The Canada Bubble?

Leo Kolivakis's picture

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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

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.

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.

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.

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.

 

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.

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.

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. 

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?

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.

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...

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.

 

 

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!"

MiningJunkie's picture

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

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.

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.

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....

 

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

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.

 

 

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.

AN0NYM0US's picture

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

lol

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.

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.

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. 

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.

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

 

 

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.

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?

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...

AN0NYM0US's picture

Avg price

Edmonton 2006 $250,915

 

Edmonton 2011 $322,991

 

source: Scotia Capital

 

(there are anecdotes and then there are statistics)

Spitzer's picture

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

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 ?

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.

dannyadornato's picture

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

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.

 

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.

Rogerwilco's picture

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

hugovanderbubble's picture

Canada is a great country and economy.

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

 

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.

ThreeTrees's picture

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

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).

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.

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

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.

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...

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.