This page has been archived and commenting is disabled.

The Financial Times Follows Up On Reggie Middleton's Admonitions Of A Canadian Housing Bubble

Reggie Middleton's picture





 

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">Two months ago I answered the query, #0033cc; line-height: 1.9;">Is There A Bubble In The Canadian Condo Market? for #0033cc; line-height: 1.9;">my subscribers. The missive started off like this: 

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">The Canadian condo market is running into a precarious over-supply situation with large inventories slated to be entering the market in 2014 and 2015. Major centers such as Vancouver, Montreal and Toronto are witnessing a rapid pace of condo construction, despite falling sales. The demand for housing overall is slowing down, with sales in the last few months of 2013 falling on y-on-y basis. In most major Canadian markets there is an increase in listings and decrease in sales (even though prices are still somehow rising, which should in and of itself be indicative of a problem). 

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">Well, the Financial Times is now weighing in on the issue... #0033cc; line-height: 1.9;">Canada’s housing market teeters precariously

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">Robert MacFarlane, a long-time crane operator, surveys his empire from the top of one of Toronto’s flashy new apartment buildings. “I can see more than 50 tower cranes,” said Mr MacFarlane, whose bird's-eye photography from the country’s tallest crane has gained him #0033cc;">online notoriety as interest in Toronto’s property sector escalates.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">These cranes – which can offer clues to bubble-like conditions – emerged in response to lofty demand for condominiums from investors and homebuyers taking advantage of Canada’s ultra-low interest rates.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">This is a fact. I've observed this in the bubble markets that I've personally experienced: Miama, NYC, DC - cranes and construction galore. In retrospect it appears virtually impossible for anyone NOT to realize we were in a bubble.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">But #0033cc;">as home prices rally and construction projects proliferate – particularly in Toronto, Montreal and Vancouver – industry analysts say the country’s property sector is perched precariously at its peak.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">David Madani, economist at Capital Economics, believes the nation is on the verge “of what will prove to be a prolonged correction”.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">“Canada’s housing market exhibits many of the symptoms that preceded disruptive housing downturns in other developed economies, namely overbuilding, overvaluation and excessive household debt,” he adds.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">Mr Madani’s comments chime with a chorus of policy makers,#0033cc;"> rating agencies and #0033cc;">hedge fund managers who have #0033cc;">warned of the risks posed by Canada’s overheated housing market.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">Alongside Norway and New Zealand, Canada’s overvalued property sector is most vulnerable to a price correction,#0033cc;"> according to a recent OECD report. It is especially at risk if borrowing costs rise or income growth slows.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">And why in the world would borrowing costs rise with all of the world's most powerful central banks pushing #ZIRP4EVA???

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">#bbbbbb; font-family: Tahoma, Geneva, sans-serif; width: 400px;"> 

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">In its latest #0033cc;">monetary policy report, the Bank of Canada, the nation’s central bank, noted: “The elevated level of household debt and stretched valuations in some segments of the housing market remain an important downside risk to the Canadian economy.”

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">The riskiest mortgages are guaranteed by taxpayers through the Canada Mortgage and Housing Corporation, somewhat insulating the financial sector from the sort of meltdown endured by Wall Street in 2007 and 2008. But a collapse in home sales and prices would be a serious blow to consumer spending and the construction industry that employs 7 per cent of Canada’s workforce.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">But isn't that a circular argument???

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">...the flipside of a low interest rate policy designed to buttress the economy has meant that household debt levels have hit record highs as homebuyers stretched themselves to jump into the housing market. That in turn propelled demand and prices.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">... Household debt has risen to 163 per cent of disposable income, according to Statistics Canada, while separate data show a quarter of Canadian households spend at least 30 per cent of their income on housing. This is close to the 1996 record when mortgage rates were substantially higher.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">On a price-to-rent basis, which measures the profitability of owning a house, Canada’s house prices are more than 60 per cent higher than their long-term average, the OECD says.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">... Year-to-date new home sales in the Greater Toronto Area – an area accounting for a fifth of Canada’s home building activity – are down by half from two years ago, according to the Building Industry and Land Development Association.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">... Mr Madani forecasts a market correction in home prices over the next few years, predicting a 25 per cent drop.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">But those that are bullish on the market point to resilient regional data. October sales of existing homes rose 38 per cent in Vancouver and 19 per cent in Toronto.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">“It’s a mistake to think that what happened in the US will happen in Canada,” said Gregory Klump, CREA’s chief economist said.

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">Yes, because this time it's different!!!

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">... Mr MacFarlane too has yet to be convinced of an imminent slowdown. “In the past when things have slowed down, there has been a distinct ‘feeling’ from the boots on the ground perspective. I don’t really sense that right now.”

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">Nothing like that good 'ole empirical forensic analysis to make an investor feel all warm and cozy, right?!

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">All paying subscribers, feel free to download.

#666666; font-family: Arial, Helvetica, sans-serif;">

#0033cc;">File Icon#cccccc; outline: 0px; font-size: 12.727272033691406px;" /> Is There A Canadian Condo Bubble? (Residential Real Estate)

Non-subscribers can purchase this report through a day pass subscription via #0033cc;">PayPal or#0033cc;">Credit Card.  

#666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">More on this topic...

    #666666; font-family: Arial, Helvetica, sans-serif; line-height: 21.81818199157715px;">
  1.  
    1. #2d2d2d;">#0033cc;">The Canadian Real Estate Bubble? Featured -#000000; line-height: 1.9; background-position: initial initial; background-repeat: initial initial;">Jul 25, 2012 - Below is an email that I recieved from a reader: RIO Canada is one of the biggest reit's in Canada I know some of there management and from 

 


- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 11/18/2013 - 15:05 | Link to Comment Diogenes
Diogenes's picture

The real estate market is different in Canada. You don't have the wild loans popular in the US 10 or 15 years ago. You need 20% or 25% down, a good credit rating and good income to get a conventional mortgage. If you are a real risk taker they will allow as low as 10% down with a CMHC insured mortgage.

So, you don't get the wild swings in prices. In 2007 - 2008 prices dipped 5% or 10% and recovered 2 months later. That was our "crash".

I'm not saying real estate prices will go up forever. But if they don't, the resulting "crash" will be mild and short lived.

Mon, 11/18/2013 - 15:19 | Link to Comment MeelionDollerBogus
MeelionDollerBogus's picture

those aren't the only factors at play.
You have rapidly unstable incomes & a huge diversity from East to West and there's also the debt.
Once people figure out how screwed they are by debt vs income, or emergencies make it happen, the house collapses.
In Canada we have a break that few need to go bankrupt just for health care but it's not impossible.
When my leg was broken in a car crash I didn't need to worry about paying for the surgery.
What I did need to worry about was paying to get around for basic needs because I had no more car, leg wouldn't work to drive the car if I had it & transportation was expensive in that condition (crutches, very immobile, very risk on a fall of a new fracture & more surgery).
That meant working was out & looking for work was out, except online, and at the time searching only online for work was not feasible. Now things have changed.

Mon, 11/18/2013 - 15:05 | Link to Comment Fuh Querada
Fuh Querada's picture

There are still 950 Million Chinese who haven't bought Canadian properties yet.

Mon, 11/18/2013 - 15:09 | Link to Comment oddjob
oddjob's picture

...in cash.

Mon, 11/18/2013 - 16:04 | Link to Comment Frozen IcQb
Frozen IcQb's picture

Bitcoins

Mon, 11/18/2013 - 15:03 | Link to Comment oddjob
oddjob's picture

FT is a rag for delusional urbanites prancing around in argyle socks.

Mon, 11/18/2013 - 14:13 | Link to Comment Frozen IcQb
Frozen IcQb's picture

Not that it's right but it is different now:  Pre QE (US Real Estate collapse) vs. Post QE (Real Estate ???)

If one country's RE goes down, it's because they're all going down.

Mon, 11/18/2013 - 13:37 | Link to Comment Rodders75
Rodders75's picture

 

Carney lays huge turd in Canada.

Comes to England to drop an even bigger stool. 

God help us. 

Mon, 11/18/2013 - 13:19 | Link to Comment maskone909
maskone909's picture

i think it might be safe to say at this point, that finding a market absent of a bubble would be an arduous task.

Mon, 11/18/2013 - 13:31 | Link to Comment rp1
rp1's picture

There can't be a bubble in *everything*, right?

Mon, 11/18/2013 - 14:30 | Link to Comment andrewp111
andrewp111's picture

There can be when all the world's central banks are pumping the bubble in everything.

And when the bust finally comes, it is truly Game Over.

Do NOT follow this link or you will be banned from the site!