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Guest Post: Oil & The Looming Canadian Housing Bubble Crash
As the year comes to a close, it is useful to put things into perspective. Sure, California has a love affair with real estate and we go through our traditional booms and busts. $700,000 crap shacks now litter the landscape but there are fewer and fewer lemmings taking the plunge. In Canada there was no correction. In fact, households continue to go into deep debt to purchase real estate. The argument goes that mortgage standards are much tighter in Canada so therefore, they are much more enlightened when it comes to financing homes. People forget that the bulk of the 7,000,000 foreclosures in the US came in the form of standard loans. Garbage loans imploded in more dramatic fashion but people lost their homes because the economy shifted. At that point, it merely meant covering the monthly nut. We were housing dependent and that market contracted aggressively. Canada is housing and oil dependent. And oil just got a big kick to the shins.
In Canadian debt we trust
There was an inflexion point for US markets when household debt surpassed household income. People kept saying it was a liquidity crisis initially but it was truly a solvency crisis. People took on too much debt and were walking on a financial tightrope. In the US, this peaked above 120 percent. Canada is well on its way above 160 percent:
Basically Canadians are deeper in debt relative to their income. And a large part of this debt is housing related. A large part of the economy is also tied to oil and as you may know, oil just took a massive cut:
It was interesting to hear that we would never see oil drop below $100 a barrel. Oil is now trading at $52.84 a barrel. Similar arguments were made about US housing never having one negative year-over-year price drop until we did.
Large part of Canada’s oil is costly to extract
A large portion of Canada’s oil is costly to extract. With oil sands for example oil would need to be at $80 a barrel to make a profit:
I doubt people want to run money losing operations for a long period of time. So it is no surprise that oil rigs are closing:
Fewer jobs and less money. And for a large part of the Canadian economy, much of this money has been flowing into housing. In Canada, there seems to be a cult belief that housing simply will not correct. They are full on drinking the good old tasting real estate Kool-Aid. In the US, we already lived that correction and understand that yes, housing does go through booms and busts especially when debt is used to supplement a lack of income growth. As the debt to income chart shows, many US households were forced to deleverage via foreclosures and bankruptcies.
Home prices out of sync
Home prices are fully out of sync with incomes. Take a look at this rise in home values:
Canada has enjoyed many years of the global commodities boom and now finds itself contending with a market full of debt and inflated housing values. Short of oil rising back up to $80 a barrel and higher Canada is likely going to face some short-term pain. The housing market is due for a correction. Those of us in California realize that booms and busts can occur all of a sudden but the events leading up to this are largely foreseeable.
I’m sure many in Canada assume that home values will simply continue to go up and just because banks check incomes doesn’t mean squat. As the above data shows, households are already deep in the quicksand of massive debt. It is all dandy when everything is going up including oil. When oil gets smashed as it did, it came on quickly. Canada has their versions of $700,000 crap shacks usually in the form of condos. Hey, at least with a crap shack you don’t have to share a common wall. When you look at the Canadian housing market it makes the US look like a frugal uncle.
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Subprime is huge in Canada, and that's what's driving the market. $900B out of a mortgage marketplace of $1-1-$1.4T is subprime, ie: so poor in quality that the banks refuse to touch it without insurance or other enhancement to the credit quality. There is no meaninful evidence that any 'money' is coming to Canada from overseas or elsewhere, as domestic credit is off the charts.
If that's bad, Australia is a disaster - official figures from the ABS say it's at 180% debt/income and still growing. http://www.abs.gov.au/ausstats/abs@.nsf/lookup/4102.0main+features202014
That's with mortgage rates around the 7-8% for most people even with ZIRP everywhere else.
Utterly ridiculous valuations in the cities - In Sydney, a million bucks won't even get you a tiny house that's been condemned miles and miles from the CBD.
Same ignorant "we're different - property prices won't go down here", same "our mortgage book is safe" nonsense, same commodity price collapse problem .. but worse.
Was only a couple years ago the price of an average detached bungalow in Vancouver hit $1mm. Full retard.
Only in a few places in Canada are the real estate markets hot. The oil patch including Calgary, Vancouver, and Toronto. Obviously in the oil patch when oil was at 100 a barrel this was driving the local market which is now in the very early stage of collapse, and it will if oil stays at this price. Vancouver has no industry whatsoever that can explain the increase in price, the locals do not have the incomes to buy property in the volume being bought. Ignore the articles saying foreign buyers are only a small part of the market, I am a Vancouverite and have lived there since '65. The overwhelming change in the demographics in the city in the past 30 years is staggering. When I was a kid in the 70's there were 1 or 2 token Chinese kids in each schoolroom. Now, it's 1 or 2 token white kids, which were mine. Only money from mainland Chinese is driving the Vancouver, and Toronto, markets. People in Vancouver sell their home for 1-2 million, on average, an then go somewhere else like the interior of the province or over to Vancouver Island and pay half that for a brand new home and put the other half in the bank. I know many people who have done this and this has been happening for 30 years. This is what drives up the real estate prices outside the major cities or oil patch, the flow of money from those areas. Now that oil has collapsed well below the breakeven point the money follow will grind to a halt. The people in the oil patch should be worried because the collpase is upon them. The number of home sales in Calgary in the past few weeks has crashed while the number of listings has shot up over 50%, what does this mean? The real estate market can and will drop like a stone...
For people who may doubt you. http://www.crackshackormansion.com/
Nice to see someone old enough who remembers previous housing crashes and corrections, and the changing demographics that have driven RE to these absurd and unsustainable levels.
I am on Vancouver Island and prices here are ridiculously high as well, especially in places like Victoria.
Agreed Pigs, housing is ridiculously high in the Republic of VI, by as much as 50%. Why did I wait to get into real estate until Sept '07?!?
Buy high, sell low...
BC Ferries: thank god they don't fly.
it begins, "According to the Calgary Real Estate Board’s website, total MLS sales in the city were 1,052 as of Tuesday — down 7.4 per cent from the same period in December 2013.
New listings were up 41.9 per cent, to 1,359, while active listings were up 42.3 per cent 3,466."
Article here: http://calgaryherald.com/business/real-estate/hot-calgary-housing-market...
This is staggering, new listings up 42% in one month? People are panicking and trying to get out, this is what it looks like, but there are no buyers, I've seen this a few times in my lifetime...
it begins, "According to the Calgary Real Estate Board’s website, total MLS sales in the city were 1,052 as of Tuesday — down 7.4 per cent from the same period in December 2013.
New listings were up 41.9 per cent, to 1,359, while active listings were up 42.3 per cent 3,466."
Article here: http://calgaryherald.com/business/real-estate/hot-calgary-housing-market...
This is staggering, new listings up 42% in one month? People are panicking and trying to get out, this is what it looks like, but there are no buyers, I've seen this a few times in my lifetime...
Yup. Hordes of poor planning. Any smart person wouldn't buy a home to live in at maximum occupancy. They'd buy a home too big to live in alone, rent out rooms to others arriving for jobs, ensure the rent is high enough to offset the mortgage, property tax, estimated maintenance budget broken down to monthly amounts to add to an account just for handling that with inflation taken into account, and then be able to have tons of cost covered up front from possible losses later for moving.
And then the people owning wouldn't be distressed to move. And then the people renting wouldn't be selling to move at all if jobs dry up.
Poor planning seems to go hand in hand with rich times which never last.
OT: I have a question for you guys: are you also having trouble downloading ZH these days? With all the crap ads and videos on the sidebards, it takes at least five minutes for everything to download... and I have a brand-new, fast computer. Is there a way to get rid of all this shit? I've never seen anything like this, anywhere on the Internet...
The ads & videos are too much, I agree. The distraction when reading is to the point where I am taping a piece of paper over the ads to block out the distraction. What is most annoying is all the ads for foreign women and dating clubs. I would like to know how to get rid of them too.
serious????
Paper?
You have no idea how to add noscript and adblock to firefox?
You're NOT using firefox??
I've never even seen an ad on zerohedge or anything else in many, many years.
What is most annoying is all the ads for foreign women and dating clubs. I would like to know how to get rid of them too.
STOP LOOKING AT PORN!!
So much crap TAB crashes regular. They are ruining the site.
HOLY CRAP. How many times do we have to say this
FIREFOX
ADBLOCK
NOSCRIPT
problem solved forever. No ads ever. No scripts ever.
Cheap oil and cheap CDN dollar is a huge boon for Ontario and specifically Toronto the powerhouse engine of Canada. Toronto welcomes 100,000 immigrants per year. That's a huge boost for housing prices to maintain their values. Watch for Canadian home prices to flatline overall and Toronto home prices to rise. Obviously Alberta, Saskatewan & the Maritimes are toast and in for a shock. Particular Saskatewan. I think their growth recently was more tied to the energy and commodity boom than any other province. They are in for a whole lotta pain.
I proudly support Israel & the Jewish people.
wha??
I think you forgot this
/dualcitizenshiprocks
Just to add, Vancouver is the Monaco of North America. Wealthy people from around the world store their wealth there as a safe haven. It has rarely experienced any major pullbacks in real estate prices. I think your money is safe in that city although you've lost a lot on the currency over past 18 months.
I proudly support Israel and the Jewish people.
I think the link between oil and the housing market in Canada isn't very obvious.
To me, a couple factors favored the boom cycle we've had but none as much as the fact that we, the boomers' kids, started hitting the market before our parents got out of their homes.
That and the ridiculous rates we've had these past years are what are driving up real estate prices in Canada.
I agree it's not gonna last (partly because the demographic component is waning) but oil price will not have been a preponderant factor. Oil prices have consequences for canadian drivers and consumers too.
I fear an interest rate hike much more. Then we'll see what happens to those prices.
What? You can directly plot the wages + employees of tar sands projects to the rise in housing prices.
It's so blatantly obvious you'd have to be worse than blind not to see it, given that any report showing it can probably easily be given even in braille so even a blind person could tell the difference.
Canada has survived many of the messes of the last 10 years
or so based on the simple fact it is a hard asset exporter.
Given that "hard assets" ( eg.g gold and oil ) are in a slump,
much of the real wealth that has kept Canada's financial
system out of trouble is now in a tricky space.
The standard response has been to allow the currency to devalue ( 'natch ;) )
and we hear a lot of ( bluntly ) B.S. about how this is good for manufacturing,
or the wild life... who knows... but basically, currency devaluation does
allow you to float a deflating market... temporarily. Newsflash, if your
currency devalued by 15%, you can pretty much bet investment left
the country on that trade!!!
Unless there is a sudden turnaround in asset prices by spring, its
likely that the entire Canadian ( and world market ) are headed for a very
bad place. In Canada, the financial system can survive a 46% drop in RE prices.
Forget about CMHC... they blew the wad keeping Canada out of the
last credit meltdown. An RE pullback is all but guaranteed. AND, if
they don't do something about the currency right now(!) you can
talk about Canada in the same sentence with Russia when it comes
to markets.
At its current trading price the CAD$ has an intrinsic
trading value "ex oil" of about US 32 cents! That would be down by about
23 cents from a few years ago...
And only a fool thinks that manufacturing ( in Canada(?) LOL ... which
is less than 20% of the Canadian economy ) is going to make a comeback
in a world where demand ( and certainly US$ demand ) is already down
...and real manufacturing is done in Asia.
Your kidding yourself if you think a US$0.85 post for the CAD$ is anything
but a fiasco. And your seriously deluded if your not doing anything about
it NOW, because any "turn around" in oil and other commodity prices isn't
likely to happen before this spring... "IF" it happens, which is a very big "IF".
On this board we all think oil is an attack on Russia. Anybody who read
Dent's prognostications know that may not be the case, and that this
could be a 10 year long affair. Did I not say something needs to be done
NOW??? Reread this paragraph and see why if your a canadian you better
heed the situation.
You're too self confident to be anywhere near correct.
Why ThankYou! LOL
But the only part I'm self confident about is the
idea that a 15% ( so far ) devaluation can't
be good for 85% of any population these days.
"The founder of a small San Francisco-based hedge fund called Hyphen Partners LP has staked 95 per cent of his investors’ assets on a wager that the country’s housing market and banking sector are about to come apart at the seams. Mr. Mohan has amassed large short positions on Canadian bank shares and the loonie, betting their values will fall sharply."
The man is Vijai Mohan of Hyphen partners in San Francisco.
Says the loonie will hit 70 cents US.
Also, Goldman Sachs shorting oil.
www.sifferkoll.se
CDN Dollar devaluation? No action need be taken whatsoever.
The real estate bubble in Canada is a realtor's market. The homeowner may take a 15% loss on the sale of a property, while the realtors and the banks are the engine of the house price bubble.
All the money is in real estate, where most of the employment is in construction, subcontracting and finance.
You might have been a waitress in a pub when you met your husband in finance or engineering and decided with the advent of a child that real estate was your calling. With your first $20k return, you got religion and never looked back.
Most of the residents in condo towers are women that do not themselves occupy their residence. Just a few sticks of furniture.
People voted conservative, because that meant real estate prices were meant to go up assuredly. The central bank has been swapping treasury bonds for mortgage backed securities and had already gone from a massive export surplus to a deficit with the last pop of the oil bubble,
Oil production is based on mining oil sands with infrastructure in place for years. It does not depend on fracking. In Canada, production depends on. getting the oil to market. A sudden decline in the price of oil may have as much to do with the geopolitics of exploiting Alberta tar sands. The big story in oil is the Canada East pipeline. Not all banks are exposed to the oil sector. If you will remember, heavy crude fetched a price far below market for years.
I think the housing bubble is a banking sector story mostly.
http://scharts.co/10DJLw5
http://scharts.co/14NpkLe
The Canadian housing bubble can summed up in one sentence: "Home is where the cat lives."
Interesting dichotomy with Canada prior to 1978. Canada had a state bank before that, and they would sit on the private banks below them, forcing them to make loans that were reasonable. State banks would also force smaller private banks in the system to stop making loans sometimes, using the power of their "jawbone."
So, Canada before 78 had world beating industries, Free Medical, Free College. Prior to that she had built out a transcontinentual railroad at low cost, and dredged and improved her waterways. She did a land re-distribution to returning vets, this in order to give them a ground stake in the economy.
By 78 Canadians had personal savings, low debts, and were self-financing new enterprises. They had almost stopped going to the banks for their usury based credit.
By self financing, families and neighbors can take risks, and if enterprise fails, they don't need to transfer property to financiers. The system gains efficiencies due to less rent -seeking overall and the loss of usury in money system.
Effectively, former State Credit from State bank ended up in the commons, and as savings of the people.
Now compare that to today, where all loans originate in private banks, and hence property is bid up, because all bank loans are related to FIRE (private finance, insurance and real estate). Property must bubble in this system as an output of design.
Please rethink on this: Canada had free college education, free medical and YET still had world beating industry and almost no personal debts.
A properly run economy can deliver the goods to labor, it is just so far removed from most people's everyday reality it is off their cognitive map.
Excuse meee, all members of our family went to the University of Alberta in the 70s. We all paid tuition...it was NOT free.
I have no idea of the State Bank you are talking about.
In the '70s, tuition at UofA was probably less than $200 a year. So although you did pay, you surely didn't pay very much.
Capital gain on prime res is tax free. People focused on that as wages were not keeping up.
So I propose, eh, a keg in every home and bacon-smoking shack in every yard. Then all property can be backed by bacon and beer and therefore the entire economy, eh? Ya also, hosers, don't forget maple syrup is a national treasure so we like have to keep it profit shared so we can just back our dollars with that. The maple trees can all be guarded by saber-tooth beavers.