The Canada bubble

April 7, 2010

So much for Canadian sobriety?

Recently the country’s chief bank regulator was in NYC to take a victory lap about successful bank regulation north of the border. Paul Krugman has argued that Canadian banks are superior to American banks because they are boring.

And yet a housing bubble is clearly inflating, and its cause — big household leverage — is familiar.

The latest news out of Vancouver, where the average price for a single detached home now exceeds $1 million, is that…

…prices have climbed 23.3% in just 12 months, and are now nearly 3% higher than they were before the housing market crashed.

But no one is worried according to Paul Kedrosky:

It’s okay, say local realtors and the like. Because of the economic rebound. And the Olympics. And the warm winter there. Vancouver is different.

Nor is the bubble limited to Olympic-site Vancouver, according to a previous article from Phred Dvorak in WSJ:

Dominic Carrasco first tried to sell his studio apartment [in Toronto] in January 2009. The only offers the 42-year-old massage therapist got were well below the 166,900 Canadian dollars he’d paid for it five years earlier.

Last month, Mr. Carrasco tried again. The condominium was snapped up by the woman in charge of posting the information to the real-estate listing site, for C$209,900, or US$196,003, 40% more than the highest bid last year.

The bubble has familiar causes as Simon White of Variant Perception told me in an e-mail recently:

household debt to income in Canada is now more than in the US.  All the usual metrics to gauge whether housing is overvalued, eg House Price/Income or House Price/Rent are at levels up to over 30% from their long-run average.  These are normally consistent with an overpriced market that is due for a correction; the question is when, as often these things persist for much longer than most people dare to guess.

If Canada’s banks are behaving so responsibly, where are households getting so much leverage?


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“If Canada’s banks are behaving so responsibly, where are households getting so much leverage?”

The government. The CMHC is a crown corporation. The Canadian government directed them to insure hundreds of billions in mortgages. So the banks make the loans and immediately sell them to CMHC. They get all the fees and almost no risk.

Sound familiar?

Also, mortgage rates were higher here (and in Australia) to begin with due to the commodity boom. So when they fell, the impact was greater.

Posted by MattStiles | Report as abusive

Yeah, if you’re talking commodity bubble, Canada certainly is amidst that

Posted by Storyburn_com | Report as abusive

[…] Is Canada finally catching a whiff of the housing bubble?  (Rolfe Winkler) […]

Posted by Wednesday links: wall of worries Abnormal Returns | Report as abusive

As a resident in Vancouver, I can tell you that the substantial presence of foreign money is ever-present and overbearing in real estate. Asian make up a majority of the 2.5M residents of metro Vancouver, and a lot of them are super rich from Hong Kong and Shang’hai. You can’t put this one on the banks, because it’s not in their periphery – it’s big foreign dollars coming in and paying up, not locals scrounging and lying through the teeth to get what they can’t afford.
And regarding the debt/GDP ratio, that’s probably a lot to do with the fact that our U6 equivalent (which is the big dirty unemployment number in America) never got above 9.5%, or about 45% LESS than America’s level.
Also, the Cdn gov’t ran a deficit of $50B roughly. Given our economy is roughly 1:9 of America’s, that’s like a US deficit of $450B… or about 70% lower than America’s. You wanna poohpooh on Canada, be my guest. But trying to point fingers because our regulators are feeling a bit smug (with good reason)… well, doesn’t help you out at the end of the day, does it.

Posted by CDNrebel | Report as abusive

Rolfe, now you have Salmonitis too, your quotes are longer than your contents, the only difference, you critisize your shareholder. Not nice to take on your 52nd State. According to CNN today, between shaving foam and coffee, 2 Canadian cities were rated highly, of which Vancouver was one, no wonder the demand is high. The only thing people forget, is that when the nukes happen, the fallout will be over Canada, and of course, the Ice Road Truckers gives it a bad name.

Posted by Ghandiolfini | Report as abusive

Of course housing is more expensive and desirable in Canada, because of government policies. Which are much kinder to the average worker, i.e. Health care, employment and now the Canadian dollar trumping the U.S.A.. Hodgy

Posted by Hodgy | Report as abusive

Most Australian mortgages are full recourse, and Canadian lenders have greater recourse than those in the US.

This seems like a huge incentive for borrowers to think before they jump, so it’s hard to believe that Australians or Canadians are solely responsible for this wave of leverage. Perhaps foreign investors feel that the width of an ocean will discourage collection should they default.

Posted by Mega | Report as abusive

[…] – Canada’s very own bubble. […]

Posted by FT Alphaville » Further reading | Report as abusive

Further to Canada’s unfortunate geographic location, and Obama praises in brooks elsewhere:

“Tactical nuclear munitions don’t engage public or political attention, because a single one cannot incinerate a city.” Really, on both accounts ?

“For 65 years, nuclear deterrence has prevented great-powers war: the maintenance of small nuclear inventories sustains that deterrence.” What a sorry state, Ray Bradbury wrote about that decades ago, we now know all of that, it just shows the disconnect between the populace and the politicians.

Any threat, by anybody, ushers in the “Warm Wars”.

Anyway, good first attempt, a table/grid analysing all the types, by country, by destructive power and distances would be nice.

Posted by Ghandiolfini | Report as abusive

It would be nice if people had any idea what they were talking about before rushing onto the internet to make declarations about it. Case in point, MattStiles.

No, the government did not “direct CMHC to insure mortgages”. The prevailing law of the land in Canada is that you can’t GET a mortgage below certain qualifying conditions (like putting up a sufficient sized downpayment) unless you buy insurance on it. That’s a good thing.

And the banks have no particular desire to then turn around and sell those mortgages to the government just because they’re insured, that doesn’t make any sense. The fact that they are insured makes them no-risk money generating machines for cripes sake, Canadian banks love holding those on their books, they’re practuically guaranteed revenue! The government, as a fiscal stimulus measure, decided to buy mortgages from the banks **that were already insured anyway** so the banks would get some cash on hand and be able to keep their credit flow going during the recession… and the banks agreed to do it.

And yes, housing prices in some Canadian markets have been rising uncomfortably fast recently, for reasons that have little to nothing to do with the CMHC… and in response you may have noticed all the Canadian banks raising their lending rates to cool things off.

The bottom line is the housing bubble in the US caused the degree of fallout it did because the US banking system has mortgage regulations that are hidously reckless. Canada doesn’t. The housing prices being over-inflated is still a concern but not like it was in the US. If people default on their mortgages in Canada they don’t just walk away from them and leave the banks writing off the loss, the banks go after their other assets and they know it. And mortgage interest isn’t tax deductible either. So people in Canada tend to be a little more careful about getting into a mortgage in the first place. And Canadian banks don’t just run around lending willy nilly to people who clearly can’t afford to maintain their payments because they DO tend to keep most of those mortgages on their books, which is why mortgage default rates in Canada are significantly more than an *order of magnitude lower* than in the US.

It is simply not remotely the same environment. You can;t just look at housing prices in Canada and housing prices in the US and say “hmmm… housing prices got too high in the US and then KABOOM!… therefore high housing prices in Canada will have the same result”. Not going to happen. Cause a problem? Quite possibly. But the kind of financial sector implosion that occured in the US isn’t much of a possibility in the Canadian system.

Posted by gcomeau | Report as abusive

CDNrebel just hit it on the nose about how much more sensible the Canadian immigration laws are compared to those in the United States. We wouldn’t be in a recession, nor having almost 10% of unemployment had our laws been promoting responsible foreign investment, and less xenophobia.

Posted by Jos5319 | Report as abusive

I’m a Vancouver resident..Prices are high.
They often write about “Vancouver” excluding the suburban cities where prices are more moderate.
Vancouver has a unique geography, like Manhattan or Hong Kong.
Land is limited. We’ve had an influx of wealthy from Hong Kong, where land is also limited and expensive.

There is no illusion in this local neighbourhood that a working person can buy a 3 bedroom home.
Prices were high; they moderated due to the global economic situation. Now prices are back to normal for this neighbourhood.

Posted by SheikYerBhouti | Report as abusive

There are definitely a few markets in Canada that have potential to overheat (Vancouver, Toronto, parts of Alberta), but it’s not as wide spread as it was in the States. The banks are not really in any danger… but “famous last words”.

Wasn’t too long ago that we in Manhattan thought we were immune to market price reductions that were hitting the rest of the U.S. Realtors were all reassuring us, until reality sunk in. Here we are, licking our wounds :( All this sounds familiar. Wonder how many of the comments people are writing are from realtors??

Posted by JohnZNYC | Report as abusive

If the government and citizens didn’t have to fund failing industries that the majority doesn’t want, such as the annual seal hunt, the country could be doing better.

Posted by MrsPerrin | Report as abusive

Gcomeau, I couldn’t disagree with you more that government mortgage insurance is a good thing.

Since you’re so knowledgable, I suggest that you go and look at the CMHC financial statements. They are available online up to 2008. What you will see there is an alarming increase in mortgage insurance being issued by the CMHC. Why has this happened??? Is it because people don’t have 25% down and want to extend their amortizations out to increase “affordability”??

Did you know up until the recent rule changes that CMHC determined “affordability” based on payments not debt? So loan amounts that were approved for CMHC insurance were based on all time record low interest rates most likely never to be seen again. Which has allowed Canadians to load up on consumer debt in the middle of the recession. This is evidenced by our consumer debt passing the americans recently.

Canada is in a bubble plain and simple. House prices double that of the US. There are regional differences, just like the US was. BC is in big big trouble and will have a collosal meltdown. Other areas will fare better because they have much stronger economies to support the prices.

Our banks are more conservative BECAUSE the government insures most of the mortgages. What bank wouldn’t like this? But what happens if we find out that CMHC didn’t know what it was doing? What happens if house prices start dropping and CMHC has to pay out on the insurance? Bubbles always burst and this one will be no different. The only question is when and to what extent the government will try to prevent the collapse.

Posted by derekjbruce | Report as abusive