Guest Post: The Elusive Canadian Housing Bubble

Tyler Durden's picture

The Elusive Canadian Housing Bubble, Submitted by Alec Pestov

This paper explores the subject of a possible housing bubble in Canada.
It examines a diverse array of factors that may have contributed to the
rise in house prices in Canada. The paper evaluates each factor
individually and determines the health of the Canadian housing market
using common valuation techniques.

Results suggest that economic
fundamentals in Canada provide little explanation for the Canadian
house price dynamics. Market fundamentals have become insignificant in
affecting house prices, and the price-momentum conditions
characteristic of a bubble now exist. The extreme decoupling of the
market prices from the underlying fundamentals suggests an upcoming
correction in housing prices in Canada.

 

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Cookie's picture

I suspect the situation in Australia is somewhat similar

Double down's picture

Take it from me, if Canada is "Crazy :)"  AUS is insane!

SteveNYC's picture

Eerily similar in fact. The Aussie government has pulled out all the stops just to get it where it is right now:

1) First home buyer grants, doubled, tripled

2) Stamp duty (tax) breaks

3) Negative gearing (tax breaks) on investment property ownership

4) A media that is in a frenzy to spread blatant lies such as:

- Get in now or never

- "CRITICAL HOUSING SHORTAGES"

- Low interest rates, buy now!

- Property only goes up

 

In addition, there are many low, low skilled workers in Australia that simply earn too much money. If not for mining jobs, these guys would have to learn to read/write in a lot of cases (I'm trying not to generalize, but many are like this).

Houses average about 6.5x - 9x average gross incomes in major cities. If this is not a bubble I don't know what is.

Interest rate increases have put a lid on it, if China blows and the Aussie job market suffers (especially the low-skill mining jobs) this thing will blow sky high.

Hatshepsut7's picture

Steve, I hear what you are saying.

I've watched since 2002 when cautious people were worried already, and look at prices today!  The old hat that things can go on longer than you can imagine surely seems true with Aussie housing prices. Simply amazing.

SteveNYC's picture

Most definitely. I sold my last and final piece of real estate down there in December of 2009. Bought the condo in 2004, almost doubled in price within 5yrs.

A good investment, but someone's gotta carry the bag on that now......

gilligan's picture

Add (5) Recent changes to foreign investment rules making it easier for non-residents to purchase property.  Eastern suburbs of Melbourne are awash with Chinese buying up properties, so much so that auctions are sometimes conducted in Mandarin and English.  Even the land rats admit that this is a big factor driving price increases. 

 

I am one of the ones who has been disturbed about the state of house prices in Melbourne (and Australia) since about 2002 .  Was a student then so couldn't buy, and now can't afford to.  Anyway, for years I have sincerely believed that the house prices and associated debt were unsustainable, and I have said as much to people.  They always laughed - "house prices will never go down, blah, blah, blah" - but the problem is, they haven't gone down. They are still increasing. 

 

While I still believe that the whole house of cards is unsustainable, I am oh so tired of waiting for a correction in prices.  How the hell am I meant to make the decision to buy a place for my wife and I in this psychotic market?  I say wait, and then they go up another 10%, 20%, 30% and I look like a fool.  When does it end?  Seems to me that the governments ability to prop up prices in the Aussie too-big-to-fail housing game possibly exceeds my lifespan...

 

nedwardkelly's picture

Here's hoping...

I hope to move back there in about 5 years, with any luck the bubble will implode by then and I'll be able to pick up a nice place for a steal :).

I was back there about 18 months ago and things seemed out of control, it's only gotten worse. An acre lot on the outskirts of a nowhereville country town sold for $250k. It sat next to thousands of acres of empty paddocks.

Here's another great example:

Prices for Craigieburn (12 months to December 2009)

  Houses Units Median Prices $325,000 $243,000 Long-term Trend 9.37% 4.39% Auction Clearance Rates 58% 50% Days on Market 71 SNR Discounting 3.86% SNR

 

Craigeburn can at best be described as a shithole, that is now part of the suburban sprawl heading all the way to Melbourne. There's not much of anything there, it's a longass commute to the city, but prices are still going up 10% p.a. What other than speculation (and cheap mortgages) is driving such solid price increases?

ozziindaus's picture

Shithole indeed. I remember whilst growing up occasionaly blowing past Ford Gate wogs hanging out on corners around Broadi with nothing to do. What a dump. Now you can't talk to these guy's. They actually think they planned the whole thing. My theory is that weath does not accumulate and stay by chance. In other words, plumbers and truck drivers SHOULD NOT be able to own investment properties....I don't care what anyone says.  

nedwardkelly's picture

The sad thing is that plumbers (and loads of other tradespeople - carpenters, brick layers etc) actually make pretty tidy $$$ these days. I know people in the trades that make more than some of my tertiary educated friends. Not that there's a problem with them making good money, but it should have some relation to the education/qualification required to do it. I guess that's what happens when you FORCE everyone to finish highschool, then give what is essentially a free (HECS) tertiary education to anyone that wants one.

I don't mind letting anyone that wants one to own an investment property - just means it'll crash harder when it does :).

ACjourneyman's picture

I have been saying it is ready to blow for a few years, house prices in Vancouver are up 20% since last january all due to low rates.What most people don't realize is mortgages there are only a fixed rate for 5 years , then comes the refi. Hope interest rates are still low in 5 years or might be a bit tough paying off that 500k mortgage on a 75k a year salary , paying 45% income tax and 12% vat.

ED's picture

In an economic environment where the only fundermental is printing of currency, isnt it (relative) savers that will be paying home-owners mortgages?

What 'ought' to happen seems merely an intellectual curiousity.

sweet ebony diamond's picture

i can't comment on this one. too close to home. but let's just say mr. hedge knows what's happening.

svendthrift's picture

The Vancouver market is completely bonkers. Toronto isn't far behind. The mentality in Van today is very similar to Miami in 2004. And the media in Van is cheer leading just as did the Miami media in 2004.

 

This time it's different. But Phoenix has year round golf! Miami will always be kept alive by rich South Americans. They ain't makin any more land. Vancouver has Rich Asians. Etc. There's always a theme.

BobPaulson's picture

Prices are insane in Vancouver but the actual percent increases in Alberta I would say may be the highest. My house has tripled in value since 2000. I thought it had come down a bit two years ago but it's levitating again. Commodity economy.

If they raise rates, US exports suffer and Ontario is toast. Having more than half your _entire_ economy based on selling raw materials to the United States of Bernanke definitely has side effects.

badameli's picture

Another article that ignores the rest of Canada.

RE Vancouver: What about all the japanese/chinese families that are buying property there? RE Toronto - same there - families abroad purchasing housing/condos in Toronto.

 

Sure the new homeowner is paying through the nose, or beyond their means, but how much of their property is financed by mommy and daddy?

 

I think you will get better representative data for what you're looking for (middle income earning family income/housing cost ratios) looking at the outlying 905 area, ignoring vancouver and discounting calgary. I think you are seeing money pass generationally in these areas.

Housing in Halifax, St. John, St. John's, Charlottetown, Winnipeg, Saskatoon or Regina is very different.

Milstar's picture

These bubbles are always justified in the media and by analysts as they are happening....up until they pop & then it's a bubble.  I remember the US didn't have a bubble either & I was in the mortgage industry.

roadcaptain's picture

the only thing that will correct canadian real estate prices will be higher rates.  you can currently get a first mortgage for 2.25%

b_thunder's picture

Canada economy has a huge nat. resource component.  A lot of ppl feed off that.  As they drive prices higher - everyone rushes in, driven by the "tomorrow the same house will cost more"  psychology.  As oil and other commods go - so will Re in Canada, Australia, lat. Am., Gulf states, Russia.  Once that piece of econ. cools off - that will deflate the bubble.

 

Leo Kolivakis's picture

As I told one Canadian billionaire, if the Canadian dollar overshoots parity, I'd start shorting it. Will be interesting to see if the Bank of Canada moves ahead of the Fed in hiking rates. I doubt it because of the appreciating CAD, but some market analysts think they'll move as early as June. This morning's rising inflation numbers do not concern me - mostly owing to one off effects from the Vancouver Olympics.

Problem Is's picture

Leo novice question:

Doesn't Canada have a major government entity a la Fannie and Freddie to guarantee the mortgage market?

They insure but do they securitize mortgages from Canadian banks?

In the US I always ask, if the government wasn't guaranteeing 90% of the mortgage market, how many mortgages loans would there be? How much would homes be worth?

I think the estimate here is every 1% increase in mortgage rates cut 5-8% off of home prices because you just eliminated qualified buyers from demand.

 

ThreeTrees's picture

Yes we do, the CMHC.

Yes mortgages are securitized and yes they are backed by the Canadian government.

Peep americacanada.blogspot.com lots of good info there.

Problem Is's picture

That is some good info. Thanks.

Leo Kolivakis's picture

Read one of my previous comments on the housing bubble in Canada:

http://pensionpulse.blogspot.com/2010/02/canada-moral-hazard-corporation.html

 cheers,

Leo

Womb Service's picture

"RE Vancouver: What about all the japanese/chinese families that are buying property there? RE Toronto - same there - families abroad purchasing housing/condos in Toronto."

 

You're buying into a myth. I live in Van. Overextended locals are driving this nightmare. Vancouver is now the most unaffordable city on the planet. Unlike New York and London, it is not a center for anything beyond marijuana production. Look at a chart and think about reversion to the mean. The implosion is going to be epic.

Robert J Moran's picture

Vancouver: Condo prices over a $Million are running WELL OVER $1000/Sqft.  (1500 sq ft apartment = $1.5M!)   With several buildings asking $2000/sq. ft.( a 1500 Sqft = $3Million!).  Na! Nothing bubblicious about THAT!  Party on Vancouver... It's different here, LOL...!

Shamwow's picture

From my old desk I would take pictures every friday of the new Shangri-la at University Ave and Adelaide.  Check out the prices but make sure you're sitting down.  Although, if I moved to the other side of the office I looked down at the Bay-Adelaide centre as it was being finished after what, 20 years after being know as the worlds pirciest underground parking garage?!?  Would history repeat itself?  Of course not!  The motto here is that we're attracting lots of asian investors to the city...

 

I should mention that 2-7 days to sell a house in SE Oakville appears to be the new norm as of late.  Glad I own my 'home'. 

asteroids's picture

My home is paid off. I notice my fellow Canadians are oblivious and unconcered to the carnage just a few hundred miles away from them. We have avoided the pain a misery, but not for long. Am looking to short the CDN banks and the Loonie once things start to fall apart.

walküre's picture

You cannot compare the US housing failure to the Canadian residential RE sector.

There are no subdivisions built into vast areas of the desert in Canada. Every house is sold and probably occupied. The supply of new homes has been reduced because smaller builders couldn't get financing. Canadian banks are tight fisted with money, always have been and always will be. There is simply no overhang, no glut of houses there. Banks will finance more builders when economic data improves further.

Question is, when will the US get their shit together and either demolish the overhang or put the homeless into the desert?

Womb Service's picture

"Every house is sold and probably occupied."

 

LOL. Tell that to the speculators who bought multiple condo assignments. You are highly entertaining. Please keep posting.

BlackBeard's picture

Excessively low interest rates bitches.  Same shit different country.

99oakley's picture

Shouldn't we note that the author of the research paper is a MBA candidate with zero work experience in Finance?

Not that I disagree with many of the comments in the paper, but it isn't the finest example of economic analysis.

walküre's picture

Canada's prime RE is bought by global investors who want to afford a house / condo in either Toronto or Vancouver. The trend is only getting higher after the Olympics.

Canada enjoys a relatively stable economy, low crime rates, very culturally diverse population and public health care option.

The US economy is not sliding further, the economies of China and India are picking up the resources.

If Canada was like any other country, I'd say yes there's a housing bubble. But the high cost of living is limited to the areas with densest population and most attractive to new immigration. Check out RE prices for PEI for example. Oceanfront cheap cheap cheap. But nobody lives there and nobody thrives there.

The local population may indeed have problems being able to afford the housing in Metro Vancouver or Metro Toronto but the influx of foreign investors, new immigrants and so on for the reasons described above is putting upwards pressure on the existing RE sector.

Only way the prices would come down there is when Canada runs out of water.

The possible threat of a nuclear Iran has Europeans with money scrambling for a piece of Canada to retreat when the shit hits the fan again. Where else?

 

 

Womb Service's picture

So to sum up your post: "It's different here/this time"

You sound like a shill for the RE industry...or someone who bought at the peak.

Who are these "global investors" who buy overvalued assets? Most rich people I know didn't get rich by paying way too much for anything.

These people must be Chinese lottery winners who aren't so saavy when it comes to business.

 

"The US economy is not sliding further"

mmmmkay

 

sheeple's picture

Doesn't take a Schulich guy to recite the fact that TO and Van are in bubble territory. What do we need to do, have the Shit & Piss raters come out and explain why they need to place CDN banks on credit watch before this "Canadian market is different" sheepCrap talk start to hit the fan? Oh that's right, Canada is in a recovery, jobs in Van is growing, employment rate is growing in TO ... yeah how about over-stretching that credit card? How about students coming out from university with massive debt who are unable to find a decent job and have to force to move back with their family?  How about those Ford and GM plants in southern Ontario? Thank god for CMHC! ... wait a minute, don't they purchase mortgage from originators and bundle these safe securities and slice them into trenches and slaps AAA with "Stable" outlook on them and provides government guarantee? Where did I heard this story before ... isn't that sound eery similar to We-lift-the-loss-cap-on-xmas-eve FANNIE FREDDIE ...  Oh yes, how about those hyper extended communities in suburbia area? My, the saturated new home market prices must keep going up and up because, why, Canada is different! Horseshit, speculations are boiling to neverland. This article didn't even scratch the surfaces of capital inflow from abroad (namely, Mainland China, Taiwan, South Korea, and other parts of Asia), the trends of Canadian families migrating from urban centres into suburbia, etc. Finally, so called analysts and economists placed too much credit on the CDN banking systems, they were not immune to the credit crisis, the tsunami hasn't landed on their front porches just yet. Everyone seems to forgot about the CAD 30 Billion + third party ABCP synthetic CDO sheepshit that were shepards to these CDN institutions back in the good-old chasing for yields days, and MOST of them are still probably hooked in their books (Mark to Nash, Mark To Mulroney, Mark to Crosby, Mark to My-PHD-Quant's algos)

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mistah zero's picture

Most Canadians are pretending it can't happen here.

I'm not looking forward to the aftermath...

sheeple's picture

+1

hope you either rent or living with someone to share the cost, there's absolutely ZERO fundamentals to support the current upward drift ... no decoupling with US

rocky89's picture

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