'This is a bubble. A very big bubble. And it is going to end in tears'
The Canadian housing market just keeps getting hotter.
Home prices in the Greater Vancouver area have surged 30% year-over-year in May, up from 15% at the end of 2015, according to the bank's June 2016 "Financial System Review."
Meanwhile, prices in the Greater Toronto area are growing by 15% YoY, up from 10% half a year earlier.
Plus, he pointed out that the gains in housing prices in these regions now "far exceed" those in the US at the peak of its housing bubble.
TD Bank expressed similar concerns, warning that these housing markets are "ripe for a correction" and that "the party will come to an end," according to CBC News.
Of course, as with all bubbles, it's quite difficult to predict when exactly this will happen. By Ashworth's own admission, his team first warned about the bubble risk in early 2011.
But, still, regardless of when this correction will happen, he did offer a somewhat ominous forecast for what might follow (emphasis added):
When prices do begin to fall in Toronto and Vancouver, expectations of further declines could become just as self-fulfilling as the expectations of further price gains now. We have no idea exactly how far prices will fall. But we would stress that the link between price declines and mortgage defaults is not a linear one like the Bank of Canada seems to believe. If prices fall by 20% in the most overvalued markets, pushing recent home buyers deep into negative equity then there is a danger that the price decline / foreclosure rise feedback loop becomes self-perpetuating.
DYI Comments: Oh Canada...Oh Canada! Central bank madness, high oil and other commodities prices, plus the madness of crowds, ending with the dictum "Its different in Canada!"
Short version Canadian economics since 1998
Remember when Exxon was Exxon and Mobil was Mobil? As the chart below depicts oil prices bottomed in December 1998 at an inflation corrected price of "drum roll please" $12.47 a barrel!
The world at that time was awash with cheap and plentiful oil, gas, along with many other commodities such as gold, silver, tin, copper, timber, coal, grains, corn, etc. Oil prices where so low Exxon and Mobil were fearful (and rightfully so) of having to cut their dividends significantly. So they married on November 30, 1999 by consummating a $81 billion dollar merger. This had a deflationary effect on Canada for their country is a commodity producing country. To push deflationary forces further their manufacturing base was in the process of being gutted since the early 1990's in the rush to globalize(Mexico, China, etc.). While the U.S. economically boomed in the 1990's Canada was feeling the effects of a declining manufacturing base and commodity based companies business plan for success was simply staying in business - dividends were a forgone conclusion. This made for a backdrop of declining wages and cheap real estate prices. Canadians back in those days were noted as very conservative in their personal finances. Most Canadian homeowners would have their mortgages retired by their late 30's or early 40's at the latest.
Central bank madness and the rise of China
After the high tech blow off(year 2000) and subsequent recession Alan Greenspan and his fellow board of governors dropped interest significantly. This pushed down rates world wide in of itself along with the Bank of Canada (central bank) following America's lead. At the same time China was moving into high gear soaking up all available commodities pushing prices higher and higher. Canadian oil/gas non edible and edible commodity companies went from a business plan of just staying in business to major expansion plans that included ramping up employment and pay. This provided the Canadian provinces with tax revenues that went from too little to way too much. What did their politicians do? Save the excess money for a rainy day? Of course not! They went on a massive spending/building boom! Couple this with historically low interest rates(and rates kept going lower) and ever higher paid employment the good times were rolling in. As you suspect the excess money the citizens went into an asset that is near and dear to all middle class folks. REAL ESTATE!
It's different here - The madness of crowds
The majority of their excess Canadian dollars went into real estate. Some of course went into more traditional investments such as stock and bonds but the majority went into the middle class favorite their home. Prices at first only rose off of their below average price rising to their average price to incomes. However, China, Canada's biggest customer for commodities went on a rampant infrastructure spending for years. After 5 years the psychology began its turn. Real estate went
a conservative investment along with stocks, bonds, basic savings to the asset of choice for wealth building. After 10 years(2008) real estate is now the battle cry for Canadians as the place to make money. After the U.S. 2009 stock and bond(especially junk bonds) crash this further solidified Canadian thought process that the only safe and sure way to build wealth is real estate. Also Canadian real estate only modestly dipped in price during 2009 American great recession only to pop back up in price. Add on world wide sub atomic low rates pushing down Canadian rates as well the mind set is now set: Canadian Real Estate is a GUARANTEED Money Maker! And that my friends is the mind set of a MAJOR ONE ASSET BUBBLE.
Canadians are in hock up to their eyeballs!
The very first chart I put up is the comparison of U.S. to Canadian household debt to income. The U.S. peaked around 130%. Canada's latest stats is 165.4%! At this rate this ratio will peak some where in the 170's% before rolling over.
There are several possibilities. Oil/gas prices dive down to the teenager level(under $20) and stay there for a protracted period of time. China's infrastructure bubble bursts ending in a depression. World wide recession. The Canadian house of cards real estate debt bubble collapses under its own weight. This madness of crowds group think will end first with a bang of around 25% decline as one or more of the possibilities hits Canada or others that I haven't thought of. Then the long term melt of declining prices based on an after inflation basis as the Canadian central bank will digitally print money like a madmen driving rates sub atomic and very possibly negative.
Mr. Market Returns
In the end all asset categories will regress back up or back down to their mean. They also overshoot either on the high side or low side creating over time their mathematical mean. Canadian real estate is no exception. My guess is that residential stand alone houses will drop on an after inflationary basis of around 50%. Condos around 70%, again inflation adjusted. How long will the great housing melt last? Most likely 10 to 15 years.
What should a Canadian homeowner do?
Sell your house yesterday. Find an idiot who will pay these insane prices. If it is an American don't feel bad he or she should know better. Use the proceeds from the sale and get out of debt. Pay it all off; credit cards, student loans, car loans etc. Become debt free. Invest the remainder in U.S. dollars. When this hits the Canadian central bank will look to drive the Loonie into the basement(devalue) in an effort to export their way out of the problem.
It's different here - The madness of crowds
The majority of their excess Canadian dollars went into real estate. Some of course went into more traditional investments such as stock and bonds but the majority went into the middle class favorite their home. Prices at first only rose off of their below average price rising to their average price to incomes. However, China, Canada's biggest customer for commodities went on a rampant infrastructure spending for years. After 5 years the psychology began its turn. Real estate went
a conservative investment along with stocks, bonds, basic savings to the asset of choice for wealth building. After 10 years(2008) real estate is now the battle cry for Canadians as the place to make money. After the U.S. 2009 stock and bond(especially junk bonds) crash this further solidified Canadian thought process that the only safe and sure way to build wealth is real estate. Also Canadian real estate only modestly dipped in price during 2009 American great recession only to pop back up in price. Add on world wide sub atomic low rates pushing down Canadian rates as well the mind set is now set: Canadian Real Estate is a GUARANTEED Money Maker! And that my friends is the mind set of a MAJOR ONE ASSET BUBBLE.
Canadians are in hock up to their eyeballs!
The very first chart I put up is the comparison of U.S. to Canadian household debt to income. The U.S. peaked around 130%. Canada's latest stats is 165.4%! At this rate this ratio will peak some where in the 170's% before rolling over.
Canadian household debt soars to yet another record
The Globe and Mail
Published
Statistics Canada reported Friday that the ratio of household credit-market debt to disposable income, the key measure of the debt load, rose to 165.4 per cent in the final quarter of the year, eclipsing the upwardly revised previous record of 164.5 per cent in the third quarter. That means that at the end of the year, households held more than $1.65 in debt for every dollar of annual disposable income.What will pop this bubble?
There are several possibilities. Oil/gas prices dive down to the teenager level(under $20) and stay there for a protracted period of time. China's infrastructure bubble bursts ending in a depression. World wide recession. The Canadian house of cards real estate debt bubble collapses under its own weight. This madness of crowds group think will end first with a bang of around 25% decline as one or more of the possibilities hits Canada or others that I haven't thought of. Then the long term melt of declining prices based on an after inflation basis as the Canadian central bank will digitally print money like a madmen driving rates sub atomic and very possibly negative.
Mr. Market Returns
In the end all asset categories will regress back up or back down to their mean. They also overshoot either on the high side or low side creating over time their mathematical mean. Canadian real estate is no exception. My guess is that residential stand alone houses will drop on an after inflationary basis of around 50%. Condos around 70%, again inflation adjusted. How long will the great housing melt last? Most likely 10 to 15 years.
What should a Canadian homeowner do?
Sell your house yesterday. Find an idiot who will pay these insane prices. If it is an American don't feel bad he or she should know better. Use the proceeds from the sale and get out of debt. Pay it all off; credit cards, student loans, car loans etc. Become debt free. Invest the remainder in U.S. dollars. When this hits the Canadian central bank will look to drive the Loonie into the basement(devalue) in an effort to export their way out of the problem.
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