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Canadian housing bubble

Commenting about the recent Wall Street Journal article “Housing rebound in Canada spurs talk of new bubble,” Rolfe Winkler of Reuters says

Last week Paul Krugman toasted the sobriety of Canadian banks. Among other things, he said that low rates aren’t enough to cause a bubble since Canadian rates are low and, well, they don’t have a bubble. If this article is to be believed, Krugman didn’t look closely enough. Banks may use less leverage in Canada, but low rates are encouraging households to borrow big — debt to disposable income is a bubbly 1.42x. Key quote in this piece is near the bottom, where a real estate agent notes that rising prices mean rents are only barely covering mortgage payments for real estate investments. The best definition of a bubble is when debt service payments finally eclipse rents. Then buyers/lenders are betting on continued appreciation, which can only be driven by still-easier credit. Canadian real estate appears to be headed in that direction.

Exactly right.  There are a few countries that have not seen their enormous property bubbles implode, among them South Africa, Canada, and Australia. All are leveraged to commodities to varying degrees. Coincidence? Hardly.

rogers-commodities-index-2010-02-08

Remember that Japan’s banks were very well capitalized in 1989, as were American banks in 2007.  While the bubble in the U.S. was plain as day as the 2005 Economist graphic in my post Naysayers, the housing bubble was obvious points out, by that juncture Canada was looking relatively tame; Australia, not so much.

Given the recent irrational exuberance in Canada, let’s wait and see how the huge run up in Canadian house prices plays out over the long-term.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty years of business experience. He is also a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College. Edward also writes a premium financial newsletter. Sign up here for a free trial.

6 Comments

  1. Tim says:

    Almost all new residential real estate lending in Canada since 2007 has been backed through the government owned/backed CMHC. This is a problem for the govt more than the banks. Also Value Added Taxes are being increased in several provinces come July 1st increasing home purchases artificially before taxes go up.

    • In a message dated 2/8/2010 19:03:08 Mountain Standard Time,
      writes:

      Almost all new residential real estate lending in Canada since 2007 has
      been backed through the government owned/backed CMHC. This is a problem for
      the govt more than the banks. Also Value Added Taxes are being increased in
      several provinces come July 1st increasing home purchases artificially
      before taxes go up.

      Why is it a problem for the Canadian government? The government doesn’t
      have a solvency problem. It’s wonderful that most Canadian mortgages are
      held in the hands of a stable Crown Corporation, which mitigates the risk of
      the sector being raped and vandalised by a bunch of greedy, blood-sucking
      investment bankers (although we came close in Canada, thanks to the Harper
      government).

  2. Joel says:

    Glad that this is starting to make headlines. Pockets of Canada are definitely in a bubble (Vancouver, Toronto). Vancouver has the most expensive houses in the world at a ridiculous 9.3X average income (http://www.demographia.com/dhi.pdf). Australia is even more out of control. Eleven of the top 14 most expensive are in Australia.

    I grew up in Melbourne and now call Vancouver home and have watched both of these bubbles develop. If you read the news in these locations, you see the bullish headlines that were common in the States in 04/05. If anything, shrugging off the global financial crisis has given people more confidence that prices can only go up. It will end badly, the only question is when.

    http://www.smh.com.au/business/property/house-price-rises-to-weather-rate-hikes-report-20100129-n2u9.html?autostart=1
    http://www.ctv.ca/generic/generated/static/business/article1460606.html