The Canadian housing market is headed for a significant bust, in my view. It’s going to be a repeat of the 2008 mortgage bubble deflation. Only it’s happening to the north. People will lose a lot of money but those who understand and are properly positioned may gain fortunes.
So says Anthony Wile (thedailybell.com) in edited excerpts from his original article* entitled Good Timing! Financial Times Affirms the Canadian Real-Estate Bust.
[The following is presented by Lorimer Wilson, editor of www.munKNEE.com and may have been edited ([ ]), abridged (…) and/or reformatted (some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. This paragraph must be included in any article re-posting to avoid copyright infringement.]
Wile goes on to say in further edited excerpts:
It’s obvious that the Canadian housing market is overbought and heading for a significant crash...I’m not alone in perceiving this. We recently interviewed Seth Daniels, Managing Partner at JKD Capital, LLC in Boston, who is providing analysis and research on the Canadian market for Spartan’s Libertas Real Asset Opportunities, a fund allowing Canadian investors to hedge against a housing slump. Daniels was just quoted in an article about the Canadian real estate bubble – and its eventual demise – posted at the Financial Times.
You might be surprised that such an “insider” newspaper would cover the doom and gloom of a housing bust but, to me, that’s a telling sign. The establishment will cover negative economic trends, but only when they are seemingly unavoidable. The Financial Times coverage can be seen as a kind of confirmation that things are pretty bad.
Here’s Daniels’ quote in the article:
“The U.S. has been printing money since 2009 and it has helped set off a series of echo housing bubbles around the world – Canada is only one of the echo housing bubbles. If the U.S. tapers QE, it could set the process in reverse and trigger the collapse of these echo credit bubbles, including Canada.”
I’d go a step farther and say that it doesn’t matter whether or not the US “tapers.” Sooner or later, the current asset bubbles are going to collapse. The question is twofold: “When?” and “How far?” We can’t answer the “when” exactly – but we can certainly speculate when it comes to the Canadian housing market that the “how far” may be deep indeed. That’s because crashes often reflect the inverse of the ascent and the Canadian housing market has climbed very far.
“It is easy to see why hedge funds are licking their chops. In the past five years, while other big developed economies have been suffering through the financial crisis, the average Canadian home price has risen 38% to C$389,119 (US$355,000), according to data from the Canadian Real Estate Association.
This has been driven in part by Toronto, where a condominium boom has driven prices to record highs. At the same time, Canadian households have been on a debt binge fuelled by easy bank lending, low interest rates and government-insured mortgages. The household debt-to-income ratio rose to a record 163.7% in the third quarter, close to the U.S. peak of about 165% on an adjusted basis.
Many of the investors and economists sounding the alarm about Canada’s housing market are veterans of the US subprime crisis. They include Mr Hanson, the analyst, Steve Eisman, an investor, and Nouriel Roubini and Robert Shiller, the economists. Whether they will be right a second time is the source of a heated debate on both sides of the border.”
These sorts of numbers have placed Canada in a kind of investment red zone. In fact, the article goes on to explain that once Canadian banks start to show credit deterioration, short-selling funds will “pile in,” turning a credit decline into a credit catastrophe that is part reality and part self-fulfilling prophecy.
Says Vijai Mohan, fund manager at Hyphen Fund Management in San Francisco:
“One of the biggest concerns is the duration of Canadian mortgages because Canadians refinance once every five years instead of once every 20. There is little doubt that Canadians who borrowed in the past few years of low rates will pay more at their next refinancing … At some point interest rates are going to have to rise and it’s going to be a shock to a lot of Canadians.”
Daniels…goes on to say in the Financial Times article:
“When the credit bubble pops, Austrian theory implies that it will have widespread fallout as the malinvestments are cleared – even to those areas that did not see significant home price appreciation. In the U.S., it was frequently argued by non-Austrians that “real estate is local”, and that a national housing bubble was therefore an impossibility. I frequently hear the same argument about Canada today.
Many parts of the United States did not see a significant rise in house prices but the areas that did have a bubble – the coasts, Arizona, Las Vegas, etc. – were sufficient to nearly collapse the global financial system. … Canadian home ownership rates, housing unaffordability, household debt and use of HELOCs meet or exceed that of the U.S. at its peak in 2006-2007 … At the same time, the Canadian regulators are now reining in credit availability: The B-20 rules governing mortgage underwriting were revised to be more stringent over the summer,
CMHC will begin levying a “risk fee” and CMHC is approaching its statutory balance sheet limit. If banks were forced to underwrite mortgages without government insurance via CMHC, mortgage rates would rise to reflect their true risk. The foregoing and future policy actions should decrease the pool of potential new buyers on the margin, which will cause asset prices to begin to fall as credit becomes less available, and the entire process goes into reverse – the bust phase of Austrian business cycle theory during which time the market clears the prior mal-investments.
Even without pinpointing the actual mechanism, it is certainly true that sooner or later the current boom – as all other booms – will subside, probably more violently than not.
Independent analyst Pater Tenenbrarum, writing at Acting Man, recently covered just this point in an overview entitled, “Carney’s Legacy: Canada’s Credit and Housing Bubble: How Long Before it Bursts?” saying:
Current BoE chairman Mark Carney is widely hailed as some sort of central banking superhero due to the fact that Canada did not sink beneath the waves during his tenure. We say Carney was nothing but an unmitigated inflationist, whose legacy is one of the biggest housing and consumer credit bubbles in history (global history that is, not just Canada’s). The result of this will be a bust of similarly historic proportions, the only question that is open is the timing, which cannot be foreseen with any degree of certainty. What is certain is that this house of cards will eventually implode.
This is not just some wild assertion that cannot be backed up. The proof, as they say, is in the pudding. Of course, Carney was no different from other Canadian central bank governors in that respect, but money supply growth was significant during his reign (and credit growth along with it).
What is not obvious to us is in what respect he was deemed to be ‘better’ than his predecessors. He simply continued to aid and abet more monetary inflation.”
Tenenbrarum helps put the tremendous growth of Canada’s asset (not just its housing bubble) into perspective:
In conjunction with this explosive money supply growth, mortgage credit, housing prices and consumer debt have shot up to never before seen levels, both in absolute terms and relative to various benchmarks such as Canada’s economic output and personal incomes.
Real estate prices in particular have risen enormously relative to rents, which is always a sure sign that one is looking at a significant bubble. In fact, when measured by this yardstick, Canada’s housing bubble is now by far the biggest in the world …
If all these bright people can see what’s going on, why can’t the upper echelon of Canada’s economic class, including bankers, economists and realtors? These pundits once again – as 2014 stretches ahead of us – are populating the airwaves with assurances that Canada’s housing market will continue to boom.
Says Tenenbrarum, “In Canada, there is currently a lot of misguided optimism about the housing bubble’s durability, no doubt due to the fact that it has kept growing with nary an interruption for so long.” Tenenbrarum explains. “Right after it was reported that house prices reached a new record high the Canadian Real Estate Association confidently predicted a strong year in 2014 … but if 2014 indeed turns out to be a strong year, the same prediction will be made about 2015, and this will continue until the crash.”
While this may seem a somewhat negative assessment, Tenenbrarum is correct. Trees never grow to the sky, as Jimmy Rogers is fond of saying, and booms inevitably give way to busts…
[Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.]
The Canadian ratio of debt to income hit 163.4% in the second quarter, up from 161.7% at the end of last year, according to figures released Monday by Statistics Canada. That’s the highest ratio of debt to income ever recorded in Canada, and more inflated than the levels witnessed in the U.S. and Britain before their housing market collapses in the mid-2000s. Words: 625 Read More »
According to the Case-Shiller 10-City index Canadian house prices only appreciated by 84% between 1990 and 2006 compared to 181% in the U.S.. However, as U.S. prices plunged by almost 33% between the peak in April 2006 and the trough in May 2009, the chart below shows that Canadian home prices continued to rise, driven by very low interest rates and relatively benign unemployment. By July 2012, they had reached similar heights as U.S. prices before their decline and fall. I believe that house prices and consumer debt levels are overextended in Canada and that a “Minsky-moment” may be developing in Canadian credit markets. [Let me explain why I have come to that conclusion.] Words: 1892
Canada’s housing prices continue to escalate [there has been no housing collapse as there has been in the U.S., Spain, U.K., Australia and elsewhere over the past 4-6 years] but concern is rising as to whether they are now, finally, ‘in a bubble’ and about to correct either modestly or severely. This article discusses what would cause a change in direction in Canadian housing prices. Words: 500
Canadians are becoming increasingly vulnerable to a housing correction, exposing them to a perfect storm of high debt and falling assets, the Bank of Canada warns…suggesting that many Canadians have constructed their finances on a house of cards, with ever rising home values the key and vulnerable support. [Sound familiar?] Words: 770
The ownership premium in Canada’s largest cities is unprecedented, dangerous to new buyers, and unlikely to persist – and if analogies to the U.S. situation at its peak back in 2005 are at all valid, this is bad news. [Let me explain.] Words: 430
The following charts indicate relative performance of US home prices in Phoenix, Los Angeles, San Francisco, Chicago, Las Vegas, New York and Miami to Canadian home prices in Vancouver, Calgary, Toronto, and Montreal. US home prices are reflected in Canadian dollars for comparison purposes. Words: 240
Canada, France and Switzerland stood alone among nine markets measured in recording annual price gains, based on second-quarter data, with inflation-adjusted price increases of 5%, 5% and 4%, respectively, compared to declines of 6% in the U.S., the U.K. and Australia, 10% in Spain and 14% in Ireland. In fact, Canada’s home prices have escalated 44% since 2005 – with a high of 68% in Vancouver – and they are up 7.7% in the past 12 months! Words: 1244
Given the global economic backdrop, and in particular the sharp correction in energy prices to which Canada is highly exposed, the risks of a Canadian housing correction are rising. Home prices, which corrected about 10% during the recession, have surged again, making household balance sheets look increasingly fragile. Economists are becoming concerned. [Should Canadians be worried too? Let’s review the situation.] Words: 280 Read More »
In the past few decades, the concept of home ownership has been completely turned on its head. Previously, homes were considered a very long-term consumption good…[No one] ever considered tripling the value of their homes by retirement time and selling them to move beachside yet, somehow along the way, this became a reasonable investment expectation. Even today, home buyers still make their purchases with the hopes of escalating prices. [It begs answers to these questions: Is a house just a home? Should a house be expected to behave like an investment? Is the housing game nothing more than a Ponzi scheme where the end buyer before the market corrects becomes the “greater fool”? Let’s try and answer those questions.] Words: 935 Read More »