Comments on: Why No Canadian Housing Bubble?

By: cape_royds

cape_royds — Sat, 13 Feb 2010 01:27:29 +0000

Half the people in Canada live in a handful of metropolitan areas.

Among those major cities, Vancouver, Toronto, Edmonton, and Calgary are all
in full-scale Stupid Bubble Mode.

So then, you could say that roughly one-third of the Canadian population
live in a Bubbleland. This overall situation is quite similar to that of the USA
a few years ago.

The home-equity loans, the instant-approval car and consumer loans, the
long amortizations, the burgeoning student loan debts etc. are all similar as well.

Canada took part in the Great Developed Liberal World Financial Deregulation Mania.
Our “reforms” were perhaps more modest, but were similar in general nature to those
in the USA (indeed modelled upon the USA’s).

Canada has enjoyed strong commodity exports which have saved our
economy from experiencing as severe a recession as the USA–so far.

Nevertheless, the Canadian government still bought about $100 billion Cdn.
of shaky mortgages in 2008-09. As in the USA, the tasxpayers have effectively
been made the co-signors on a huge amount of private debt.

Our prime minister has spent a lot of time boasting about Canada’s record being
better than that of other G8 countries. Please bear in mind that Dear Leader has an
unstable minority in Parliament, so he’s doing his best to talk up some
sunshine. Also bear in mind that back during the 1990′s our PM’s boasted of
how fast they were deregulating everything, i.e. they say whatever they think
will get our little country some more brownie points in the world financial media.

By: Why Canadian housing didn’t collapse, but USA’s did | Jay Bookman

Wed, 10 Feb 2010 14:18:56 +0000

[...] analyst Barry Ritholz, at his Big Picture blog, cites a Wall Street Journal story reporting that Canadian housing prices are actually up 23 [...]

By: Boo-urns

Boo-urns — Wed, 10 Feb 2010 14:00:21 +0000

Barry, interesting post. However, I’d argue that as far as the first 2 points, you’re looking at symptomatic differences, rather than structural ones. Why was there better underwriting in Canada? Why were there generally lower LTV loans (with or without mortgages)? A related question: why have mortgages with similar LTVs performed better in Canada than the US?

Both the US and Canada saw an explosive growth in securitized mortgages from the mid 1990s- 2000s. The major difference between the two was that US securitization growth was concentrated in a new private process (with most growth starting around 2001 or 2002), whereas Canadian growth was concentrated in their CHMC (essentially a FHA/Ginnie type model, as I understand it, with growth starting in the 1990s). Canada has basically no private securitization.

This gives additional credence to the view that the cause of the crisis was deteriorating lending standards in PLS pipeline mortgages (due to lack of regulation, poorly designed process, misaligned incentives, overly optimistic investor confidence, etc. etc. etc.).

By: Eric K

Eric K — Wed, 10 Feb 2010 08:18:36 +0000

The contrast between Vancouver and Seattle for price-to-rent and price-to-income ratios is striking. Just as investors and creative financing fueled the bubble in the USA, Chinese investors and rock-bottom rates are fueling prices in Vancouver.

Ultimately that is good news for anyone who wants to live in Vancouver and is smart enough not to get caught up in the buying frenzy — there are a lot of great units that will be rented out.

By: eurostoxx

eurostoxx — Wed, 10 Feb 2010 04:36:15 +0000

it will be interesting how the BoC plays it hand with the housing bubble or non bubble. Over-valued housing really only hurts new buyers, and is a big boost to aging baby boomers who have little saved for retirement. I think its a policy goal to keep real estate price high. The game of never ending rising prices can be played for a long time as long as leverage is low, forced selling is minimal and there are enough new buyers. Lending standards are OK in Canada, as a result of the cautious nature of banking here. Rich immigrants love to come to Canada, despite the crappy weather. Comparatively speaking Canada is still cheaper than Asia, Europe and expensive cities in the US like NYC, LA. And most importantly you can be confident that if there ever was a bust and the accompanying rise in foreclosures (due to a rise in interest rates most likely), you would not have the same type of cascading lower prices as seen in the US, as CMHC is the national mortgage insurer and not in the business of propagating a panic. From anecdotal evidence, CMHC doesnt give any good deals and they are likely to sit on foreclosed properties.

I think Canada, and other over valued places like Auz, are likely to see prolonged periods of flat housing prices, which would eventually get income/price ratios back in line.

This is how it usually worked and why S&P and the other rating agencies were confident that home prices ‘never’ go down. … they just adjust in real terms, not nominally.

By: Growthstock

Growthstock — Tue, 09 Feb 2010 21:09:13 +0000

great article from globe on a sample of Toronto, I know its a small sample set. I live in TO and its actually quite accurate.

http://www.theglobeandmail.com/report-on-business/rob-magazine/how-much-do-your-neighbours-owe-on-their-mortgage/article1445137/?cid=art-rail-economy

good site on Cdn real estate http://www.greaterfool.ca

By: Darkness

Darkness — Tue, 09 Feb 2010 18:26:12 +0000

The Recourse loans are good on the upside of the bubble (IF consumers actually grasp what that means. Clearly the Brits were incapable of that. I frankly don’t think the Canadians are truly any smarter than the Brits. They think they are, certainly.) but on the downside it means that household balance sheets get repaired only over a decade’s long slog, and the consumers disappear from the economy, which just piles on the pain. Mass foreclosures do have this upside of getting consumers back into the game. Growthstock’s numbers back up my personal observations of friends in Toronto and Edmonton. The downturn is being masked by consumers dipping into personal credit, hard. I don’t see a path out of this without some serious pain if not turmoil.

So, put me down on the ticking time bomb column. It’s 3-4 years from now, inflation takes off, mortgage payments soar, the consumer, already deeply in debt from keeping up their hip, urban standard of living for the previous 5 years, can no longer make their payments. But they are still on the hook. The Chinese, smarting from their own bubble bursting, cease pumping in new money. The government insurance ends up bailing out the market, and the consumers withdraw to the workhouses or the mines. Or whatever the Canadians do with people who will need 50 years to pay off their debts.

By: bobopapal

bobopapal — Tue, 09 Feb 2010 18:16:43 +0000

Barry – I wonder what the effect of Chinese money is on the Canadian real estate market. I know several wealthy southern Chinese who have one foot in Canada and one in China. They love real estate and usually purchase with 100% cash, usually in Vancouver and Toronto. With Chinese real estate gone wild they are looking for deals in Canada where many have citizenship. They probably don’t amount to a large percentage of the total market, but on margins they may add to the buoyancy of Canadian real estate.

By: ivanhoff

ivanhoff — Tue, 09 Feb 2010 17:42:17 +0000

An interesting read on the relation between consumer leverage and the increase in housing prices around the world:
http://www.frbsf.org/publications/economics/letter/2010/el2010-01.html

By: Gatsby

Gatsby — Tue, 09 Feb 2010 17:29:38 +0000

GG:

You are relying far to heavily on Vancouver for your logic to work. Vancouver is one city in Canada and from a real-estate perspective has been the outlier for years. Your analysis is the same as if I used California as an analogy for the entire U.S. Not to mention Vancouver has had the Olympics and Asian money inflows unique to that city

I think the key point is that yes, Canada did have a run at 0% down forty year mortgages for a very very brief time (measured in months not years). They key difference was a regulatory body, and banks whose motivations prevented them from self destructing.