sui to other parts of the country; therefore, an increased or stepped up security won’t be able to handle the menace in the normal manner.

So disappointing is the badly crippled revenue generating capacity which is beyond an easy fix. The industrial sector has been severely hit sending a large majority of workers home for good. The government miserably failed to deal with load-shedding and the poor gas supply.

Among several other factors, the curse of feudalism seems to be one of the leading sources for Pakistan’s economic disability and disparity leading to criminal activity including misappropriation and looting the resources. Since its independence, Pakistan has not been able to have a true democracy just because of the prevalence of feudalism. There is a stubborn hurdle in educating the masses, and such a constant lack of education leads to a massive economic retardation. Feudal lords get elected to the parliament due to their dominance. No importance is given to integrity and merit at all. Furthermore, the poor people cannot move an inch against the wish of this elite class. Even the independence of national institutions is corrupted by this group. They always prefer to have their dear ones selected for the positions of power and authority in the police and civil bureaucracy. Competence stands no chance at all.

Inherently defective political system of Pakistan has always enabled the feudals, industrialists, bureaucrats and the generals to go beyond limits. The environment is ripe for the insincere, incompetent, inefficient, corrupt and selfish class of people to flourish.

Beyond doubt, without a viable economy, the political environment will stay non-stable. Thus, a weak government poses the greatest threat to the economy and national security.

Now the good news: Fortunately, Pakistan has huge untapped coal reserves, one of the largest in the world, which if explored with the right investment would certainly overcome the current electricity crisis. Furthermore, Pakistan is also blessed with one of the world's largest copper and gold reserves. In fact, just with one mine in REKO DIQ (BALUCHISTAN) is worth more than enough to pay off its entire foreign debt.

Although, according to State Bank of Pakistan (SBP), the country’s total liquid foreign exchange reserves witnessed an increase of 190 million dollars during the week ended January 15, 2011, climbing to a record high at 17.28 billion dollars. The foreign exchange reserves held by SBP were 13.65 billion dollars and net foreign reserves held by banks (other than SBP) 3.62 billion dollars. Yet, the government has no funds to continue with the required payments to debtors nor does it have any financial capacity to carry out national projects of extreme economic importance.

What needs to be done: Broaden the tax base including the RGST and directly taxing the agricultural income. There should be capital gains tax on the stock market and the real estate as well.

Get fiscal house in order on urgent basis. Chronic condition of the national economy requires urgent attention too. A consensus is required to facilitate a peaceful revolution to rid the country of all corrupt elements. Such operation must start indiscriminately from the very top and of course - gradually climbing down to the grass root level. Special constitutional amendments through the national Parliament are needed to affect all areas regardless of the immunity.

Since, Karachi is the commercial hub of Pakistan which is being reduced to a war zone between ethnic groups. Target killing scenario is a danger sign of a strong possibility of Anarchy and Civil War. There is an urgent need for an overhauled governance mechanism in place before it is too late.

The best solution is: All politically motivated recruitments in the judiciary and the police in Karachi must be reversed right away in the best interest of the country. If Karachi bleeds and descends into total chaos, the repercussions will be catastrophic not only for the Karachites but also for the whole country.

It is strongly suggested that strengthening the federal set up is the way out to tackle all the economic and political ills. Provincial powers should be delegated to the Divisional Commissioners throughout the country for the sake of better administration. There is no need of provincial administration, provincial assemblies or provincial governors. Deputy commissioner/district magistrate is good enough to have a better grip on the corrupt people.

A simple system of governance means an effective control on lavish spending. Remedying mismanagement and eliminating corruption within the government will pave the way for further remedial activity. Some kind of mechanism to protect the vulnerable sections of the society should be in place before it is too late. A coherent strategy is needed to genuinely develop the economy by investing in its key sectors to resolve Pakistan's chronic and systemic issues. General sales tax reforms and land reforms will definitely be beneficial to the whole society.

In addition to restructuring, reshuffling and reducing federal ministries, the 10-point agenda must be fully implemented by the deadline. As claimed, the said agenda is aimed at addressing the crucial problems including price control formula, electricity and gas shortages, lawlessness and the messy financial crisis. All political parties should be on the same page when it comes to eradicate economic woes.