MacroScope

Canada housing: This time it’s different, eh

June 11, 2014

AResults are in from the latest Reuters poll on Canada’s rampant property market from economists and market analysts, and the message is everything’s fine.

Prices will rise gradually over the next few years and there is very little risk of a crash.

But house prices in Canada have been rising in nearly a straight line for the better part of a generation, more than doubling, and taking household debt up with them.

They have risen by more than a third since the market last paused for breath five years ago, at the start of the financial crisis.

Meanwhile, Canada’s household debt to income ratio has soared to more than 160 percent, much higher than where it was in the U.S. before the crisis, and nearly as high as it was in Britain in 2007, where house prices have taken off again in the past year after spending years in the doldrums.

But even with the explosive growth in house prices in the UK over the past year – which most think is unsustainable, particularly in London – Britain still has plenty of catching up to do to close the gap with Canada

Britain is a tiny island, the story goes, and the pace of house building is never able to keep up with new demand for housing. Canada, on the other hand, is the second largest country in the world, with nearly 10 million square km of land, admittedly a lot of it too cold and rugged to live on.

The U.S., a country nearly as big but with nearly ten times the population, is still climbing its way out of a hole dug from its only property market crash since the Great Depression.

It is not particularly remarkable for those who have made a fortune off the property market to say that everything is fine and that house prices will continue to rise.

What is striking in the latest Reuters poll is the number of people who say Canada’s housing market boom is a special case from any other real estate market, and therefore not likely to crash, outnumbers those who say it isn’t by five to one.

In other words, the vast majority of them, most based in Canada, say “this time it’s different.”

That conclusion is all the more astonishing given that that in the very same survey of respondents the consensus view is that property prices in Vancouver are extremely overvalued, i.e., too expensive, with Toronto, the financial capital, not far behind.

One analyst, undeterred by sky-high prices, not to mention warnings from the International Monetary Fund and the Organization for Economic Cooperation and Development about a housing bubble, denied there was even a boom.

Helmut Pastrick from Central 1 Credit Union said:

There is no housing boom in Canada, with the exception of Alberta and Saskatchewan. Vancouver and Toronto are not experiencing a housing boom – high prices do not necessarily mean a boom is underway.

Federal regulatory changes to tighten mortgage credit, lender loan issuance standards, more restrictions on mortgage securitization, and higher lender capital and liquidity requirements will restrain the availability of credit and raise the marginal cost of capital.  These measures to cool the housing market and growth in household debt will ensure no boom occurs and hence no crash.  Housing booms need and are fuelled by credit booms.

But household debt in Canada has spiraled higher, and apart from the Netherlands, where house prices have been falling for years, it is the highest in the developed world as a proportion of income.

As a percentage of GDP, household debt in Canada increased over the period from just before the financial crisis began through early last year at an even faster pace than China, where there are grave concerns about a property market overhang based on over-investment and oversupply.

chart2_Canada’s house prices now are about one-third above their long-run average compared with incomes and a staggering 87 percent above the long-run average versus rents, the highest in the world, according to the OECD and IMF staff calculations.

Robert Hogue at RBC, one of Canada’s largest mortgage lenders, doesn’t think there will be a crash but says there will be a correction:

The Canadian housing boom rests on more solid regulatory and mortgage lending practice foundations than the U.S. boom was. The U.S. downturn started because of poor lending practices and morphed into a full-blown crash because of the twin blows of financial market meltdown and severe economic recession. While the Canadian market certainly isn’t immune to a downturn (in fact, it is quite likely over the medium term), the odds of a U.S.-style crash are low.

David Madani at Capital Economics, a London-based consultancy that earned a reputation for being bearish on the UK property market for years before it finally did crash by about a fifth when the financial crisis hit, gets to the heart of the matter.

The timing is still uncertain and that’s true of any housing bubble … but we certainly expect prices to fall substantially in the major cities.

If you talk to the banks and the real estate companies, they are not concerned because they are putting on a brave face about all this.

With mortgage debt now making up such a large chunk of bank assets, and interest rates just about as low as they can go, no wonder people are saying it’s different this time.

** This blog was updated on June 12 with fresh data from the IMF on global house prices

 

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