The Elusive Canadian Housing Bubble

[GRG55]

Re: Defending Krugman

This is my first, and hopefully last, positive statement about Krugman.

He is talking about a Canadian property bubble, not US public sector debt.

The US can print money and devalue it's debt, but Canadian home owners cannot.

I would like to see a Canadian mortgage debt vs Canadian median income chart.

The source of the potential "deleveraging shock" that Krugman is referring to is exactly the same as the source of the USA deleveraging shock that hit starting in 2007...debt backed by over-inflated home prices. So I don't see any material difference in the situations north vs south of the 49th Parallel.

Here's a few charts below to amuse, the first of which I believe includes a form of the debt to income data you were inquiring about. Please note that mortgage interest on a principal residence is not deductible against other income in Canada, unlike the USA. Further, our mortgage market is quite different from the USA in that 30 year fixed mortgages and easily refinanced mortgages aren't available. Refinancing early usually involves heavy interest penalties, and mortgages generally have to be renegotiated at maximum 5 year intervals, so Canadian home buyers are generally more exposed to rising interest rates over the life of their indebtedness.

The second chart below shows Canadian Mortgage and Housing Corporation (CMHC) insured mortgages. CMHC is a federal government (e.g. Taxpayer) backed mortgage insurer. At present (1st Q 2013 data) it insures some CAD $560 Billion or about 62% of all home loans in Canada. Since CMHC insulates the banks who write the mortgages from losses there is a growing concern about potential loosening of credit standards. Although the Finance Minister won't use the phrase "housing bubble", the now acute concern about Canadian debt levels within the Finance Ministry and the Bank of Canada caused the government to announce that it was capping CMHC's balance sheet at a maximum of CAD $600 Billion. They know full well that in the event of a train wreck in the real estate market the taxpayers will have to bail out the banks both directly and via bailing out CMHC. Earlier this year the banking regulator designated all six major Canadian banks as "systemically important" - read: TBTF.

There is currently Cdn$960 Billion of real estate backed lending on the books of the major Canadian banks. The Cdn $400 Billion that isn't insured by CMHC is high-ratio mortgages that don't qualify for the insurance and Home Equity Lines of Credit (HELOCs) that also don't qualify. If there is a significant downturn in Canadian home prices it is these loans that have the potential to start the deleveraging cascade. That risk rises at the onset of the next Canadian recession (the economy is already slowing, unlike the USA) when reduced incomes will impair the ability to service these record household debt levels.

What I find most amazing is that almost everyone I speak to where I live in western Canada is completely convinced that real estate is the most secure "investment" they can make today. Most of them seem to have way too much of their net worth tied up in their expensive personal residences, and an extraordinary number also have second vacation homes on the lakes in B.C., at the ski resorts in the Canadian Rockies or Whistler, and most recently in places like Phoenix or Palm Springs. Mind boggling...


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[GRG55]

Re: The Elusive Canadian Housing Bubble

If he were to get 30 year fixed mortgage, what would the rate be?

It is called "mort-gage" for a reason.

There are no 30 year fixed mortgages in Canada.

[Polish_Silver]

Re: The Elusive Canadian Housing Bubble

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...

If he were to get 30 year fixed mortgage, what would the rate be?

It is called "mort-gage" for a reason.

[Polish_Silver]

Re: The Elusive Canadian Housing Bubble

ans: private debtors don't get to print money. when the private sector is deleveraging, the public sector needs to leverage up to counteract the change in private debt levels to avoid net contraction of demand and consequent deflationary pressures.

This problem is solved implicitly in Kotlikoff's limited purpose banking system. There is no leverage, and lending never exceed prior savings. No more credit cycles. You don't have to wonder why it's being ignored.

[Polish_Silver]

Summers vs MMT

We have many such charts.

The question is, Is there a maximum threshold for household debt, credit market debt, public debt, and foreign (external) public debt?

Here's the official answer from Larry Summers when I asked him in 2011. Having asked around I can assure members that Summers' answer is The Official Answer.

The answer is that previously estimated thresholds have been "comfortably surpassed." Apparently they think it can go on forever. Or maybe they think it can go on for as long as they are in office and accountable and the next guy in line will have to deal with the ultimate debt crisis.

Summers' answer included a household budget analogy, in which debt was increased to acquire assets. That is not what the country is doing. It is just acquiring more debt, period.

Assuming "they" (public officials) think "it" (debt expansion) can go on forever, how is the ideology different from MMT ?

Now that I think about, it, suppose the country borrowed an additional $ 1 trillion this year, and used it to buy gold. Wouldn't that actually improve the balance sheet? Or would that be admitting that gold holds value better than T-bonds.

[Polish_Silver]

Defending Krugman

Let me see if I have this right...deficits don't matter. But "deleveraging" does.

What does PK think the end game is when debt levels are rising faster than GDP for years on end?

This is my first, and hopefully last, positive statement about Krugman.

He is talking about a Canadian property bubble, not US public sector debt.

The US can print money and devalue it's debt, but Canadian home owners cannot.

I would like to see a Canadian mortgage debt vs Canadian median income chart.

[jk]

Re: The Elusive Canadian Housing Bubble

Let me see if I have this right...deficits don't matter. But "deleveraging" does.

What does PK think the end game is when debt levels are rising faster than GDP for years on end?

ans: private debtors don't get to print money. when the private sector is deleveraging, the public sector needs to leverage up to counteract the change in private debt levels to avoid net contraction of demand and consequent deflationary pressures.

[EJ]

Re: The Elusive Canadian Housing Bubble

Let me see if I have this right...deficits don't matter. But "deleveraging" does.

What does PK think the end game is when debt levels are rising faster than GDP for years on end?

We have many such charts.

The question is, Is there a maximum threshold for household debt, credit market debt, public debt, and foreign (external) public debt?

Here's the official answer from Larry Summers when I asked him in 2011. Having asked around I can assure members that Summers' answer is The Official Answer.

The answer is that previously estimated thresholds have been "comfortably surpassed." Apparently they think it can go on forever. Or maybe they think it can go on for as long as they are in office and accountable and the next guy in line will have to deal with the ultimate debt crisis.

[GRG55]

Re: The Elusive Canadian Housing Bubble

Even Krugman's babbling about it now ...

Paul Krugman: Canadian Economy Vulnerable To 'Shock' Due To Debt Levels, House Prices

The Huffington Post Canada | By Daniel Tencer Posted: 06/15/2013 7:13 pm EDT | Updated: 06/15/2013 7:17 pm EDT

Renowned economist Paul Krugman is worried about Canada’s economy.The Nobel Prize winner and New York Times columnist wrote in a blog post Saturday that Canada “ought to be quite vulnerable to a big deleveraging shock despite its boring banks...

Let me see if I have this right...deficits don't matter. But "deleveraging" does.

What does PK think the end game is when debt levels are rising faster than GDP for years on end?

[Fiat Currency]

Re: The Elusive Canadian Housing Bubble

Maybe now?? Who can tell...

Even Krugman's babbling about it now ...

Paul Krugman: Canadian Economy Vulnerable To 'Shock' Due To Debt Levels, House Prices

The Huffington Post Canada | By Daniel Tencer Posted: 06/15/2013 7:13 pm EDT | Updated: 06/15/2013 7:17 pm EDT

Renowned economist Paul Krugman is worried about Canada’s economy.The Nobel Prize winner and New York Times columnist wrote in a blog post Saturday that Canada “ought to be quite vulnerable to a big deleveraging shock despite its boring banks.”By “ought,” he means he’s not quite sure. But he sees warning signs in the fact that a very large spread has developed between U.S. and Canadian house prices, and Canadian household debt levels are reaching levels seen in the U.S. just before that country’s own “deleveraging shock.”House Prices, U.S. vs. Canada



He sees Canada as a “test case” for theories as to why the U.S. has been struggling for so long to come out of its economic slump.One such theory -- which Krugman himself gives credence to -- says that it wasn’t the bank crisis that caused the slump, but rather the “overhang of private debt” from the country’s housing bubble.If that’s the case, Krugman argues, then the fact that Canada’s banks didn’t get involved with the “toxic” mortgage-backed assets that sank U.S. banks won’t stop the country from experiencing the same sort of economic stagnation and high unemployment that has plagued the U.S. for the past half decade.But for that to happen, the housing market would have to actually crash -- and, as Krugman notes, the market isn’t crashing.“People have been [predicting a crash] for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too,” he wrote.Many economists argue that for a bubble to pop, there needs to be an “event” -- such as an economic slowdown, or a bank crisis -- and that no such event is on the horizon for Canada’s economy.Krugman is not alone in predicting trouble for Canada’s economy. Robert Shiller, the real estate expert whose name is on a U.S. house price index, said he is worriedCanada is experiencing a “slow-motion version” of the U.S.’s housing crash.The Economist and the OECD have both recently declared Canada to have one of the most overvalued housing markets in the developed world, and at least one U.S. hedge fund manager is staking all his clients’ money on a Canadian housing downturn.But there are plenty who argue the opposite. David Rosenberg, a former Merrill Lynch economist credited with predicting the U.S. financial crisis, said last week those betting against Canada are taking a big risk.He pointed to the fact that the fundamentals of Canada’s housing market have turned positive recently, after slumping for many months, and that Canada’s bank profits are holding up despite predictions for nearly a year they would turn south.And there are many who continue to argue it was fraudulent business practices and poor regulation in the U.S. that caused the collapse.“A lot of the problems that generated the crisis in the U.S., they just never happened in Canada,” University of Toronto finance professor Laurence Booth told the Financial Post. The people betting against the Canadian banks “have no idea of the difference between the Canadian and U.S. housing markets.”

[GRG55]

Re: The Elusive Canadian Housing Bubble

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

Maybe now?? Who can tell...

An excerpt from Garth Turner's always amusing blog:

Suck It Up

How tough are things in the mortgage broker business? Brutal. Volumes have crashed. Virgins disappeared. Rates rising. And banks are rushing the exits.

The latest to bolt is CIBC, which this week bailed out of its Mortgage Centre operations, selling it for scant dollars (reportedly) to Dominion Lending Centres, the outfit with the sleazy Don Cherry commercials (how could they be otherwise?). The deal means the bank gives up 160 stores, about 1,200 loan-flogging salespeople and $7 billion in volume. It also means Dominion swells to occupy almost a third of the entire industry.

Why would the bank throw overboard a sales network generating revenue? Because in a shrinking real estate market, CIBC wants all that business redirected through its branch network where ‘deeper customer relationships’ can be forced. Kind of like bondage, but without the handcuffs and jelly.

If you have your mortgage at the bank, chances are your car loan, RRSP and home equity loan will be, too. Plus TNL@TB can get her talons into you for fee-laden mutual funds and comatose GICs. Times may be tougher to be a banker, but they’re terrifying to be a broker.

Peter is a real estate appraisar working the south end of BC’s Okanagan Valley, where the wrinkly people from Alberta migrate to avoid some snow, drink bad wine and live in monster houses before they croak. This, of course, is the goal of life.

“I thought you would be interested in what is really happening here in the South Okanagan,” he writes me. “Here are three sales that may or may not shock you.”:

3948 Valleyview Road , Penticton. “The ultimate in privacy. High end home located on two beautifully landscaped acres. This home has been completely remodeled. New granite kitchen with extensive cabinetry and 5 high end appliances. 3,000 square feet. New hardwood floors. 3 impressive bathrooms. Good quality finishing’s throughout. Triple garage has 3 separate door openers, built in oak cabinets with beverage fridge. Spacious patio areas to enjoy the privacy. Huge driveway and RV parking. Room to build that big shop and carriage home.”

Sold in June of 2011 for $1,195,000. Sold in May of 2013 for $890,000. Loss: $305,000 plus realtor fees and improvements, or 29%.


174 Ponderosa Ave, Kaleden BC (15 km south of Penticton). “This stunning home is located right across the street from Pioneer Park & Skaha Beach. This is a 3 bedroom, 3 bathroom home with beautiful mountain and lakeviews. Large windows and sliders so that you have a lot of natural light. Large deck perfect for entertaining or taking in the lake breeze. The home is surrounded by Allan block walls and amazing gardens. The park across the street has new tennis courts, bbq area, park, basketball courts, boat launch and beach front area.”

Sold in October of 2007 for $715,000. Sold in June, 2013 for $425,000. Loss of value: 40%.


169 Christie Mountain Lane, Okanagan Falls. “Captivating lakeview from nearly every room! This Heritage Hill residence is situated on 0.529 acres of privacy. 4,254 sq ft, 4 bedrooms, 4 full baths (hobby room could be 5th bdrm). 2 large lakeview decks to enjoy the beautiful views! Spacious kitchen with breakfast bar, 6 appliances and open to nook with vaulted ceiling, skylights and bay picture windows. The sunken great room has a 19′ vaulted ceiling with extra large windows to take advantage of the incredible lake vista, rock faced floor/ceiling gas fireplace. The main floor master bedroom has a cozy fireplace, 4 pc ensuite and French doors to the pool area. This home is located 10 minutes south of Penticton. Relax in the warm Okanagan sun around the in-ground swimming pool or on one of the many stamped concrete decks. 4 gas fireplaces, 2 staircases to upper level, 2 furnaces w/central air, plus 2 hot water tanks, and much more.”

Sold (new) in December of 2007 for $1,150,000. Sold in June of 2013 for $875,760. Loss: $274,000, or 24%.


Still think the housing correction’s a mirage, or that real estate always goes up? This is what happens when property-rich, asset-poor, almost-retired people discover a house is not a financial strategy. And there are nine million Boomers in Canada. Get ready...

[lektrode]

Re: The Elusive Canadian Housing Bubble

this phenom might start to affect that number too:

• Updated June 3, 2013, 10:36 p.m. ET

The Latest Urban Development Trend: Less Elbow Room

VANCOUVER, British Columbia—To get a sense of how America will pack more people into its cities, head north to an alley that runs behind Petersham Avenue here. That's where Ajay Kumar built a $300,000, Moroccan-themed cottage that sits in his backyard and will soon be occupied by his parents.

Mr. Kumar's "laneway house" is part of a broader plan that encourages Vancouver homeowners to add rental units in their basements, attics and backyards. The hope is to reduce sky-high housing costs and increase population density throughout the city—including the single-family-home neighborhoods like Mr. Kumar's that surround the city's towering downtown.


Cities across the U.S. and Canada are liberalizing their zoning codes to allow multiple dwellings on a single lot. Planners like these "accessory units" because they steer growth to developed land and infrastructure, reducing the cost of city services. Such housing can allow seniors to live near their children. And the dwellings are smaller and cheaper—helping cities create more affordable housing.


Few cities have gone as far as Vancouver, which has seen real-estate prices soar after an influx of domestic and foreign buyers. In many U.S. cities, citizens might not tolerate changing the rules to boost population density. But other places, including those with high real-estate prices and housing shortages, are encouraging accessory units despite resistance from some residents.

more...

in hawaii, it was called 'ohana zoning' and resulted in overloading of the infrastructure (and likely crimped NAR revenues) so it was stopped

of course now they call it 'transit oriented development' and are attempting to raise the height limit from 400feet to 700feet in town.

infrastructure?
who needs that, when ya can build to the moon...

[GRG55]

Re: The Elusive Canadian Housing Bubble

Two things that were too amusing not to post:

Vancouver Realtor Hunger Index

The Vancouver Realtor Hunger Index for April 2013 was 60.

The VRHI is the percent of realtors who earned no commission income for the month using a simplistic formula: start with the total reported sales from the REBGV Monthly Statistical Report; assume 5% of those sales were ‘double ended’ (one realtor kept the entire commission by ‘representing’ both buyer and seller); add to the number of ‘double ended’ commissions the number of split commissions (which I reduced by an assumed 15% ‘earned’ by realtors who handled multiple sales); divide the resulting number of commissions by the total number of realtors; subtract that fraction from 1 to yield the percent of realtors not earning commissions and therefore going hungry.

Historical results using the same methodology are below (the REBGV website (http://www.rebgv.org/about-rebgv) reveals neither the exact number of realtors at any particular time nor the percent actively engaged in selling residential property; I used 11,000 for 2013, 2012 and 2011; 10,000 for 2010, 9,400 for 2009, 9,500 for 2008, 9,000 for 2007, 8,200 for 2006, 7,800 for 2005, 7,100 for 2004, 6,700 for 2003, 6,500 for 2002 and 6,700 for 2001):

Month....2001.....2002.....2003.....2004.....2005. ....2006.....2007.....2008.....2009.....2010..... 2011.....2012.....2013
Jan.........70%......42%......51%......54%.....64% ......61%.....67%......68%......87%......68%..... 72%......76%.....80%
Feb.........56%.....23%......31%......28%.....35%. .....40%......47%.....53%......74%......59%.....5 3%......61%.....73%
Mar........42%.....13%.......31%......0%.......16% ......18%.....36%......47%......60%......48 %....38%.....56%.....64%
Apr.........44%.....3%........23%......0%.......14 %......32%.....37%......44%......48%......42%.... .51%......58%....60%
May.......33%......12%......19%......8%.......5%.. ......13%.....20%......47%......38%......47%..... 49%......57%
Jun.........30%......31%......12%.....18%......8%. .......20%.....21%......57%......25%......51%.... .51%.....64%
Jul..........35%......32%......0%.......29%......2 2%......45%.....28%......62%......27%......62%... ..61%.....68%
Aug........36%......37%.....18%......42%......22%. .....39%.....37%.....73%......39%......63%......6 4%.....75%
Sep.........46%......37%.....17%......33%......29% ......49%.....49%.....72%......37%......63%...... 66%.....77%
Oct.........41%......27%......6%.......36%......34 %......45%.....44%.....76%......34%......61%..... .65%.....71%
Nov........35%......35%.....25%......42%......37%. .....52%.....47%.....85%......45%......58%......6 4%.....74%
Dec........41%......44%......40%.....52%......50%. ......66%.....65%.....84%......55%......68%.....7 5%......83%

This thread will be updated at the beginning of every month as soon as the REBGV reports the prior months' sales.



Vancouver Price Drop


Documenting Vancouver real estate price movements


Weekly Drop Metro Vancouver Attached – May 1, 2013

[GRG55]

Re: The Elusive Canadian Housing Bubble

This chart probably looked quite different in circa-2006

A study by the OECD, which compared prices with local wages and rents, suggests Belgium, Norway and Canada are the most expensive markets compared with their own long-term averages, followed by New Zealand, France and Australia...

[jk]

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...