Don sent in this link to yet another housing bubble warning in the mainstream media – there seems to be more and more of these lately. They compare the two arguments for and against the case that we’re in a housing bubble. The no bubble side seems to rely on a “magic armour” defense:
Arguing for the armour case in a new report for the Federal Reserve Bank of Cleveland, University of Western Ontario economist James MacGee says the main reason Canada’s housing market hasn’t gone bust is because of much sounder lending practices. An explosion of subprime and high-risk mortgages, rather than merely low interest rates, was the primary reason that U.S. prices boomed and then collapsed, according to Prof. MacGee.
The result is that Americans took on too much debt, relative to the both the value of their homes and their incomes. That left them highly vulnerable. They bought homes they couldn’t afford, leading to an inevitable spike in delinquencies and tumbling prices.
So Americans bought homes they couldn’t afford by taking on too much debt. Are Canadians taking on too much debt? Carney seems concerned lately about the high levels of Canadian household debt, which recently hit 145% – higher than the American level.
The counterpoint argument is covered by economist David Rosenberg:
..in a recent Globe and Mail column, economist David Rosenberg, chief strategist at Toronto-based Gluskin Sheff + Associates Inc., raised the spectre of a Canadian housing bubble that is on the verge of collapse. He figures prices are 15 to 35 per cent overvalued, based on relative rental rates and incomes.
Canadians should pay attention. Mr. Rosenberg, a former Merrill Lynch economist, was among the first on Wall Street to warn of a housing-led recession in the United States. He knows what a housing correction looks like.
Homes are now less affordable in Canada than they’ve even been, relative to income.
That’s less affordable across Canada as a national market, the Vancouver market is leading the pack when it comes to being ‘out of sync’ with rent and incomes. Whether the root cause is risky lending or low interest rates, it seems the situation in Canada is similar to where the US was just a couple years ago. If I drive a mile to run head first into a wall, does it really matter which route I take?
UPDATE: On a similar note I see that Merrill Lynch has just issued a bubble warning as well: