Housing market has big cracks

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:

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@patriotz: "You haven’t presented any facts. Just hypothetical numbers." — I'm not sure what passes for 'facts' in your world, do they have to pass your 'confirmation bias' filter? Oh wait, here comes a fact… "A whole house in E. Van for $1500/month" — A single data point from Craigslist, that's your case? First of all, it's listed as $1600/month, not $1500, so it's an incorrect fact right off the bat, but that's ok, not a big deal. Secondly, I'd bet dollars to donuts that this place is a dump at this price, not a 'benchmark' E. Van house. But of course there's no further information provided about the place to verify. But since we're trading facts, I did find a fact of my own for $2400: http://vancouver.en.craigslist.ca/van/apa/1514543… "Now either rents are the same today as in 2005, which means… Read more »


You haven't presented any facts. Just hypothetical numbers.

Here's a fact for you. A whole house in E. Van for $1500/month:


Now either rents are the same today as in 2005, which means your estimated rent is too high, or they've gone down. Either way you've lost money.


@66 Patriotz:

Look we can argue what $400K bought you in 2005, and of course it depends when in the year (it was increasing pretty rapidly), in what area, and the condition of the house. In my neighborhood, $400K bought you a decent (not updated) solid post war bungalow in mid 2005.

But anyways, lets use the benchmarks you linked to. The benchmark ranged from 430K in Jan to 523K in Dec of 2005.

Keeping our down payment at 25K, and assuming you qualified for a mortgage that large, the revised montly carrying costs (with above assumptions) range from $1900 to $2300. Again, rent for a whole house was around $2000. So it doesn't really change the outcome that much, some deals were probably losers and some were winners, why can't you just accept the facts?


@YouCouldBeWrong and VRENG: In any bubble, there is that one person who pays peak price. Imagine how pissed off you will be to find out that person is you and that all your wild hopes of price gains start to fade again. It’s completely possible the price drops will continue for another decade. Bulls, you know it deep down inside it can't last. Sure, we've had a great run, but it's now time to sell or you'll be waiting another decade before you can get rid of your properties. It is easy to see this taking 10 years to play out. The Gov is not out of bullets yet. Not by a longshot. The problem is that it has been shooting so many bullets that the gun is now jammed and is backfiring.


@Boombust: This guy has a sense of humor. It's hard not to laugh when a drug dealer sounds genuinely concerned and tells his clients not to take too much blow.


#63 @VRENGD: The government already has a huge deficit, and the losses are coming for the CMHC. Borrowing to spend raises interest rates, at least for a small country like Canada.


@VRENGD: For as long as renting means living in double the space at half the cost in a livable location, I'll be perfectly happy not to buy. If that's a decade, or two, or fifty, so be it!


"It is easy to see this taking 10 years to play out. The Gov is not out of bullets yet. Not by a longshot. "

I really do fear you could be right – from a fundamental standpoint things are grotesquely out of whack in Vancouver, and in Canada overall to a lesser extent.

All the same there's obvious lack of trust in market fundamentals now by the Powers That Be – nothing can be allowed to fail, needed contractions can't happen, etc. They may well game the system for years to come to prevent any corrections.

One of the few barometers I still kind of trust is POG – the price of gold is telling us that things are profoundly unwell (and that's coming from a non-goldbug).



I agree that one of the problems with looking at housing as a normal investment decision is difficult due to the massive government intervention in the markets. Basically, it is politically safe to try to keep housing prices inflated when 70^% of Canadians are "homeowners" (some say "debtowners', but why quibble on semantics). However, I also see that massive government incentives in the US didn't help their market recover. I also see rates in Japan having been at or near zero for decades and their housing is still half of what it was at the peak.Perhaps our politicians are smarter than in the US and Japan but I doubt it.


I just heard Kevin Newman on Global say that Mark Carney is getting very worried, and is cautioning Canadians about taking on too much debt.

He'll be reporting more on this on his show at 5:30.



Like I said, an average house in E. Van was ~400K. (in 2005)

No it wasn't, that's what you would have paid for a teardown, probably on a substandard lot. I.E. the very bottom of the bunch.

Historically the average house in E. Van has sold for about the UBC (Sauder) benchmark. In 2005 that was about 500K. An independent data point is the REBGV benchmark for E. Van, which was $478,500 in June 2005.



But, hey, renting is fine. Nothing wrong with it. Just know that you will be waiting another decade to buy.


#61 @Rent-o-rama: "Are there even dumber people out there? Is there a never-ending supply of dumb people?"

Yes there are, but they appear at an insufficient rate. That's why the bubble is unsustainable.


"What major factors do you think will keep the bull run going over the next decade?" The endless prosperity engineered by government manipuation of the markets. Interest rates will never rise. Mortgages rates will go down to 0.25 percent as the government buys bonds on the market (financed by BOC printing presses) to keep yields low. Lower rates cause higher prices. When prices appear to stall at a 0.25 mortgage rate, mortgage interest will be made tax deductible. Prices will rise more. When the price boost from interest deductibility peeters out, the Gov will dish out new buyer tax credits or other subsidies and prices will go up even more. All the while, all the Gov printing will cause inflation, which will do its part to push prices up. It is easy to see this taking 10 years to play… Read more »


I have an appointment to speak to my MP tomorrow about CMHC. I wrote an email and got invited to the constituency office. I suppose some politicians are more responsive than others!


If one assumes that people who invested in 2004 were "smart" – i.e. have broken even on a cashflow basis and that they now have large paper gains – then doesn't it follow that the these same "smart" people are the ones who are now selling to the "dumb" ones who are buying? Wouldn't that be what a smart investor would do (i.e. crystallize their profit)?

If this is happening, then who do the "dumb" buyers of today sell to in 2 years? Are there even dumber people out there? Is there a never-ending supply of dumb people?

Just wondering…


@patriotz: "No you haven’t. You’ve just pulled some numbers out of the air. Show us price, rent, taxes, and mortgage rates for an actual property and we’ll start listening." — Oh come on, do I need to provide an actual address to make the numbers believable? Like I said, an average house in E. Van was ~400K. Taxes ~2K. Maintenance ~2K. 5 year fixed ~5% (Interest payments ~87K over 5 years). Rent ~1500-2000K for comparable house rental. Total carrying cost: 87,000 + 5*4,000 = $107,000 or ~$1800 / month. So it's pretty much a wash with renting, with a slight advantage one way or the other, depending on assumptions used. Which numbers do you think are pulled out of thin air and wrong enough to change the overall analysis significantly? "The reason I don’t take you seriously is that I… Read more »


@YouCouldBeWrong: "If you can’t take the heat get out of the kitchen." Huh? We are out of the kitchen. The kitchen appears to actually be on fire. By all means, keep cooking if you want to.


YouCouldBeWrong, interesting point of view. What major factors do you think will keep the bull run going over the next decade? Asking since there are a lot of indicators for a major correction.

Tsk Tisk


Oh Supraboy…posting under another name because you have been kicked around hard a few discussions ago….keep the dream alive in your parents basement



I assume that it refers to standard deviations away from the mean price/income ratio over the whole period.

No it can't be that, because the real price peak in 1981 (which was also the price/income peak) was not surpassed until 2006. Compare to the real price graph:


Note that real incomes have been pretty much flat from 1980 to today.

That graph makes no sense to me whatsoever, particularly the peak in 1988.


Imagine how pissed off all you bears will be in 10 years when all your wild predictions of a big crash once again do not materialize. It's completely possible the bull run will continue for another decade bears and you know it deep down. It's time to put up or shutup. If you can't take the heat get out of the kitchen. Be like scullboy and give up.



I’ve shown a scenario where in fact you would be cash flow neutral having bought in 2005 vs renting,

No you haven't. You've just pulled some numbers out of the air. Show us price, rent, taxes, and mortgage rates for an actual property and we'll start listening.

The reason I don't take you seriously is that I was involved in the market in 2004 and I could see that buying was more expensive than renting even then.


This is getting too good: Crisis? What crisis?


Maybe it's the one where 35 year olds are bidding 8x annual income to buy a shoebox, because they can't borrow 30x to buy a house.


Actually, I have no idea what they did. I think this is somehow an "affordability" index, related to interest rates, etc.