Merrill Lynch warns of Canadian housing crash

Realbiz pointed out this story in the Globe and Mail this morning: A recent report from Merrill Lynch Canada is warning of a Canadian housing market crash and mortgage meltdown similar to the one currently eating away at the US economy:

Canadian households are more financially overextended than their counterparts in the United States or Britain, a report issued by Merrill Lynch Canada economists David Wolf and Carolyn Kwan says.

“We’re just now starting to see house prices fall in Canada, and sharp rises in unsold home inventories increasingly imply that this will not be a transitory phenomenon … From this perspective, the absence of a Canadian credit crunch to date may be cause for concern, not comfort,” their report says.

They say it’s only a matter of time before the “tipping point” is reached and the housing and credit markets crack in Canada.

Stephen Harper was asked to comment on this at a campaign stop in Vancouver, where he rejected the economists conclusion:

“Firstly, we have seen that the housing market and the construction market are much stronger in Canada than in the United States. We don’t have the same situation here with mortgages as was the case in the United States with the subprime mortgages there. And so therefore I think our market is in a much stronger position.”

Merrill Lynch Canada says the main concern is the way Canadian households have overextended themselves and carry a large quantity of debt.  The housing and construction market may currently be stronger than it is in the US, but there’s no guarantee that it will stay that way:

“What worries us is that Canadian households have been running a larger financial deficit than households in either the U.S. or the U.K.,” the Merrill report says. “… After 40 years of net saving, Canadian households moved into sustained deficit in 2002. In 2007, household net borrowing amounted to 6.3 per cent of disposable income, a wider deficit than in the U.K. and not far off the peak U.S. shortfall seen in 2005.”

The economists say the data imply that Canada’s household sector is now overextending itself as much as the United States or Britain ever did.

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Nick
Nick
11 years ago

I'm from UK and lived in Vancouver for 3.5 years and your property market is about 1 year behind the UK's, so prepare for a savage downturn! Ok, you are landlocked, which will help you more than some cities but prices vs earnings are dire in Van. Just research condos (flats in UK!) in city centres and see what happened to speculators.

jesse
jesse
11 years ago

"In the U.S., lenders have little recourse — they can take the keys and settle relatively quickly, or sue and go through great expense for a potentially lengthy period. … But the rest of Canada provides greater recourse to lenders than in the U.S."

This is actually quite incorrect. Not to take away from the plethora of other arguments they make. I haven't fully reviewed the other points but patriotz is right. The 800 pound gorilla in the room is price-rent and price-income ratios and they aren't looking that favourable right now.

They spent a lot of time on this rebuttal. I'd check the leverage of BNS.

jesse
jesse
11 years ago

greed64: Sounds like damage control. They have bested Merrill Lynch by their sheer volume of cited statistics and their interpretations. Bravo bravo.

They conveniently ignored a few parts of the ML report. All the ML report did was use the same methods as Kasriel used in his paper to compare Canada and US situations around debt levels and deficits. Their fight is not with ML, it's with reality.

I guess Scotiabank is still lending. 😉

richard
richard
11 years ago

no bailout in the us just yet.

so it's come down to the treasury secretary begging on his knee…

John
John
11 years ago

CANADA IS THE NUMBER WON CUNTRY IN THE WORLD YOU TEA BAGGERS!!!!! There is no housing crisis in Canada due to the multicultural, liberal society of free healthcare and open drug use.

patriotz
patriotz
11 years ago

Yes. The article looks at everything except the only things that really matter – price/rent and price/income.

Also check out the koolaid drinkers in the comments section. Amazing that they are still keeping it up.

greed
greed
11 years ago

Anyone catch this. Havnt had a chance to read and digest.

http://www.globeinvestor.com/servlet/story/RTGAM….

Cynixinc
Cynixinc
11 years ago

"Which begs the question: why didn’t ML listen to its own analysts? Or was 3 years not enough time to unwind their related positions?"

Because the goal of the ML employees is not long term ML success and stability, but rather their own short term financial gains (bonuses, pay raises). This is the problem with most firms – the best interest of the firm, and the employees, are not aligned.

jesse
jesse
11 years ago

Lock in today!

Big banks raise residential mortgage rates on longer-term loans

Now we have a plausible excuse for price drops! 😆

richard
richard
11 years ago

dropping like flies, aren't they?

"Washington Mutual Bank, the country's largest savings and loan, was seized late today by federal regulators and immediately sold to JPMorgan Chase & Co., the New York banking giant that has long coveted the thrift's California and Florida branches."

jesse
jesse
11 years ago

"I expect 50% of the world’s population of homo sapiens to disappear by the year 2030."

That doesn't change much. By your definition, politicians and bank executives are not included.

oziijjiizo
oziijjiizo
11 years ago

“If I had $700bn on the government’s terms to buy distressed assets, I would,” he said. “Unfortunately, I’m tapped out.

Warren you kill me!

Dan in Calgary
Dan in Calgary
11 years ago

Comments rated above ten now get an extra highlight, hopefully this will make scanning the discussion for quality comments easier. Click the thumbs up icon below your favorite comments to give them a vote.

The yellow became meaningless to me when I saw that thumbsucker2 got yellow highlighting on a nonsense post.

crabman
11 years ago

Randallbard, did you hear what Warren Buffett said?

"The market could not have taken another week like what was developing last week," Mr Buffett told CNBC. "Last week will look like Nirvana if they don't do something. I think they will. I understand they're very mad about what's happened in the past, but this isn't the time to vent your spleen about that." He predicted that the taxpayer would make a profit on its investments in toxic mortgage debt. "If I had $700bn on the government's terms to buy distressed assets, I would," he said. "Unfortunately, I'm tapped out."

Aleks
Aleks
11 years ago

Pope, you might consider toning down the highlight color a bit, it's pretty eye-searing. I'd suggest something like #FFEC8B.

Michael Randallbard
11 years ago

Interesting comments from a member on Bill Cara's site "ALOHA !! ON THE BUSH BANK PLAN First off, if my Father were alive today he would literally be crying now. He fought in WW2 and believed in America's greatness and was a staunch Republican/conservative all his life. He would be shattered today watching BUSH begging on TV talking about panic and collapse … So many have miscalculated the corrupt monetary system as the basis for where we are today. Of course this BAILOUT will not work … Its a BAND AID on a CANCER! It's a systemic disease that is only being addressed with cosmetics! Look how many times Bush has been on TV talking all about the robust US economy and as time goes by he keeps trying these ridiculous plans to get AMERICA back to its assigned global… Read more »

patriotz
patriotz
11 years ago

http://www.globeinvestor.com/servlet/story/RTGAM….

"Tight credit as a result of the crisis of confidence among the world's lenders is impeding a recovery of the U.S. housing market and consumer demand, Mr. Carney said in a speech Thursday in Montreal."

Silly me, I thought the recovery of the US housing market was being impeded by ownership costs which are still higher than rent, and more houses than there are households to put into them.

Also Mark, consumer demand has dropped because Americans are so deep in debt they can't borrow any more. Are you suggesting the remedy for this is enabling them to borrow still more? I've got news for you- the only way for the US to get out of the mess it's in is for people to save more.

Thums up2
Thums up2
11 years ago

"But it couldn’t have been clear while it was happening, because the banks kept doing it,and the market kept accommodating it." You Moda Fucking Lynch, Canadian population is not even a inch compare to the size of population in usa even less than the population of California definitely we have very few people who purchased mortgage since 2005,if there was excesive debt those buyers should have been bleed long time ago. We don't have subprime,threats,disasters,greedy lenders(5-10 year mortgage is avialable on 5.00%)and we don't have greedy investors (despite high housing prices rents were affordable till end of 2007)to draw some good graph does not change the genuine out come when the master have no brain in his head you dumhead pvt. ltd. "Canada is well protected from a true slump by strong fundamentals such as robust consumer and housing markets… Read more »

MickeyFinn
MickeyFinn
11 years ago

Thanks Dave's Kryptonite…

I read just recently that the average annual "family" income in the Lower Mainland is like $64,000 which implies about $50,000/year after taxes (after income taxes… not sales tax, gas tax, liquor tax etc.).

According to the data from the REBGV, the average price of a condo as at August 31st was $400k and an average Townhouse was $500k and an average SFH was $800k.

Well, even just to support the average condo price of $400k would imply an annual rent of say $22k – $24k and the implied rent on an $800k single family home is more like $40k…

with an average after-tax income of only $50k/year those average prices seem extreme to say the least.

Facts: Dave's K
Facts: Dave's K
11 years ago

http://tinyurl.com/4yookx

2006 Census data on average, median income (full-time and all with employment income) for Vancouver.

Drachen
Drachen
11 years ago

Anonymous

And know your rights as a tenant. You have way more rights in the case of an eviction than most people know. If you're being evicted for reasons other than your breach of the contract or the rental statute you're entitled to three months notice, during which time you can give 15 days notice at any time, one month's free rent and your full damage deposit back.

Anonymous
Anonymous
11 years ago

Just make sure your renting situation is secure:
http://thetyee.ca/News/2008/09/25/Evictions/

oziijjiizo
oziijjiizo
11 years ago

cheapo URL for ML report;

http://tinyurl.com/4naept

i'm getting "error: invalid cookie"

when i try to give thumbsup to a posting.

alexcanuck
alexcanuck
11 years ago

OOps, no coffee yet. that belonged next door. Head hung in shame. 🙁