Canada Housing bubble in the Wall Street Journal.

I think Domus was the first to point out this article in the Wall Street Journal – it looks like the Canadian Housing Bubble is getting some attention in the US media.

But some economists who are concerned point out that home prices are rising far faster than other measures of economic health. The 2009 price increase of more than 20% came as personal income in Canada fell nearly 1% and total employment was 1.4% lower than the year earlier. In a December report, the Bank of Canada warned that household debt—largely mortgages—was 1.42 times disposable income during the second quarter of 2009, a record high.

Another possible danger: Because Canadian banks typically reset adjustable-rate mortgages every few years, those who are buying now at low rates will likely see increases soon. Toronto-Dominion Bank forecasts suggest that the rate to which many Canadian mortgages are pegged, the prime rate, could nearly double by the end of 2011. The Bank of Canada warned in its December report that if interest rates increase as expected, by mid-2012 about 9% of Canadian households could have so much debt that they’d be “financially vulnerable.”

“This is exactly what happened in the U.S., when affordability had moved way out of whack with prices,” says David Rosenberg, an economist who witnessed America’s housing bubble at Merrill Lynch in New York, and now sees similar trends up north from his post at Toronto-based wealth-management firm Gluskin Sheff.

Reading the article it quickly becomes apparent that Canada = Toronto (with a dash of Red Deer).  So we finally get some mainstream media coverage and there isn’t a single mention of the Vancouver market in there.  What are we, chopped liver?

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chico
Member
chico

The even better article is the G&M article concerning the Competition Bureau's decision to attack the MLS monopoly.

This poor industry: Attacked by foreign journalists and bloggers and now domestic bankers and bureaucrats. Pile on the HST, no more "the Olympics are coming" and buyers of the future used up months ago. Ouch!

Starving Artist
Guest
Starving Artist
It's going to be interesting to see what happens when completions catch up to the starts line – that's a lot of construction jobs that aren't likely to come back any time soon. http://housing-analysis.blogspot.com/2010/02/cons… Although I'm not sure how that jives with this: VANCOUVER, BRITISH COLUMBIA–(Marketwire – Feb. 8, 2010) – According to Canada Mortgage and Housing Corporation (CMHC), 917 new housing units broke ground in the Vancouver Census Metropolitan Area (CMA) in January, 50 per cent higher than the same month a year ago. I'd be inclined to believe the former, but that's just my bias showing. The construction industry has grown by 110,000 workers according to BC Stats, from 2000 to 2008 and falling since then. That represents almost 5% of the BC workforce in 2008 numbers. If all those are boom jobs…..? 15% unemployment a possibility? http://www.bcstats.gov.bc.ca/data/dd/handout/naic…
patriotz
Member
http://www.theglobeandmail.com/report-on-business… Bubbles remain hard to define, difficult to measure and, like recessions, can only be accurately assessed after they have burst. Economists have wrestled with bubbles for generations, but have yet to devise an adequate scientific means of analyzing them, comparing them or providing us with an early warning system that would safeguard from their worst effects. With respect to RE bubbles, that is complete nonsense. Because the earnings of RE (rental value) and ability to pay (wages) are so predictable, it's very easy to see from price/rent and price/income whether price is out of line with earnings. These numbers cannot deviate from historical norms in the long run. This has been demonstrated by many well known experts like Robert Shiller. Anyone willing to take an objective look at the numbers in 2005 could see that the US market was… Read more »
Boombust
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Boombust

TOTALLY off topic…but I almost gagged when Michael J Fox'x name came up as a possible person to light the Olympic torch.

WTF? What has he ever done for this country? He's not even Canadian anymore.

As far as Tsur Somerville, he reminds me a lot of Michael Levy.

Sticks up his finger to see which way the wind blows.

Me? I salute them both with the middle one.

ta da
Guest
ta da

Good thing those rich foreigners don't read the Globe and Mail's ROB.

Boombust
Guest
Boombust

Really though, all the recent MSM attention to our market…

I feel like a Noxema Girl. I knew I was beautiful all along.

Purp
Guest
Purp

@Patriotz "…it’s very easy to see from price/rent and price/income whether price is out of line with earnings…" — Doesn't it really come down to a monthly payment? In that sense price/rent should be a good indicator since rent can't mortgaged it represents what the market is willing to bear for housing. But I don't really get the price/income ratio, since this ratio is closely correlated with interest rates and amortization lengths. When rates were 10%+, the ratio sat at 3-4. It has been trending upwards for the past 25 years as rates have been decreasing, for much longer than a bubble existed. So I don't think it's really a good metric, or at best it's an indirect measure of affordability.

patriotz
Member

@Purp:

You seem to be assuming that today's low interest rates are permanent. What I am saying is that if price/income and price/rent deviate significantly from their sustainable values seen during times of moderate interest rates (the 50's for example), they have to come back down. Because interest rates will inevitably return to normal as well.

rp
Member
rp

"What are we, chopped liver?" – a lost cause.

domus
Guest
domus

More bubble talk on the G&M this morning:

http://www.theglobeandmail.com/report-on-business

I am hearing echos of 2008.

anonymousAA
Guest
anonymousAA

Nice press from the US. If Americans are finally taking notice of Canada, there MUST be a problem.

It's tax time, and as an accountant I see a lot of financial information. I really don't like what I'm seeing. Excuse me, but people who earn $40k per year really shouldn't have $700k in debt (and that's just the mortgages!) And it's not just one or two clients, it's quite a few. They've taken out these mortgages to buy principal residences, and then added a couple of rental properties for good measure.

Ever get that sick, worried feeling in your stomach? Yes, this would be one of those times.

shannon
Guest
shannon

bubble verbatim article from globe and mail

http://www.theglobeandmail.com/report-on-business

Purp
Guest
Purp

@Patriotz — I guess the question is what is 'normal' for rates? No doubt that rates have nowhere to go but up, but is it realistic that 5 year mortgages will go back to 10%+ anytime soon?

Not much of a name...
Member
Not much of a name...

@Purp:

It doesn't matter if rates don't go as high as 10%. When you have rates that are in the range of 2-4%, going up to, let's say 6%, will hurt many many people.

If people are stretching in terms of affordability now, every incremental rate increase will only be that much more painful.

Purp
Guest
Purp

@NMOFAN — Agreed, higher rates in any form will cause hurt. My point is only that if we are using a price/income ratio of 3-4 as 'normal', then we are really waiting for interest rates to return to 10%+ and amortizations to max out at 25 years. I just don't see that happening anytime soon (if it did it would absolutely bring the world economy to it's knees). In the medium term, I wonder if we will return to something in between, say 6-8% and 30 year ams. This will correspond to a different price/income ratio, say around 7-8. People who are waiting for homes to return to 3x income may as well rent for the rest of their lives.

Eyes of the World
Guest
Eyes of the World

Hahaha..I love checking in here and seeing the same old "arguments" being rehashed over and over and over again…

Vancouver is the best place on earth and the Olympics will show that to the world. People will walk around, notice the beauty and buy here.

Most people are room temperature, and there are a lot of them with tons of money. A lot of them are coming to the games (who else can afford them?). Not all of them are rational investors, as the supposed bubble has shown. If you think that many of them wont buy here because of the price you are out to lunch…

Not everyone is a rational investor like all the bear renters here..

Drachen
Member

@Starving Artist:

Regarding the sharp uptick in housing starts in January it may just be the unseasonably warm weather we've been having this year. Often housing starts follow weather patterns rather than 'calendar' seasons.

No Longer Looking
Member
No Longer Looking

Vancouver is Interzone. Exterminate all rational thought.

Aleks
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Aleks
@Purp: @NMOFAN — Agreed, higher rates in any form will cause hurt. My point is only that if we are using a price/income ratio of 3-4 as ‘normal’, then we are really waiting for interest rates to return to 10%+ and amortizations to max out at 25 years. I just don’t see that happening anytime soon Interest rates doubling from 3.5% to 7% would have exactly the same effect on people's ability to pay as when they went from 5% to 10% or 9% to 18%. Plus, a lot of people are so maxed out that even just a 1% rise would sink them. Sure, 1% doesn't sound like much but as a fraction of the current interest rate it would mean about a 30% increase in the interest portion of mortgage payments. Whether rates will ever go to 10%… Read more »
patriotz
Member

@Purp:

My point is only that if we are using a price/income ratio of 3-4 as ‘normal’, then we are really waiting for interest rates to return to 10%+ and amortizations to max out at 25 years.

What do you mean "we", white man? I explicitly gave the 1950's as a time of stable house prices and interest rates. What do you think the rates were then?

BTW longer amortizations cannot result in lower prices long run, because they borrow demand from the future with interest. They also greatly increase the risk from rising interest rates.

patriotz
Member

@patriotz:

Excuse me, "longer amortizations cannot result in higher prices long run".

logic
Guest
logic

16: "Not everyone is a rational investor like all the bear renters here."

———————————

In Soviet Russia, Investment Rationalizes You!

(coming soon to an Olympic town near you)

Drachen
Member

@Eyes of the World:

"Not everyone is a rational investor like all the bear renters here.."

Well that's what we've been saying for the past five years!

A bubble market cannot develop if everyone behaves in a rational manner. But it cannot be sustained indefinitely either so it will crash. The only pertinent question is when.

Your own argument promotes the bubble hypothesis you know?

Purp
Guest
Purp
@Patriotz : I don't know what the rates were in the '50s, I wasn't alive yet, maybe you can tell me? 🙂 Look, the point is, a given 'affordable' price/income ratio is only relevant in a static lending environment (ie rates that are steady). If someone says a 4x ratio represents a normal market, they are also implying that 5-year interest rates are in the 10-12% range. If the rates change, then the price/income also changes, which means it's not a particularly useful metric. I think price/rent is a much better metric because it directly ties the price to a monthly payment. I understand your point about longer amortizations, but I think it's fair to say that as amortizations increase the price/income ratio will also be rising. If they are held steady I guess eventually enough future demand will be… Read more »
Purp
Guest
Purp

@Aleks — you kind of made my point. Wishing for a 4x price/income ratio is like either wishing for unicorns or economic scorched earth. One isn't going to happen and you don't want the other one to happen.

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