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The Canada Bubble?

Leo Kolivakis's picture





 

Via Pension Pulse.

Jason Kirby with Erica Alini of Maclean's report on The Canada Bubble:

Bob
Haber and David Madani are foreigners who have spent a lot of time
studying Canada. Haber, an American, was chief investment officer at
fund giant Fidelity Canada for 12 years and tracked Canadian stocks
from his base in Boston.

 

Meanwhile, Madani, a New Zealander, spent a
decade with the Bank of Canada as a forecaster and policy analyst. Both
are outsiders with an acute understanding of the inner workings of the
Canadian economy. That is where the similarity ends.

Last December, Haber’s new book, Go Canada: The Coming Boom in the Toronto Stock Market and How to Profit From It,
hit bookstores. Haber, who now runs his own investment firm in Boston
and manages a series of Go Canada funds for

 

Toronto-based Canoe
Financial, has emerged as one of the most enthusiastic proponents of
Canadian investments at a time when the world can’t seem to get enough
of us. With Canada’s strong economy and wealth of resources, Haber
predicts the S&P/TSX Composite Index could double to 30,000 points
within 10 years. “Global growth and all the free money out there are
coming together and investors are realizing the best place in the G7 for
them to put their money is Canada,” he says. “Things are in gear for
Canada to really outperform.”

 

Madani’s outlook couldn’t be more
different, though it tends to get drowned out amid the Canuck euphoria.
Last fall, he joined Capital Economics, a prominent U.K. investment
research firm, to cover the Canadian market from Toronto. He says the
boom in commodities is due for a reversal. More importantly, Canada’s
red-hot housing market has soared into the danger zone. By his
estimates, house prices are set to plunge at least 25 per cent, and
will drag the economy down with them. “Housing has gotten crazy, it’s a
bubble,” he says. “These things always have an unhappy ending, and
Canada is not going to be any different.”

 

So
there you have it. Canada is either primed to be a world beater, or
we’re about to go down the tubes. There’s arguably never been a time
when forecasters have been so divided in their views of Canada’s
economy. That’s partly due to the seemingly Herculean way we shrugged
off the global recession while almost every other developed nation
tanked and continues to struggle—a feat that can’t help but arouse a bit
of too-good-to-be-true anxiety.

 

But the division of opinion has
to do mostly with the two particular engines that have driven our
success—resources and real estate. Both are cyclical. Prices rise and
fall as supply and demand shift. Only that’s no longer seen to be the
case in Canada. Never mind that some experts now say the surge in
commodities exceeds anything we’ve seen in two centuries, or that by
many measures the housing market sits at multi-decade highs. Those who
see good times ahead are convinced the phenomenal gains reflect a
fundamental shift in the global economy. In short, it requires one to
ascribe to the four most dangerous words in the world of investing:
this time it’s different.

As it is, the love-in for all things
Canadian is in full swing. In January, giant U.S. retailer Target
announced plans to take over hundreds of Zellers stores in 2013, its
first expansion beyond America’s borders. The company expects big
things from shoppers here; Target believes its new Canadian stores will
help drive annual revenue, now around US$67 billion, to more than
US$100 billion over the next few years. And Target is just one of many
big name U.S. retailers, including J.Crew, Kohl’s and Marshalls,
banking that Canada’s prosperity can make up for sagging sales on their
home turf.

 

Canada is also the toast of international think tanks
and world leaders. They praise our sound financial system, which
seemingly avoided the traps that engulfed other nations’ banks.
Conservative legislators in America and Britain sing the virtues of our
relatively sound government finances. Like a cherry on top, the Economist
magazine once again just selected Vancouver as the world’s most
livable city, with Toronto and Calgary also making it into the top
five.

You can read the rest of this long article by clicking here.
So is this time different? Is Canada going to coast right through the
next decade unscathed? Of course not. I have already referred to a
Canadian bubble back in October 2009 when I stated another bubble sooner than you think.
It was a very wise senior pension fund manager who opened my eyes to
the one bubble that escaped me because I live in Canada and never
thought that a major bubble is brewing right in our own backyard.

Of course I never bought into the real estate hype and totally missed
the boat on the spectacular run-up in housing prices. My friends were
all laughing at me because I preferred renting and waiting for a major
correction in housing, which has yet to materialize. But it will and
when housing corrects, the Canadian economic miracle will be exposed for
what it truly is, lots of hot air driven mostly by speculative flows,
not by solid fundamentals.

Bank of Montreal economist Sal Guateri recently wrote a report stating that Canada’s housing prices nearing bubble territory:

Canada’s hot housing market may not be in the red zone for prices yet — but it’s getting there, says a new report issued Friday by the Bank of Montreal.

 

And
unless there is some moderation in sales and prices, the market could
be setting the stage for a major correction, the B of M report warns.

 

“While
we do not expect a significant correction nationwide, the risk of
such would increase, especially in some regions, if prices were to
continue to outrun incomes or if interest rates were to increase
rapidly,” B of M economist Sal Guateri says.

 

He says that after slowing last summer, Canadian home sales rebounded in the fall and house prices have kept rising.

 

On average, home prices are 10 per cent higher now than they were before the recession, when they were at an all-time high.

 

He notes that after slowing last summer, Canadian home sales rebounded in the fall and house prices have kept rising.

 

The
U.S. realty market may be plagued by falling or stagnant prices, but
not Canada’s. Thanks largely to stricter Canadian bank lending
standards, Canada hasn’t had a real-estate bubble. Not yet.

 

I
sat in a sun-drenched coffee shop on Vancouver’s trendy Granville
Island last month with an old American friend from Portland, OR., who
also happens to have a Canadian passport. “The main thing that makes it
hard for me to move up here,” he told me, “Is the housing prices. They’re crazy. It’s over $1 million now for a home in Vancouver.”

 

Prices just keep rising

 

According to a report in the Toronto Globe and Mail headlined “Home prices nearing bubble territory,” Canadian home sales rebounded in the fall and house prices have kept rising.

 

“On
average, home prices rose 5 per cent in the past year to January,
while in Vancouver they rocketed 20 per cent. On average, home prices
are 10 per cent higher now than they were before the recession, when
they were at an all-time high.

 

“The problem is that the value of homes have increased much faster than incomes.”

 

The
cautionary Bank of Montreal report says average home resale prices
compared with personal incomes are 14 per cent above the long-run
trend, up from last summer, although still below the 21-per-cent peak
that preceded the 1989 crash.

 

But
that is not the case in all Canadian real-estate markets. Five
provinces are currently in the danger zone, led by Saskatchewan, where
the ratio is 39 per cent above historic norms. That province has a
booming commodities industry, centered around potash and oil.

 

Also
well above the long-run levels is Newfoundland, 34 per cent higher;
British Columbia and Manitoba, 31 per cent, and Quebec, 23 per cent
above.

 

By comparison, in the wealthiest province, Ontario, the
price-to-income ratio is only 10 per cent higher than historic norms,
suggesting prices are moderately overvalued but not in bubble
territory.

 

Outlook could improve

 

The Globe and Mail
piece explains that historically low interest rates, which have
allowed Canadians to carry bigger mortgages, have made such realty
prices possible. As a result, mortgage payments for the typical owner
consume 35 per cent of disposable household income, about the same as
the 23-year average of 34 per cent.

 

The bank says there should be no major correction if incomes increase faster than home prices in the future, as expected.

 

It
says sales are expected to cool and prices to stabilize this year in
response to higher interest rates and tighter mortgage rules that go
into effect later this month.

 

As for Vancouver, given that city’s
high rate of Asian immigration and investment — plus its scenic beauty
and solid infrastructure — who knows? The sky seems to be the limit
right now.

No major correction if incomes
increase faster than home prices in the future? Come on, who are we
kidding here? Australia's Business Spectator posted an excellent
article, Is Canadian housing the next domino?:

Canada and Australia have a lot in common. Both
economies are commodity exporters. Both countries have experienced
similar rates of immigration. Both countries largely dodged the global
recession that has recently shocked the developed world. And both are
said to have world-beating banking systems, with Canada’s ranked as the
strongest and Australia’s ranked third strongest in the world by the
World Economic Forum’s
Global Competitiveness Report.

 

As in Australia, there is also widespread
debate about whether Canada is experiencing a speculative housing bubble
or asset inflation based upon sound fundamentals.

 

Canadian home values have risen strongly
relative to incomes and rents over the past ten years on the back of
sharply rising debt levels. The key charts pertaining to the Canadian
housing market are below, taken from Capital Economics’ recent Canadian
housing and economic updates.


 

The house price growth of Canada’s major cities compared to Australia’s capital cities is shown below (chart courtesy of World Housing Bubble, here and here).


 

As you can see, there are some striking
similarities between the two countries' housing markets. First, the two
mineral rich cities of Perth and Calgary experienced their own unique
house price booms during the 2006/07 commodities bubble. Second, both
countries' governments and central banks were highly successful in
reflating their respective housing markets after brief falls during the
onset of the global recession.


In Australia’s case, the housing market was
reflated by a combination of significantly reduced interest rates, the
temporary increase in the first home owners' grant, cash handouts to
households, and the temporary relaxation of foreign ownership rules.


Canada’s central bank and government also
provided significant stimulus to the housing market. In addition to the
Bank of Canada lowering interest rates to record lows (
click to view chart),
the government significantly loosened mortgage eligibility criteria,
culminating in the introduction of the zero-deposit, 40-year mortgage in
2007. Further, the amount that Canadians could
borrow
was increased, with many individuals in 2009 being granted loans in the
$C500,000 to $C800,000 range, provided their household income ranged
from $C110,000 to $C170,000.

 

Finally, in an effort to support the housing
market in 2008 (when affordability fell sharply and the economy
stalled), the Canadian government directed the Canadian Mortgage and
Housing Corporation – the government-owned guarantor of high
loan-to-value-ratio mortgages (explained
here)
– to approve as many high-risk borrowers as possible in order to keep
credit flowing. As a result, the approval rate for these risky loans
went from 33 per cent in 2007 to 42 per cent in 2008.

 

By mid-2007, the
average Canadian home buyer who took out a mortgage had only 6 per cent
equity in their home, suggesting the risk of negative equity is high
even if there is only a moderate correction.


The Canadian government has since raised the
mortgage eligibility criteria. In October 2008, it discontinued the zero
down, 40-year mortgage, reverting back to the 5 per cent down, 35-year
mortgage requirement that was in place prior to the global recession.
Then, last month, the Canadian government announced that it would reduce
the maximum amortisation period for mortgages to 30 years from March,
adding around $100 in extra loan repayments to the average mortgage. The
government also reduced the maximum amount that Canadians could borrow
against the value of their homes – called a Home Equity Line of Credit
(HELOC) – from 90 per cent to 85 per cent.


Bubble trouble


Last week, Capital Economics released its Canada Economic Outlook Report (Q1 2010), which predicts sharp falls in Canadian house prices, household deleveraging, and anaemic economic growth into the future.


The report warns that Canadians' belief that
their economy is somehow invincible after emerging from the crisis
relatively unscathed is "disconcerting" as house prices lose touch with
fundamentals.

 

"Relative to incomes, our calculations suggest
that Canadian housing is now just under 40 per cent over-valued, which
is about the same level of excess that the US market reached before it
collapsed. We have pencilled in a 25 per cent cumulative decline in
house prices over three years, mirroring what happened south of the
border.


"The biggest downside risk is that an adverse
feedback loop could develop, as it did in the US, with rapidly falling
house prices leading to a contraction in both output and employment,
which puts even more downward pressure on house prices."

 

Capital Economics also warns that the
government-owned CMHC could be exposed to significant losses should
house prices fall significantly.

 

"According to our reading of CMHC financial
statements, insured mortgages and securitised mortgage guarantees total
an amount close to $C800 billion. The total equity of CMHC is $C10
billion.

 

"If house prices collapse further than we
predict, say by 35 per cent, with a default rate of 10 per cent and
average home equity of 10 per cent, then the potential capital loss
amounts to $C20 billion.

 

"Even if we assume that half of this amount is
eventually recovered, that still leaves an expected loss of around $C10
billion. Under the same assumptions, the 25 per cent decline in house
prices that we expect over the next few years would still result in a
considerable loss of around $C6 billion."

 

Only a year ago, the mainstream view in Canada
was that the housing market was bullet-proof and that a US-style
meltdown was highly improbable. Now sentiment appears to have changed
following a collapse of sales, a build-up of inventory, and three
consecutive months of price falls between September and November
(December recorded a 0.3 per cent rise).

 

Will Canada be the next housing market to fall? Watch this space.

Yes,
it's only a matter of time before the Canadian housing market gets hit
hard. It's worth noting that the CMHC recently came out to publicly defend itself against its critics. Why such a public response from an agency that's typically very low key? Are they worried over at Canada's Moral Hazard Corporation?

If they aren't, they should be. We should all learn the lessons from housing bubbles worldwide:

Whether
we are talking about people, trees, or real estate markets, this same
idiom holds true. Since the recessionary period in the 1990s, the
economies of most developed nations have been growing at a rapid pace
and their real estate values have followed. Home values in some
countries have grown more quickly than others, and due to this rapid
growth, many of them also experienced rapid declines following the
credit crunch.

 

Prices in perspective

 

To
provide some perspective on the “bubbles” which supposedly formed in
global real estate markets over the past decade, here is a housing price index from The Economist showing home prices in Australia, Britain, Canada and the United States over the past 10 years (see chart above).

 

During
the past decade, global economies recovered from the dot-com crash
and real estate values went on a tear in most of the developed world.
What we can see from this graph is that the countries who showed the
greatest growth were later hit by the greatest declines. Australia and
Britain had a great run over the first 7 years of the new millennium,
but were stopped in their tracks as the global financial crisis
unfolded. Things started to unravel a little quicker for the United
States where the mortgage defaults started to occur first. In Canada,
price growth was much more modest, but the decline in house prices
that followed was the smallest of the bunch.

 

Another interesting
observation that may not be apparent from media headlines is that
even in real (inflation adjusted) terms, house prices in each of these
countries are still ahead of where they were at the beginning of the
last decade.

 

Learn From History

 

It’s
easy to get caught up in the hype, especially when things are going
well. With double digit growth rates, who wouldn’t be excited to get
into the market? When things start to heat up, here are a couple
lessons we can take away from our recent recession.

 

1. Look for Sustainability

The
important thing is to ensure you are investing in properties which
offer sustainable growth potential for the future. Take a look at the
national and regional economies to determine whether they are poised
to grow. Beyond that, drill down to the individual property and look at
whether your monthly cash flow should be expected to grow or shrink
based on economic trends.

 

2. Be Prepared for Price Dips

Now
that we know that prices don’t always go up from recent experience,
we need to make sure we can hang onto our properties through any price
corrections so we are not forced to sell. As long as we have enough
cash flow to ride out price fluctuations, we won’t be forced to take a
loss while the real estate market#2b65b0; padding-bottom: 0px; color: #2b65b0; background-color: transparent;" rel="nofollow"> hits a temporary bottom.

The problem is that Canadians are indebtted up to their eyeballs. Canadian household debt continued to grow at a faster rate than assets in the fourth quarter of 2010, Statistics Canada reported Monday:

The
average debt-to-personal disposable income ratio edged down to 146.8
per cent in the quarter, but only because a 1.8 per cent gain in
average personal disposable income outpaced a gain in credit market
debt.

 

The ratio of household debt to
assets remained high, by historical standards, and homeowner's equity,
or market value minus debt, continued a three year slide, reaching the
slowest level since 2001.

 

But the rate at which Canadians piled
on debt slowed, with nonmortgage credit, such as credit cards, slowing
the most, at 5.8 per cent from a year ago. That was its slowest growth
rate since the mid-1990s.

 

Overall household liabilities grew by
6.5 per cent from the same period a year ago levels. That was its
slowest annual growth rate since the fourth quarter of 2002.

The
value of financial assets, including investments in stocks and bonds,
grew by six per cent from the same period a year earlier.

Someone
recently told me that our policymakers are "smug" about the Canadian
economy and believe that we will escape the hardship that the US
suffered. I wish I can share their optimism but it's a fool's paradise.
Sooner or later, we're going to find out the harsh lessons of worldwide
real estate bubbles and when Canada's housing bubble pops, the fallout will be felt for years.

 

 

 


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Thu, 03/24/2011 - 08:55 | Link to Comment Zoran
Zoran's picture

12 months ago there was complete denial that Canadian and Australian real estate was in trouble, but now the realization is beginning to dawn on many that something terribly serious is about to occur in Australia and Canada. Australian and Canadian housing is vastly, dramatically overpriced, by all reasonable measures. The recent analysis by The Economist is right on the money, and anyone will see from the excellent charts on AustralianPropertyForum.com just how overvalued Australian and Canadian housing really is:

Australian House Price Charts

http://australianpropertyforum.com/pages/gallery

The bigger the boom, the bigger the bust, and the property boom that began in Australia in the nineties evolved into the greatest real estate bubble known to mankind. The bust that's coming will be a doozy. As 2011 unfolds the spruikers will come to understand that real estate in Australia is dead for generations. During the next two years we can expect to see vacancy rates and inventory levels surge to unprecedented levels as house prices collapse by up to 40 or 50% in most parts of Australia. This might sound extreme, over the top. But how over the top were the 200% to 300% rises in house prices we saw over the past decades. A 50% fall is nothing in the scheme of things, it just brings prices back to a fair level. The bubble is dead. Long live the new new paradigm, where an average family can finally afford a decent home in Australia. It's been a long time coming, but soon it will be time for the bears to party. Bring it on!

Zoran Credit Crunch

http://australianpropertyforum.com/blog/main/3200746

Sat, 03/19/2011 - 06:53 | Link to Comment longorshort
longorshort's picture

Hi,  Are there any hedge funds planning short strategies on the Austrailian or Canadian, Housing, stocks, or Currencies?  Currencies and stocks are easy to short, but what methods are there to play the Housing Sectors as far as investment instruments?  Also, Does anyone know of any financial instruments or hedge funds playing the shortside of US farmland?  I know what I want to short, but some of these areas are hard to find decent instruments to track the play.  Be awesome of there were future contracts tied to the moves.  I find allot of ETFS have allot of slippage due to the effect of diminishing returns and slipage.

Fri, 03/18/2011 - 14:16 | Link to Comment SRV - ES339
Fri, 03/18/2011 - 13:52 | Link to Comment speculator
speculator's picture

Judging by how cheaply one can rent a furnished apartment short-term in Toronto or Vancouver, relative to their sale prices, I'd say there is a glut of capacity right now. Too many 2nd and 3rd homes bought as investments are just sitting empty.

Fri, 03/18/2011 - 14:05 | Link to Comment Seer
Seer's picture

Just wait until the rich Chinese start calling their children back (due to economic crunches back home).  Clearly the rental market is the thing to watch; and, clearly, it has been in the process of turning for a while now- the tide has shifted.

Fri, 03/18/2011 - 13:22 | Link to Comment JEHR
JEHR's picture

I find it very depressing to hear how Americans revel in the bad management of other countries.  It is almost as though they want everyone to share in their own misery.  One thing that is different in Canadian mortgages is that we didn't have 10 large banks making junk derivatives from subprime mortgages to sell to everyone in the world.  I must say, though, that a couple of our banks acting as counterparties did receive money from the AIG bailout and that information is not common knowledge in Canada.  We in Canada want the Americans to succeed in getting out of their economic doldrums because we are very closely linked in our exports and imports.  I do not wish any bad luck for you Americans.  We are doing the best we can to live in the world as peacefully and successfully as we can without bringing financial distress to others.

What you should have mentioned is the high rate of debts of some of the provinces, especially the smaller ones.  We are trying to deal with that much the same as the individual states in the US are.

Be nice to your Canadian cousins!  We love you.

 

Sun, 03/20/2011 - 12:35 | Link to Comment Kayman
Kayman's picture

JEHR

I am a little late in this conversation, but Canadian banks and Canadian Financial Institutions are EXACTLY like American banks.]

1. Asset Backed Commercial Paper dumped on unsuspecting victims.  Loss to public- $35 billion.  Read the fine print. If a Canadian bank lies to you, too bad, go fuck yourself.

2. The Bank of Canada and the Federal Government provided billions in liquidity to the Canadian banks during the crisis. BoM and CIBC were nearly cratering./

3. Not one mortgage would have been written by Canadian banks after the crisis EXCEPT that the government (the taxpayer) was saddled with the mortgages.

Canadian banks are exactly the same, they just have better propaganda.

P.S. I wonder how many Canadian citizens know the Royal Bank of Canada is a Primary Dealer to the U.S. Federal Reserve, meaning an implicit guarantee by the Government of Canada to U.S. government debt, when Bernanke's Ponzi collapses.

Fri, 03/18/2011 - 14:00 | Link to Comment Seer
Seer's picture

That's quite a load to be carrying, being the ambassador to Canada...

"We in Canada want the Americans to succeed in getting out of their economic doldrums because we are very closely linked in our exports and imports.  I do not wish any bad luck for you Americans.  We are doing the best we can to live in the world as peacefully and successfully as we can without bringing financial distress to others."

Canadians are no different than anyone else.  You have more of a passive element because you're the tail on the US dog.  If it were the other way around it would be the other way around.  You partake in the global capitalist system, therefore you are no less responsible for what happens in the world.  As far as being peaceful, you Canadians are also slinging your military around in far off lands: as a percentage of GDP what do you spend on your military? (http://en.wikipedia.org/wiki/List_of_countries_by_military_expenditures lower than a lot, higher than a lot) can you really stand up to the claim as being "peaceful?" (which, means absolutely nothing when you look at the US's world-wide militarization, its continual bombing/killing world-wide).

Lastly, in order for "Americans" (hey, isn't Canada in North America, and therefore also "Americans?") to get out from their debt they will have to vastly increase their consumption/growth, and on a finite planet this isn't going to turn out very well.  Be careful of what you wish for: your military is no match for the US's, and, as it's seen in the ME, if the US needs a resource all it needs to do is dispatch its military.

Fri, 03/18/2011 - 15:05 | Link to Comment JEHR
JEHR's picture

Don't be so mean, Seer.  I love my country and it isn't your country, yet.  No, we are NOT Americans; we are Canadians and proud of it.  We don't want to be a super-power even if we could be.  You are just mean.

 

Did you think I was wishing to be American?  No, way. 

Fri, 03/18/2011 - 16:12 | Link to Comment Seer
Seer's picture

"You are just mean."

Well, you can take it any way that you would like it, but I'm just speaking the truth: don't confuse the messenger with the message- I happen to regularly battle the empire.

As far as being proud of your country, well, good for you.  I hope that you accept its non-peaceful actions just as you do its peaceful ones, othewise you're just deluding yourself: I see/face this on a regular basis here in the good ol' USofA.

Again, I wouldn't recommend flaunting your "wealth/resources" in the face of a desperate, highly militarized neighbor (who is anything but peaceful).

NOTE: One day I hope to see NO "Countries!"  Yeah, a wet dream for corporations perhaps, though without State power they're not going to realize their dream.  REAL natives would likely be in agreement with me... sigh, but I'm just a white guy who continues to profit from all the spoils...

So, long live the queen- eh?

Fri, 03/18/2011 - 12:09 | Link to Comment AcidRastaHead
AcidRastaHead's picture

It's all interesting but probably irrelevant.  As the U.S. goes so to will Canada and if some of the dire predictions/scenarios often presented here come to be then having a bunch of natural resources won't mean anything, it'll just mean some dingus will be selling cords of firewood from his front lawn to passersby.

Fri, 03/18/2011 - 13:48 | Link to Comment Seer
Seer's picture

"it'll just mean some dingus will be selling cords of firewood from his front lawn to passersby."

Hey!   I resent that remark!  LOL!  Pretty common around my rural [US] community...  But, would rather see this honest kind of work rather than the iPod/Google non-reality work.  It's how the majority of the world operates, the anomaly WILL subside...

Fri, 03/18/2011 - 12:02 | Link to Comment FranSix
FranSix's picture

Average Toronto housing prices are popping:

http://www.gettingtechnical.com/01_home/market_commentary/can_en.html

Bear in mind that this is a pure housing price bubble, and not a real estate sector bubble.  The entire real estate sector in Canada sold off during the first collapse, though the rebound has been not unlike the Philadelphia Housing sector index. The speculators with access to leverage are in control of the buy/sell price relationship.

stockcharts.com S&P TSX Real Estate Index

http://tinyurl.com/26nh4zy

That means that mortgages are being packaged in tranches into "covered bonds" in the banking sector.  Asset Backed Commercial Paper was one of the first blow ups in the financial risk assets, these covered bonds are no different.

Note that spreads between corporate 3-month bills and 3-month treasuries have been widening since December:

http://bankofcanada.ca/en/rates/monmrt.html

The money supply has increased yoy by at least 12%:

http://www40.statcan.ca/l01/cst01/econ07-eng.htm

Some banking sector stocks in Canada are higher than their pre-crisis levels, such as TD.

 

 

Fri, 03/18/2011 - 13:42 | Link to Comment Seer
Seer's picture

I guess that pretty much says it all!

Yeah, it's going to turn out just fine.  "This time it's different!"

Fri, 03/18/2011 - 11:28 | Link to Comment MiningJunkie
MiningJunkie's picture

meant "Leo" , not "Bruce" - sorry.

Fri, 03/18/2011 - 11:24 | Link to Comment MiningJunkie
MiningJunkie's picture

Bruce forgot about one small item - Canada has a 34m population and has a great deal of room for immigration to fill the demand gap for housing. The second item that he forgets is that central bank policy is designed to "cost-push" the replacement value for housing bach above Case-Schiller average prices via reflating input costs in lumber, cement and copper. Unless the C$ currency appreciation offsets that U.S.-driven reflation effect, it will be a very long time before Bruce owns a house.

Print, Print, Reflate. Rinse and repeat. Choose your country.

Stocks will NOT be allowed to go down and that goes for U.S. real estate as well. BTFD.

Fri, 03/18/2011 - 13:38 | Link to Comment Seer
Seer's picture

"Canada has a 34m population and has a great deal of room for immigration to fill the demand gap for housing."

Two-dimensional thinking/argument!  Where are the jobs?  Geez, I'm not wanting to sound like a snotty US citizen, but the US IS the economic engine and sets the general trajectory, everyone else, like it or not, is pretty much along for the ride.  What you see going on in the US WILL happen everywhere else that subscribes to the same economic system (global capitalism).

I sold at the top of the US market and have since re-purchased (a fair chunk of land, which is an actual asset; bonus was also historically low interest rates).  I was able to do this because I rented for several years.  Was also fortunate enough to have hedged via USD/CAD (allowed me to protect a chunk of cash).  And now, though not necessarily planned, I've got a wife who is pulling in a CAD salary: with CAD above USD means an increase in purchasing power here in the US.

I'm just an average guy and I've pretty much beaten ALL the markets. Talk is cheap.  Takes a lot of balls to bet against the status quo...  But fundamentals are fundamental for a reason, they don't lie.

Fri, 03/18/2011 - 11:03 | Link to Comment krugergate
krugergate's picture

Vancouver - Calgary Toronto are completely over priced - 1,000,000 buys nada in Hongcouver - same for Toronto. Toronto does have a huge Somalia - Ethopian pop as well as every other flee bag country refuge.

 

The bubble will pop soon - good time to rent - LT - West Canada is in good shape - plenty of food - water - high ground - nat resources.

Eastern Canada esp NB and NS - the recession has never ended and for 150,000 you can buy a house in the country and pay 4 gallon for milk and 1.00 L for gas....

 

Fri, 03/18/2011 - 11:09 | Link to Comment AN0NYM0US
AN0NYM0US's picture

Toronto does have a huge Somalia - Ethopian pop

 

very interesting, I assume you are referencing Somali pirates who with their spoils are contributing to the $1m + price tag for homes in Toronto

Fri, 03/18/2011 - 11:33 | Link to Comment Hicham
Hicham's picture

Ha. Well done.

Fri, 03/18/2011 - 09:36 | Link to Comment Jack Sheet
Jack Sheet's picture

The picture looks a bit like the UK. Doomsayers there have been predicting a collapse in hose prices for decades since the 60s but it simply refuses to happen. A little blip down in 1990-91, slightly larger corrections 2008-10, but a collapse ? No way. Historic nominal house price appreciation has been 9% p.a. The GBP has always been a toilet paper currency, the Bank of England is an absolute past master at inflation, they make Benanke look like a store clerk - and property (real estate) has always been the inflation hedge mantra of the man in the street. At least the CND is backed by a few natural resources (I am told - but Murray Pollitt has written otherwise.) Good luck to all house owners and seekers.

 

 

Fri, 03/18/2011 - 10:21 | Link to Comment Spitzer
Spitzer's picture

And what do you think these markets will look like when interest rates trend up for 30 years rather then down. I have not lived a day on this earth to see interest rates trend up.

The UK is already in banana republic territory. .5% rates, 4% inflation.

Fri, 03/18/2011 - 10:32 | Link to Comment AN0NYM0US
AN0NYM0US's picture

higher interest rates certainly slammed the housing market in the late eighties

lol

Fri, 03/18/2011 - 08:53 | Link to Comment Mercury
Mercury's picture

Canada still may have more going for it than the U.S.  Most importantly i should think: it's got a lot of natural and energy resources which isn't a bad thing to have in the face of worldwide commodity inflation and macro-organic growth in the developing world.

Is there an RE bubble? maybe but if the government stays mostly the hell out of the way if/when it wants to pop that's not exactly the end of the world...better than the situation the U.S. is in right now.

Plus, if Canada really is a more desirable place to be than it once was, maybe it won't pop at all.  Many parts of England are dismal, post-industrial hell holes but if you've been holding out waiting for a bargain on a flat in London...good luck.

I've met Bob Haber.  He's a very decent guy and pretty sharp on Canada.

Fri, 03/18/2011 - 13:24 | Link to Comment Seer
Seer's picture

As I noted above, resources mean diddly if you're talking exports and the export market is collapsing.  Canada is deficit spending (when they went down this path, following the US's "buy your way out of debt" philosophy, I pretty much wrote them off), which means that they HAVE to export MORE!

The unicorns, er a, "developing nations" that you talk about are unable to carry the consumption drop-off from the US, let alone present any outlet for growth.

What growth rates in exports are necessary to maintain current levels?  What sort of increase in internal consumption is there (internal consumption decreases exports)?

Growth will continue to contract, and will do so in lock-step with the decline in the production of cheap conventional fossil fuels.  It would be too simplistic, not to mention premature, to arguing that Canada's tar sands would stand to fare well in the face of declining conventional, in that as conventional declines so too will growth, which means that margins will be greatly pressured: yeah, Canada will be able to, likley, produce more, but increased production doesn't automatically mean increased revenues.

No, the US has MORE resources.  The issue is how much is consumed internally and how much is exported: the later is the key to realized "sustainable" (as much as it's possible on a finite planet) growth.  Food, shelter and water.  Water is a bit shaky, but clearly the US can produce a LOT more food than Canada: and this is the reason why I opted to hunker down in the US.

Wed, 03/23/2011 - 05:30 | Link to Comment Arkadaba
Arkadaba's picture

No, the US has MORE resources.

Possibly but the US also has a lot more people. Per capita, I would guess Canada has more resources though I have never seen any data presented that way. 

Fri, 03/18/2011 - 09:04 | Link to Comment iota
iota's picture

You're right, the property bubble never quite popped in and around London. Just go look at some of the newer developments in the home counties for some lulz.

Fri, 03/18/2011 - 08:44 | Link to Comment mogul rider
mogul rider's picture

As a canadian I can assure you the bubble is a bubble.My family has owned property for 150 years here and this is stupid. The people truly believe a 1000 sq ft house is worth a million - jesus friggin christ!

It is huge. My real estate has quadrupled since 2000. I sold it all.

Made an absolute monster killing. But after 30 years common sense tells me these specs are gonna get absolutely crushed.

It is NOT! different this time.

Ask our friends in the US,UK, China, Hong Kong, Singapore etc.

The important point here is that the madness of crowds dominates the landscape here. They had a chance to lighten up after 2008 and have refused to do so. Thus debtor's prison is their future.It's driven by immigrant bubble behaviour. Indian, chinese, and other ethnic Canadians are bidding up property to insane levels.

Adios amigos

 

 

Fri, 03/18/2011 - 13:07 | Link to Comment Seer
Seer's picture

Clearly someone who knows what is going on up there...

It's just amazing that people refuse to acknowledge what is going on just to the south of their border!

Buy low, sell high.  One has to ask themselves just where on the graph they think they are.

For the greater Vancouver area they were cursed by the Winter Olympics.  A great distraction/distortion to keep the bubble blowing.  The wad was blown.  Now public services are being hacked, which is a sure sign of contraction: the US is much further along in this regard; the pattern is clear to see.

Fri, 03/18/2011 - 09:53 | Link to Comment AN0NYM0US
AN0NYM0US's picture

I just spoke to a friend in Singapore, he suggested you are quite wrong

 

Where in Canada did you get a four bagger in RE over the past 10 years?

Fri, 03/18/2011 - 10:18 | Link to Comment Spitzer
Spitzer's picture

4 bagger in 10 years ? My buddy got a 4 bagger in 5 years. A condo in dwontown Edmonton. It was a little more then a 4 bagger actually.

get with it...

Fri, 03/18/2011 - 10:33 | Link to Comment AN0NYM0US
AN0NYM0US's picture

Avg price

Edmonton 2006 $250,915

 

Edmonton 2011 $322,991

 

source: Scotia Capital

 

(there are anecdotes and then there are statistics)

Fri, 03/18/2011 - 11:39 | Link to Comment Spitzer
Spitzer's picture

average, yes. You asked if i knew anyone who has had a four bagger and i told you

Fri, 03/18/2011 - 08:17 | Link to Comment wang
wang's picture

Of course I never bought into the real estate hype and totally missed the boat on the spectacular runup in housing prices. My firends were all laughing at me because I preferred renting and waiting for a major correction in housing, which has yet to materialize. but it will and when housing corrects, the Canadian economic miracle will be exposed for what it truly is, lots of hot air driven mostly by speculative flows, not by solid fundamentals.

Agree it will eventually correct, of course when it does prices may revert back to what? 2005 or 2003 like some markets here in the US or maybe to Canadian prices during 2008. Problem is Canada never had the super spike and assorted mortgage shenanigans so if/when there is a 20% or even 30% correction, from what level will that correction be measured? In the end the only ones who lose will be the speculators who were the last fools in, but at this point the only 'greater fools' have been those who took to heart expert bearish opinions of Garth Turner, Rosenberg and Mish along with a few others.

Fri, 03/18/2011 - 10:16 | Link to Comment Spitzer
Spitzer's picture

Higher interets rates is all it will take, just a few ticks and watch out.

Interest rates have not gone up for 30 years, pretty simple innit ?

Fri, 03/18/2011 - 12:58 | Link to Comment Seer
Seer's picture

Rates HAVE gone up: http://www.tradingeconomics.com/Economics/Interest-Rate.aspx?Symbol=CAD

I got my wife out of her place before she went upside-down.  Though it was a success (gain even after buying near the top of the market) I still like to look in the rearview mirror to see what I/we missed.  The termination of the 40-year amoritization and increase in interest rates (in addition to the "unified" taxing thing) are market contractors.

Some have mentioned multi-family incomes to support mortgages, but you've got to ask yourself this question: when you're running at the max you're running on borrowed time- looming job losses, not to mention ARM resets, will tend to push things to the very edge.  The "straw" will be the exodus of Chinese when their economy goes bust: rental market decline will pull everything back down.

Fri, 03/18/2011 - 12:06 | Link to Comment dannyadornato
dannyadornato's picture

And they won't anytime soon either cuz if they do the ponzi scheme come tumbling down...

Fri, 03/18/2011 - 08:10 | Link to Comment sudzee
sudzee's picture

Stagnant wages for 15 years except for public sector. 5-10% yearly rise in property taxes along with reduction in services. Gas price roughly 4.75 per US gallon. Natural gas rates higher now than the peak in prices a few years back. Hydro prices going up at 3 times the posted inflation rate to guarantee corporate profits. Average Joe now using his house as a piggy bank as was the case in the US. Canada now the most indebted country per person on the planet. Most "connected country on the planet".

Houses are not assets, they are liabilities. Grandma and gramdpa losing 5-6% to inflation in their "safe" bank accounts per year.

No bubble here, just ruinous low interest rates.

 

Fri, 03/18/2011 - 08:01 | Link to Comment gmak
gmak's picture

I agree that housing prices are high across the country. 5% down, 35 year amortization periods and incredibly low variable rates ensured that there was an increase in the number of candidates who could buy houses. Stir in herd behaviour, real estate agent spin, and cash flow-based decisions (rather than price-ased) and the cake is baked.

There are 3 ways that this can resolve:

1. Prices keep going up but at a lesser rate. This requires a proportionate growth in demand - which requires candidates willing and ABLE to meet the low hurdle of 10% down and 30 year mortgage at the 5 year rate. Even at current prices, this is not too difficult for 2 income families. Don't forget that a number of young people have stayed at home longer. As well, entry-level salaries seem much higher than back in the day (I referring to career salaries, not min-wage). The boomers laboured under the curse of numbers to compete for jobs and money. This latest generation, if anecdotal evidence from friends and co-workers is typical, seems to be offered dream jobs at high initial salaries - even if they don't want them. I believe that this factor of better paid, and better capitalized initial home buyers is something that can keep housing prices supported longer than many would expect.

2. Prices stabilize and remain in this area for a long time. This requires constant demand - which given Canada's population growth is feasible. The underlying assumption in constant demand is that the economy continues to grow at the same rate as the population.

3. Prices drop. This can happen suddenly or slowly over a period of time, depending on where interest rates go. Variable rate mortages are 2.25 - 2.5% right now. 5 year are around 4%, 1 year is around 3%. If rates are rising and expected to keep rising, there will be a rush into possibly 3 year rates (a guess given that 1 year is too short and 5 year will be too expensive). Usually this takes 2 - 3 rate hikes (assuming that they are around 25 bps each) before the herd behaviour changes. Or, a 1% rate hike might do the trick all by itself.  So the herd would be switching from 2.25% to about 5% which is just over a doubling of the interest payment. On a 35 year mortgage (which was most new mortgages over the last 5 years), this means effectively a doubling of a monthly payment. If this happens, we will see people mailing their keys to the bank and walking away as we saw in the '70s.

 

I am astonished at how housing prices in my area have risen from what seemed to be excessive at 250K to around 600 - 800K over 7 years. The area has become trendy. However, there is another distsurbing trend for real estate prices. A lot of condominumns have been built - competed over by aging boomers trying to cash in by downsizing, and 30-somethings who are flush with cash and see a condo as a good entry point to real estate ownership. Prices have moved up considerably. There seem to be an increasing number of condos being offered for rent (speculators, I guess) at what I can only believe is an attempt to cover a high mortgage, because the rents seem excessive even for our nascent-trendy area. (1600 for a one bedroom 700 sq ft apartment vs 1300 for a 4 bedroom house). we've seen a lot of small shoe-box war homes bought up by developpers and "bowling alley" duplexes put up - each priced at double the original house. (And people buy them!).

So, I would say the market is alive and well for now. I've seen popular magazines with an entire issue devoted to real estates, and captions like "...Why Prices Will Continue to Rise...".  Food and energy prices are nibbling away at disposable income. If economic history is any indicator, unless the laws of financial physics have been repealed, interest rates will be rising at some point in the next 2 years. If one has only 5% equity (or even 10% equity) in a house, it doesn't take much of a rate increase in a cash-flow sensitive market to put that home underwater. 

 

The best of all possible worlds would be if prices stabilize and economic growth continues at the population rate - keeping inflation tamer. I hope this happens. But long-run 5 year rates have been closer to 8% than 4%, and this is not a pleasant scenario to contemplate.

Caveat:

I rent, have no debt - and live in a very pleasant and "trendy" neighbourhood where a car is not necessary, and I can bike to work. I expect deflation to win (see other Zero Hedge article today on why the FED will try to do more stealth QE). However, if I see a whiff of wages growing faster than the economy, or expectations being built-in to wages, then it is a simple manner to leverage up and buy real assets (if wages are going to grow more rapidly than interest rates).

 

Cheers.

Fri, 03/18/2011 - 08:13 | Link to Comment Rogerwilco
Rogerwilco's picture

Your narrative sounds like Phoenix, AZ -- in 2006.

Fri, 03/18/2011 - 07:58 | Link to Comment hugovanderbubble
hugovanderbubble's picture

Canada is a great country and economy.

Little overheated ok, but they will know how to treat this.

 

Fri, 03/18/2011 - 10:10 | Link to Comment Spitzer
Spitzer's picture

Canada and Canadians are so up to their foreheads in debt that a few ticks up in interest rates and this whole thing comes crashing down. Even the resource rich areas where I live, all the well paid people are maxed out on debt. When there is even a slowdown in oil production, I notice the neighbours  big pickup trucks get repo'd and a few houses go into foreclosure.

People here are brain dead, it is a joke, a house of cards. Interest rates up and its game over.

Fri, 03/18/2011 - 14:19 | Link to Comment ThreeTrees
ThreeTrees's picture

Straight up.  Soooo many ATV's are going to get repoed in the next downturn.

Fri, 03/18/2011 - 12:47 | Link to Comment Seer
Seer's picture

Yup!  No different than in the US!

But... up in Canada they like to pay WAY MORE (or is that "charge" more?) for stuff, on average 20% more (that's what I know/see for British Columbians).  Read a fairly exhaustive study on this phenomena that pretty much concluded that there wasn't a real definitive reason for this, that taxes and whatnot really didn't account for but a few percentage point increase; seems that Canadians just accept things (has a feel of "lemming-itis, not going to turn out well).

Fri, 03/18/2011 - 07:47 | Link to Comment Rogerwilco
Rogerwilco's picture

Let me guess, the pension funds are buying lots of MBS due to the virtuous combination of security and high returns. And who cares about those dusty old norms for DTI ratios? Canada is a special place (like Kolyfonia), where average Joes can live happily in homes that sell at 5X or even 8X their incomes.

Fri, 03/18/2011 - 07:44 | Link to Comment johnQpublic
johnQpublic's picture

canadian housing was overpriced fifteen years ago, and its worse now

take a ride north out of buffalo ny, and watch the prices there(reasonable), go insane as you approach toronto

it was 250k for a tiny condo 15 years ago when you could get a 2200 sqft house in buffalo for 85k

its far worse now....americans used to head north to shop in toronto to play the exchange rate ,while canadians came south to avoid the vat/gat 30% sales tax total

now you need a passport to cross a once open border....restricting local trade and movement

brave new world

Fri, 03/18/2011 - 12:41 | Link to Comment Malachi Constant
Malachi Constant's picture

need a passport to cross a once open border....restricting local trade and movement

What's the big deal? A passport takes very little effort to obtain. It's not a PhD.

....restricting local trade and movement

I live in Vancouver BC, fly from Seattle, shop and top up my gas tank in Bellingham WA. If I need something from a US store that they don't ship to Canada, there's a full industry of shops clinging to the border on the Southern side that will receive my shipping for $2.50. Plenty of people I know live the same way. I guess Ottawa will have to pass a Patriot Shopper law, if any more people jump the wagon.

Fri, 03/18/2011 - 09:28 | Link to Comment Jessica6
Jessica6's picture

Okay, you can't compare Toronto with Buffalo. Toronto's population is at least four times the size and it IS the financial/cultural center, as well as the provincial capital.

Toronto at least has a thriving downtown core (though it is hollowing out thanks to overly high commercial rents and twenty-dumbthings that depend on their entire paycheck for their 500 sq ft condo and if the banks ever lay off...).

However it's certainly no London or Manhattan either.

Though nowadays I think you can buy a whole block in Buffalo for about $25K.

Also, you could get a tiny condo for 90K in the late 90s in Toronto and a house for around $150-something. Vancouver on the other hand...

Sat, 03/19/2011 - 02:58 | Link to Comment Arkadaba
Arkadaba's picture

You want to buy a condo in downtown Buffalo? Guess not. This whole comparison is invalid (actually stupid) - know you did not start it.

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