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The Elusive Canadian Housing Bubble

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  • The Elusive Canadian Housing Bubble

    I thought the Canadian crowd might like this ...


    by Alexandre Pestov - Schulich School of Business

    (P.S. - Uploading the PDF kept failing - so you'll have to use the link)

  • #2
    Re: The Elusive Canadian Housing Bubble

    'tis INSANE what I've been seeing.

    I'm having the same "conversation" with Torontonians that I had on DC housing bubble blog & SD housing bubble blog ca. summer 2006.

    " There will never be a Canadian housing bubble. "
    " ... somewhere to sleep ... and have sex ..."

    Point out that only 2 countries have "survived", Oz & the GWN and people seem to go deaf & not want to hear how we might have survived.

    Condo maintenance fees are running higher than my current rent(!!!)[0], and the property tax will be around 30% of the maintenance fees)

    [0] granted that in the vernacular my "apartment" is a ****hole, but still ...

    Comment


    • #3
      Re: The Elusive Canadian Housing Bubble

      Originally posted by Spartacus View Post
      'tis INSANE what I've been seeing.

      I'm having the same "conversation" with Torontonians that I had on DC housing bubble blog & SD housing bubble blog ca. summer 2006.

      " There will never be a Canadian housing bubble. "
      " ... somewhere to sleep ... and have sex ..."

      Point out that only 2 countries have "survived", Oz & the GWN and people seem to go deaf & not want to hear how we might have survived.

      Condo maintenance fees are running higher than my current rent(!!!)[0], and the property tax will be around 30% of the maintenance fees)

      [0] granted that in the vernacular my "apartment" is a ****hole, but still ...
      Insane is a good description.

      Oldest son of a long time and close friend of mine just bought his first home a couple of months ago. He and a buddy of his decided that it was "cheaper" to pay the mortgage on a house than the rent on their separate apartments.

      They have a variable rate mortgage at a current interest rate that is less than 3%. His parents live in a upscale, but older neighbourhood. The house their son bought is in the same district, but on top of the hill overlooking them, about 20 years newer, and twice the size.

      When I saw the pictures of the "new" house I pointed out to his father that when we were at the same stage of life as his son, house prices to income levels were much more reasonable than they are now, and yet although we both were earning professional incomes we couldn't afford such a house. The difference? Interest rates on the debt. Back then they were double digits.

      Our bankers and politicians are wrecking the country...

      Comment


      • #4
        Re: The Elusive Canadian Housing Bubble

        Originally posted by GRG55 View Post
        The difference? Interest rates on the debt. Back then they were double digits.

        Our bankers and politicians are wrecking the country...


        question, why weren't interest rates lowered back then? wouldn't it be good to have low rates?

        Comment


        • #5
          author's 1st language may not be english, and

          he's doing some really (I'm guessing for most North Americans) non-standard things here

          Until I realized what he was doing here I thought his hypothetical 10% rise was 10% to 11%.

          he calls interest rates going from 4% to 14% is a "10% rise", instead of calling this case the more usual "a 10 point increase", or some such.

          this really clashes on page 5:
          "10 percent rise in interest rates from 4 to 14 percent on a mortgage amortized over 25 years will send a $2,500 monthly payment to a stratospheric $5,701 or 128% increase"

          And there is the probable idiom he doesn't explain on p21
          "the shock waves rippled through the fabric of the global financial world at speed and intensity of those triggered by the Tsar Bomb. "


          "Tsar bomb" ? No explanation to non Russians?

          Comment


          • #6
            Re: The Elusive Canadian Housing Bubble

            Originally posted by touchring View Post
            question, why weren't interest rates lowered back then? wouldn't it be good to have low rates?
            Because this was the 1980s and Central Bankers, led by the Volcker Fed, were frightened of inflation. Now they are frightened of deflation...

            Comment


            • #7
              Re: author's 1st language may not be english, and

              http://en.wikipedia.org/wiki/Tsar_Bomba

              Comment


              • #8
                Re: The Elusive Canadian Housing Bubble

                And this just in from Edward Jones via The Globe and Mail ...

                Report warns of housing bubble threat
                ‘The increasing likelihood of a cooling housing market still poses some risks for investors who are not well-diversified’

                Steve Ladurantaye
                Globe and Mail Update Published on Tuesday, Apr. 27, 2010 9:36AM EDT Last updated on Tuesday, Apr. 27, 2010 10:37AM EDT


                Canada's housing market is looking increasingly like a bubble in the making, Edward Jones said today in a report.

                “Canada’s housing market escaped the recent severe downturns in the U.S. and other countries. However, today’s conditions in Canada share some characteristics of those countries prior to their downturns, leading us to take a cautious stance on housing investments,” wrote analysts Kate Warne and Craig Fehr, adding that Canadians should prepare for “the possible impact” of a housing downturn.

                An asset bubble forms when cheap money causes speculators to flood into a market, driving prices higher despite weak underlying fundamentals. With unemployment high and the economic recovery on shaky ground, the rapid recovery of Canada's real estate market has many economists concerned that prices could head lower. Prices have gained almost 20 per cent in the last year, as a lack of inventory and easy access to cheap money has propelled Canadians toward home ownership.

                The analysts said three factors must be in place for a bubble to form – prices that are too high compared to historical averages, easy credit, and lax government policy that allow people to get in over their heads. Last month the federal government made it more difficult to obtain a mortgage, requiring all borrowers to qualify at the five-year rate when applying for credit rather than the variable rate, which can be much lower.

                “We think the first two conditions characterize the current Canadian housing market,” the report states. “To avoid the third condition, the government is taking steps to tighten mortgage availability, and regulation remains relatively tight. While we believe any housing downturn in Canada won’t be as severe as the recent U.S. experience, the increasing likelihood of a cooling housing market still poses some risks for investors who are not well-diversified.”

                While the economy has shown signs of strength, the analysts suggest the pace of recovery in the housing market has been too high to be sustainable.

                “Housing prices have outpaced the overall economy, including unemployment trends and gross domestic product (GDP) growth,” they state. “As a result, our stance on Canadian housing market risk is becoming increasingly cautious.”

                Tighter lending standards, rising interest rates and mortgage costs, an increase in new supply and consumer deleveraging could all conspire to take the market lower, they said. Any slowdown has implications for the broader economy, they said, particularly when it comes to consumer spending.

                About 30 per cent of all mortgages taken out between 2007 to 2009 have terms of less than three years, they said, which means they will likely be renewed at higher rates.

                The extra costs could keep people from spending on other items -a 3 per cent increase in mortgage rates would mean an extra $444 a month for a mortgage of $254,514, they said. That would shift $1.82-billion of Canadians' $911.5-billion in annual discretionary spending toward mortgage costs.

                “In addition, Canadian consumer debt has risen steadily for several years, reaching new highs as measured by debt as a percentage of disposable income,” they said. “Thus, consumers don’t appear to have the flexibility they might have had in the past.”

                Last week, Gluskin + Sheff economist David Rosenberg suggested Canada's housing market was in for a 20 per cent price correction. He said government intervention and easy money has helped the market get ahead of itself.

                “The question is not whether home prices slide especially in bubbly Toronto and Vancouver, but just how much froth is there to come out,” he said. As rates begin to rise and more supply comes on the market, he said the market will be under a lot of pressure to keep advancing.

                “The housing market in Canada, the goose that laid the golden egg for the broader economy, is now going to be operating without the crutch of massive government support. It will be fascinating to see how this all plays out.”

                Comment


                • #9
                  Re: The Elusive Canadian Housing Bubble

                  Hi itulipers, this is my first post on the board but I've been reading for a year or so now. I noticed today that the Canadian banks lowered fixed mortgage rates by 10-15 basis points, citing the Greek (EU) crisis and subsuquent market pullback and flight to Canadian bonds as the primary reason for doing this.

                  http://www.theglobeandmail.com/repor...rticle1564570/

                  In my view, this will effectlively prolong and enhance Canada's real estate bubble. The B of C has hinted at rate increases for the end of June but in the event of a further market pullback, will these increases be put on hold? Given that ongoing market pullbacks are highly likely on and off for the next several years, can we legitmately expect rates to rise in rapid and linear fashion, as has been speculated widely by many individuals? Also, I'm interested in hearing peoples interpretation of how the deflation of the Canadian real estate bubble might occur. Obviously the key indicators suggest that we are very frothy in some parts of Canada and I expect a sizeable correction but I'm starting to think that the bubble popping may be further off than I thought (I was thinking it would start this summer and fall), especially if market turmoil in the EU has the effect on mortgage rates that it did today. Thoughts?

                  Things to ponder:

                  1) Western Canada is loaded with natural resources, which typically gives Canada a positive balance of trade
                  2) Our own ugly debt problem has not been acknowledged but still exists although perhaps not to the extent to the US.
                  3) Are our banks as healthy as reported? US banks looked healthy prior to a collapse in real estate as well.
                  4) CHMC is still guaranteeing mortgages that banks probably wouldn't touch. I wonder what would cause that situation to end.

                  Thinks in advance for any thoughts that you have.

                  Comment


                  • #10
                    Re: The Elusive Canadian Housing Bubble

                    A nice follow up piece by Alexandre Pestov ...

                    The Elusive Canadian Housing Bubble: Summer 2010 Edition - Canary In A Coal Mine

                    Comment


                    • #11
                      Re: The Elusive Canadian Housing Bubble

                      Originally posted by Fiat Currency View Post
                      Well here we are almost 3 years later, watching gold and silver (and oil and copper and everything else in the commodity complex) get smashed. Canadian housing you ask?

                      Home prices tick higher despite sales slump

                      Prices inch 2.5% higher in March from year earlier, CREA reports

                      CBC News
                      Posted: Apr 15, 2013 9:27 AM ET
                      Last Updated: Apr 15, 2013 10:28 AM ET

                      Canadian home prices continued their upward trajectory in March despite a large decline in the number of homes sold, the Canadian Real Estate Association said Monday.

                      The number of sales recorded on the group's MLS system declined by 15.3 per cent in March 2013 compared with the same month a year earlier.

                      Yet despite that drop-off, prices inched higher. The average price of a Canadian resale home was $378,532 in March, up 2.5 per cent from a year earlier...

                      Comment


                      • #12
                        Re: The Elusive Canadian Housing Bubble

                        Originally posted by GRG55 View Post
                        Well here we are almost 3 years later, watching gold and silver (and oil and copper and everything else in the commodity complex) get smashed. Canadian housing you ask?
                        Fun times for sure. When does the Canadian housing market's turn come? Who knows.

                        All I know, is it sure is going to be a fun 6 months if you're fortunate enough to have a shed full of dry powder.

                        I love a good deflationary sale

                        Comment


                        • #13
                          Re: The Elusive Canadian Housing Bubble

                          Originally posted by Fiat Currency View Post
                          Fun times for sure. When does the Canadian housing market's turn come? Who knows.

                          All I know, is it sure is going to be a fun 6 months if you're fortunate enough to have a shed full of dry powder.

                          I love a good deflationary sale
                          A chart of relative values of Canadian housing vs USA housing from a recent BoM report. No prizes for figuring out which line is which



                          Oh, and by the way, if anybody wants a few minutes of amusement about the idiotic real estate market in one of the last holdouts in the Great Global Property Bubble, take 3 minutes to cruise through this link:
                          http://vancouverpricedrop.wordpress....april-16-2013/
                          Last edited by GRG55; 04-29-13, 08:06 PM.

                          Comment


                          • #14
                            Re: The Elusive Canadian Housing Bubble

                            Even CNBC is getting in on the discussion...

                            Comment


                            • #15
                              Re: The Elusive Canadian Housing Bubble

                              in march '10, when the initial post in this thread went up, gold holders were thrilled that it was trading at 1100-1150. just an fyi...

                              Comment

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