Guest Post: Is Canada's Housing Bubble 'Different'?

Tyler Durden's picture

Via Pater Tenebrarum of Acting-Man blog,

Nothing to Fear, They Say

According to this article, CIBC thinks the huge amount of household debt in Canada and the beginning cracks in the housing bubble are nothing to worry about. The main reason for this benign assessment seems to be that there have been a few other credit and real estate bubbles in the world that have grown even bigger than the US one before it burst. What a relief.

"The news out of Canada's real estate market isn't good, but the country will avoid a U.S.-style real estate meltdown, CIBC said Tuesday.


Economist Benjamin Tal said in a report that even recently released data about high levels of Canadian consumer debt isn't proof that there will be a sudden, big drop in home prices.


"To be sure, house prices in Canada will probably fall in the coming year or two, but any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today's Canadian market," he wrote.


Tal noted that Canada's debt-to-income ratio has just broken the U.S. record set in 2006, but said other countries have had even higher levels without a crash.




Tal said home prices in large cities like Vancouver and Toronto are overshooting their fundamentals and will likely slip as sales fall.


"But the Canada of today is very different than a pre-recession U.S., namely as far as borrower profiles are concerned," he wrote.


"Therefore, when it comes to jitters regarding a U.S.-type meltdown here at home, the only thing we have to fear is fear itself."

(emphasis added)

To sum this up: there have been bigger bubbles, so ours can grow bigger too. Moreover, it is different this time.

It is actually fairly typical to find this type of thinking near the top of a bubble. The people living inside it cannot believe that it could possibly crash. Of course Canada's economic situation is in many respects 'different' from the US economic situation, but that is the case with every slice of economic history. Not one of them can possibly be exactly the same. Nevertheless, one can come to some general conclusions about credit expansion-induced bubbles. Economic laws will be operative whether or not the precise historical circumstances are similar. When Japan reached the height of its bubble in the late 1980's, it was also widely argued that the overvaluation of stocks and real estate was no reason to worry because Japan was allegedly 'different'.

Regarding borrower profiles, Mr. Tal is mistaken if he thinks that the current  profiles of borrowers are actually relevant. These profiles always look good at the height of a boom. They deteriorate only after the boom ends. To wit, here is a chart of the history of US household credit scores:


During the US housing bubble, even while capital was malinvested and consumed and the actual creditworthiness of borrowers constantly declined, 'credit scores' got better and better. The error was only revealed after the boom began to fall apart – click for better resolution.


Canadian household debt as a percentage of income by now vastly exceeds the peak that was seen at the height of the US real estate bubble. So in this sense, Canada is also 'different' – only not in a particularly good way. Note that the chart below actually understates the true level of the Canadian debt-to-income ratio by a full 11 percentage points. It does not yet reflect the most recent revision to the numbers (i.e., the ratio is really at 163%).


Two credit bubbles compared side by side: US and Canadian household debt as a percentage of disposable income. The green line should actually be at 163% – click for better resolution.


The 'Soft Landing' Mantra

Canada's housing market has begun to cool markedly. As is usually the case, the first sign of trouble is a sharp drop-off in transaction volumes. Existing home sales in Canada were down by 15.1% in September year-on-year. This seems to be the result measures recently introduced by the government that are aimed at slowing down or reversing house price increases. Prices will no doubt eventually follow transaction volumes.

The WSJ reports on the cooling of the previously red-hot Vancouver market. What is so funny about this report is that government officials are patting themselves on the back for having produced this cooling without realizing that the measures are coming way too late. Yes, they may well lead to a bursting of the bubble, but the hopes for a 'soft landing' are very likely misguided.

“Canada's finance ministry tightened home-lending requirements, the latest in a series of moves the government has taken to tighten credit amid the real-estate boom. Recently, a number of economists and policy makers, including the country's central-bank chief, have warned about possible overheating in several Canadian markets, notably in the Vancouver and Toronto condo markets.


This summer, Ottawa cut the maximum mortgage amortization period from 30 years to 25 and reduced the amount of home equity Canadians can borrow against, from 85% to 80%. This month, Finance Minister Jim Flaherty said that the new mortgage-financing rules are beginning to have "some effect," as activity in the housing market has cooled in both Vancouver and Toronto.


"We think that's a good thing," Mr. Flaherty told reporters. "I would much rather have a soft landing than a hard landing."

(emphasis added)

This is a good example for what is known as a 'non sequitur'. The credit tightening measures are beginning to bite, but it does not at all follow from this that a 'soft landing' will result.

The 'soft landing' mantra is invoked at every opportunity, as if repeating it often enough will make it true. Consider the conclusion of this article on Canada's growing household and mortgage debt burden in the Vancouver Sun:

Ottawa has moved four times in as many years to tighten mortgage rules to keep marginal buyers out of the market, most recently in August.


The latest change, which added to monthly payments on insured, first-time purchases, has been partially credited with a recent slowing in home resales, particularly in previously hot markets of Vancouver and Toronto, and with a moderation in prices.


New data released Monday by the Canadian Real Estate Association showed sales of existing homes fell 15.1 per cent in September from a year ago, although last month’s numbers were slightly higher than in August.


Bank of Montreal economist Doug Porter said he believes the trend points to a soft landing for housing, not a crash.”

(emphasis added)

One is tempted to ask: what exactly is it about the 'trend' that 'points to a soft landing'? It sounds more like wishful thinking than a conclusion justified by the evidence.


House prices compared to rents in Vancouver. To say that prices are out of whack with  rental returns would be sugar-coating it. This is, in a word, insane. Sales in Vancouver have meanwhile plunged by 32.5% from year ago levels – click for better resolution.


The divergence between prices and rents is far less extreme in Toronto, but it is still obvious that prices are now way above trend – click for better resolution.


Are the Banks Safe?

It is generally held that Canada's banking system is in ruddy health and not in danger from the extended credit and real estate bubble, mainly because a government-owned organization, Canadian Mortgage Housing Corp. (CMHC)  insures most of the mortgages with down payments of 20% or less. The company also helps fund mortgages by issuing debt and buying mortgage backed securities with the proceeds. 

This kind of thinking has things exactly the wrong way around. It is precisely because such a state-owned guarantor of mortgages exists that the vaunted lending standards of Canada's banks have increasingly gone out of the window as the bubble has grown. Today some $500 billion, or 50% of Canada's outstanding mortgages are considered 'high risk' according to the Financial Post. Moreover, HELOCs ('home equity lines of credit', i.e., the use of homes as ATMs) have grown like wildfire, at loan-to-value rates of up to 80%.

Through CMHC and government guarantees for privately held mortgage insurers Genworth Capital and Canada Guarantee, Canadian tax payers are on the hook for more than C$1 trillion in mortgages. In other words, there is no practical difference to the role played by the once nominally private GSE's and credit insurers in the US and the Canadian version of them: in both instances these institutions have enabled vast growth in ever more risky lending, while ultimately tax payers are picking up the tab when things go wrong – as they invariably must. In this sense the banking system is 'safe' – the government has already committed tax payer resources beforehand to bail out the mortgage credit market in the event of trouble. However, mortgage debt is only a part of the household debtberg. It stands to reason that the end of the boom will create a lot of economic pain and the banks won't be able to evade it. Moody's has recently put the biggest Canadian banks on 'downgrade watch' for precisely this reason. Of course Canada's economic situation depends greatly on commodity prices, especially the price of crude oil. Similar to Australia, Canada is thus to some extent a 'warrant'  on China.

Lastly, the official house price data – as scary as they look, especially in Vancouver's case – don't really capture the sheer insanity of the bubble. To get a sense of what the bubble has wrought, one should take a look at the following web pages. They compare actual 'crack shacks' with Vancouver homes that have been sold at incredibly high prices, but can otherwise hardly be differentiated from the former.

Crack Shack or Mansion?

Crack Shack or Mansion, Part two

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
q99x2's picture

You don't mean to say that some entity is still buying mortgage backed securities? You have got to be kidding me. Arrest them.

flacon's picture

I went to ScotiaBank today to take out $1,500CDN. The teller refused to give me my cash because she said it exceeded my $400 limit. She did say that on ONE CONDITION she would give me my money - if I showed her two pieces of GOVERNMENT ISSUED IDENTIFICATION. 


Last month Royal Bank of Canada REFUSED my ScotiaBank cheque to pay my rent. It was "cash only" (or equivalent (certified cheque)). 


I keep a minimum possible balance at my bank - just enough to pay the bills. All my other assets are kind of cold, hard, and shiny and usually sitting in a dark, dank place. 


LOL! Canada is just a fucked as everyone else. 

redpill's picture

Any time I get the slightest attitude from one of the banks I use, I just shrug and calmly say, "ok then I'd like to close my account."   Suddenly they become remarkably helpful.

flacon's picture

That's a good idea. I'm going to open up some local credit union accounts so that I have a backup first. 

Herkimer Jerkimer's picture

I walk around with a copy of my mom's bank statement that has my name on it, since we co-mingled to beat the govy, in the event of her untimely death, and simply slide it across the table to the offensive party.


They look at me, and I motion for them to open the envelope, which they do.


I watch their eyes walk down the page, getting bigger and at the appropriate time, when there just about done and as soon as they look up, I'm there, leaning forward, looking them in the eye, saying,



"Now. Do I have your complete attention?"


Never met a bank manager that wanted me to stand in line, again.




James_Cole's picture

Worth noting - CIBC is one of the worst banks out there, so of course whatever they say officially is wrong. 

markmotive's picture

They don't want you to know this but the Canadian banks were bailed out in 2008/2009 along with the rest of them...

Why so smug, Canada?

zuuma's picture

You can hide your assets in your chesterfield!

asteroids's picture

A good friend is a grocer. He's seeing the cracks at the retail level. He's at the Ontario Food Terminal (Ontario's major food clearing house) every day. He hears rumors, and they aren't good. Canadian job numbers are just as made up as the BLS numbers. There are more cranes in Toronto building condos than any other place in North America. This will NOT end well.

ACP's picture

Well, at least Vancouver is a nice place to visit. So laid back. It'll be even better when prices drop, because some Chinese criminal from Shanghai who bought a house at the peak will have to sell it on the cheap to pay the hundreds of thousands of $CANs to keep from getting deported and executed.

Interesting the article didn't really take into account the fact that mortgage interest is not tax deductible, and how that will affect investor, er owner mentality. Or how much recourse banks have towards homeowners. I don't think that'll make much different on how the bubble bursts, but might during the aftermath?

James_Cole's picture

"Interesting the article didn't really take into account the fact that mortgage interest is not tax deductible, and how that will affect investor, er owner mentality."

It is tax deductible, just need a good accountant. 

Absalon's picture

The interest is tax deductible only under limited circumstances - namely, that the money borrowed against the property is being used to earn income.

jackinrichmond's picture

if you want to make your mortgage interest tax deductible, check out the "smith manoeuvre" 

(it can be done)


What fool uses a bank anymore? Credit union only. I asked for 10 grand, no questions, handed it over and

JuliaS's picture

Vancouver credit unions are heavily invested in local CRE. Wouldn't touch them with a 10-foot pole.

BurningFuld's picture

This could be true for Vancouver. Interior of BC...everyone has actual real jobs and can actually really afford their mortgages. I have no mortgage neither do any of my  friends...I'm wondering about this debt level thing???

JuliaS's picture

Even people who can afford their bloated mortgages will be walking away once they discover they owe multiples of what the houses are actually worth.

I'm glad you and your friends don't have mortgages. Keep in mind what the "average" means. If an average debt shared between 2 people is 30K and one of them is debt free, how much debt does the other person have? It's 60K. It's called math.

For every person relatively well of there's one out there who's really messed up.

Your friends aren't to their neck in debt? Well, unless you have 34.5 million friends, your individual observation doesn't make it a national trend.

BurningFuld's picture

How do they walk away if they have a job and can afford the payments and the debt will not be forgiven. Perhaps they are trapped in their current home but that's as far as it goes. Even if the value of their home goes to zero they still have to make the payments which they CAN. This is all supposing there is not some global financial collapse, and then all bets are off.

JuliaS's picture

"This is all supposing there is not some global financial collapse?"

What do you call the last 5 years?

aint no fortunate son's picture

Nonsense. "It" is different this time. It always is.

AvenoSativo's picture

Don't know about your circumstances, my experiences are totally different from yours.

Just the other day, I withdrew $800 cash from an RBC (Royal Bank of Canada) ATM machine at a gas station without any problem.

hardcleareye's picture

He just needs to meet with his Scotia Bank rep and set the withdrawal limits on his account to meet his needs, no big deal and it is set up like that so that it min the liability to the bank and you, in case if someone gets ahold of your bank account and pin numbers.

billsykes's picture

I argue more so than the US, for a number of reasons.

Canada- and Canadians in particular are very risk adverse, so they don't venture far from home in business, and when you look at the business there it is comprised of money shuffling, O&G & real estate. That's it. The big problem is that they are too far concentrated in energy, and don't, as all resource based economies, diversify.

So when the companies start selling out to foreigners- which they already have- 70% of the oil sands are foreign owned they are like the boiled frog.Industry CEOs scoff at that number, its all right there in the news and ownership of stock.  Bank of china opens up in a city of 1m in Canada.

They have 1 productive province that is is being sold and mismanaged away, another with huge debt and high taxes (Ont), and another that wants to break off (Que), and gangsters running and floating another (BC), the rest doesn't make anything and is totally uncompetitive without subsidies. 

Combined with the fact that it hasn't succeeded from the UK, they don't even own what they think they do(governor general from a nod from the QUEEN can dissolve the government and prime minister) - even worse is their property owner rights (the worst in the western world)

When put into this prospective-  Canada has way more issues than the US, plus they are highly dependent on the US for income as their largest trading partner.

With sky high personal debt, unsustainable health care system, low job prospects, huge unproductive land mass, pussy corporations afraid to expand internationally, and continuing to engage in war(s) (Iran next) they cannot win- this goose is cooked.

Canada, the geek half brother to the receding, dysfunctional, violent, slightly retarded but loveable buffoon brother, America.

robertocarlos's picture

You forgot about Sask. They have a surplus and they are doing well.

Matt's picture

The Governor General is a symbol, like the Queen. The government can, unlike the United States, deploy the military domestically. 

Our banks are expanding internationally. I don't know what corporations you are thinking of specifically that are adverse to expansion. 

Tech is pretty hosed, with Nortel and now RIMM going down the tubes. 

As for BC, the high Canadian dollar hurts Hollywood North and tourism. Lots of wood, but no one really needs lumber, and all these shitty trade agreements result in more and more of it being shipped as raw logs.

I would be surprised if we get into any new conflicts with Syria / Iran / whatever, other than maybe sending a few token CF-18s. I don't think the will or capabilites are there.

billsykes's picture


and read the bank act- sorry no pictures, get your dad to read it to you if you cannot and see who actually owns the bank of canada shares.

also kicking out embassies is a prelude to an act of war;

lumber business blows, its not profitable.

Matt's picture

I understand that on paper, the Governor General IS the Executive; however, in reality, the Governor General is a symbol that goes with the Prime Minister's decisions.

The Deputy Minister of Finance holds the shares in the Bank of Canada on behalf of Canada.

Lumber can certainly be profitable, it simply is not right now, due to current market conditions plus the trade agreements we are stuck in. Back in 1969, Port Alberni (a logging / mill town) had the highest per capita income in the country. Now I think it has the lowest.

billsykes's picture

No you are not getting it. the Governor general specifically has the right to dissolve parliament- they did it in Aust. just because they don't exercise the option does not mean they cannot.

The queen is not symbolic, its because legally the UK still owns Canada.  If you were a squatter on my land, just because I don't kick you off- doesn't mean I forfeited my legal right to kick you off.

You have to educate yourself- you have been a member here over 2 yrs- haven't you learned something?

Or are you so rigidly tied in to thinking the government is out for your best interest?  Are you shaking your head because the lie is so big that you cannot fathom its truth? Are you aware of history?

Matt, get some knowledge in legal. If you change the ownership of something the new owner holds all the shares, if you are a custodian, you hold them on behalf of someone else. This is the bank of canada shares. 

Do not reply, its obvious you don't know anything, you can fix that, read the articles at least.



Handyman's picture

Flaherty had no problem putting mortgages up to 40 years in 2006. The only thing I'll say for him now is at least he looks scared shitless. Carney looks the same way. Of course when the SHTF they blame it on everyone else.

Too bad Canada sold all it's gold.

orangegeek's picture

Canada's workforce is largely government employees - well over 50%.  Under Obama, the US count grew to over 30%.


Canada's tax base is primarily high priced commodities, particularly oil and gold.


And when these commodities fall hard, Canada will have caught up to the US real estate crash.

trembo slice's picture

Is this hard fall in commodities imminent?  Why would the dollar go up in the current environment?

Orly's picture

People are realising that Dr. Bernanke is about out of bullets and the magical unemployment numbers from last week told everyone that the punch-bowl is going to be taken away by Unca Sugar.

Now, they know they'll have to deal with their problems on their own, so they seek a safe-haven.  And yes, commodities, including precious metals, are due for a hard landing as well because all the money that was being pumped into them via the retail crowd following JPM, Wells, etc., is also going to dry up pretty fast.

Sell all risk-on stuff now, including your gold and silver.  There is no such thing as hyperinflation and if there were, there is no medium of exchange for gold and silver bricks or coins.  You're going to be holding a bunch of very pretty, shiny rocks.



flacon's picture

The antidote for hyperdeflation is hyperinflation. It's happened hundreds of times before why would this time be different?



Orly's picture

Because Dr. Bernanke said he could stop inflation in fifteen minutes.  Also, we're not talking about a third-world currency here, it is the US dollar.  Everyone one the planet is going to want to get paid in US dollars.

It simply won't happen here.


flacon's picture

Given enough global economic/monetary stress something is going to go "SNAP!" and change the US Dollar paradigm overnight. 


There hasn't been a single fascist dictatorship that has survived the wrath of the people. Not even Pol Pot, Lenin, Hitler, Chauchescu, Mussolini, etc. In theory these regiems should have gone on into infinity until the ocean turned to lemonade but for some reason or other there reached a critical mass of rebellion and they were toppled. Ben Bernanke can stop inflation in 15 minutes, but he can't stop hyperdeflation when money velocity falls to zero - and when it does that signals the loss of faith in the currency and money velocity goes from zero to infinity from Monday to Friday. 


There is a fine line between zero and infinity - one could argue they are the same in some respects. 

Orly's picture

I will grant you that under your scenario, it is possible for that to happen.  However, there are already grumblings in the US military about stepping in to wipe the slate clean.  But even suppose there weren't, the people of the United States aren't going to be fooled by a Pol Pot or Lenin or Stalin or any of these people and please, don't even think of comparing the murder of millions of your countrymen to rigging the stock markets and sticking the populace with a lifetime of debt in this case because it is simply not accurate.

While I will grant you the possibility of that happening, you must admit that the probability of it is very near zero.


Toxicosis's picture

You're giving far too much credit to the awareness and attitude of people living in the good ol' US of A.  Most people thus far are just going along with all of it.  Perhaps that's why they are referred to as sheeple.  And point of fact, sticking people with harrowing debt is and robbing them blind is effectively killing them, however, indirectly.  A man with a briefcase can also kill more people than even a man with a gun.

oddjob's picture

$40 billion a month in toxic mortgage bond purchases....those are real cutbacks.

Orly's picture

QE3 has been priced into equities eleven months in advance, by the way.  Not only that but the banks will have to start using that extra cash to try to soak up equities to prevent an out-right crash of the stock market.  I'm sure that this is in their "contract" somewhere.

billsykes's picture

Who cares. Why? because canada doesn't own any of it anymore.

rete's picture

Good must be "let's yank random numbers out by butt" day. 

You don't say, Mr. Orange?


Given that governments in the US and Canada (at all levels) spend basically an identical % of GDP (39.7% Canada and 38.9% US) that must mean some kind of gravy train in the US for those lucky enough to work for guvment. And those well over 50% of all employees in Canada must be seeing pretty shitty pay and benefits - let's face it, having to be paid from that same ~40% of GDP that also pays for healthcare everywhere and welfare in Quebec there's likely not much left in the pot for wages.

FrankDrakman's picture

Canada's workforce is largely government employees - well over 50%.

Excuse me for a moment - hahahahahahahahahahaha. While I would never disagree that our public sector is bloated, the FACT is that about 20% of Canadians work at all levels of government - federal, provincial, and local.

This bozo's probably never set foot in Canada, and thinks we live in snow forts ten months of the year. Moron.


hardcleareye's picture

Concur, thank you for  correcting this misconception.

Orly's picture

Love the game at the end!  Holy smokes!  Really...can you tell the difference?  I scored 12 of 16...

How'd you do?

Blammo's picture

I got 4 out 16....Even got the one with the cops in front wrong....I thought it had to be a head fake

Orly's picture

Yeah, I got suckered on that one, too.

Divided States of America's picture

I got friends who make less than 40k CAD a year who has multiple condos that they are renting out or looking to rent out. The immigration effect there has definitely helped kept prices higher than they should be but this wont last....Canada's condo market is about to burst. I can see the skyline of Toronto and they have high rise condos sprouting like weeds. Its amazing but I hope ppl keep buying because the bubble will burst sooner rather than later and I can try to pick some carcasses off for cheap.