The Canadian Housing Bubble

There is no doubt in my mind that Canada is experiencing a housing bubble.  This is not in only a few cities like Vancouver and Toronto, but more of a country-wide over-valuation, just as it was in the USA.  And like all bubbles, it is difficult to predict when it will pop.  I expect the top to be in the summer of 2010, but bubbles often carry on further than anyone expects.  It is not easy to predict the exact financial disaster created by the bubble popping, even if you know the extent of over-valuation at the top.  But it will be bad for the finances of Canadians, and for the finances of the provinces and the nation.  All government budgets are going to be blown out, just like in the United Subsidies of America.

 INTRODUCTION
I touched on Canadian housing in a previous post, which you might want to skim for some general comments made there.

When getting information on housing, I would advise never accepting any statement from the following four sources at face value:

1. The federal (or provincial) political party in power;
2. Any bank or lending institution;
3. The mass media (radio, TV, newspapers); and,
4. CREA.

Politicians lie regularly.  I think it's a requirement of their job description.  In addition some may be totally incompetent, while sounding knowledgeable.  Our esteemed federal Finance Minister, Jim Flaherty stated vehemently on Oct. 9, 2008 that there would be no deficit budget.  On Oct. 10 Prime Minister Harper assured Canadians that there would be no recession.  The election was Oct. 14, and after that the truth came out.  (Anyone paying attention knew Flaherty was into deficit spending at the time of the election.)  On Jan. 27, 2009 Flaherty delivered a $33.7 billion deficit budget; then in May Flaherty updated his deficit estimate to over $50 billion.  Oops!  On March 4, 2010 Flaherty's 2010-11 budget deficit estimate was $49.2 billion.  I find this suspiciously just under $50 billion, and consequently predict the actual will be something over $50 billion.  Perhaps way over!  Currently the federal debt per capita in Canada is about $15,000;  provinces are piling on debt as well, even Alberta.  Kevin Page, the parliamentary budget watchdog, claims Flaherty's future budget projections are overly optimistic.  Flaherty claims Page doesn't know what he's talking about.  And Flaherty continues to insist there is no housing bubble in Canada.  You have been warned.

Banks and lending institutions should never be trusted.  They will always be your best friend, going out of their way to extend easy credit during the good times, but going after your assets without mercy whenever you encounter difficulty paying.  Banks will never lose much on defaulting Canadian mortgages because they either have sufficient collateral, or the borrower is paying CMHC to cover the first 20%.   CMHC is going to need a taxpayer bailout, just like Fannie Mae and Freddie Mac.

The media cannot be trusted because much of their advertising revenue comes from the housing and banking sectors.  As a consequence, most of what you read, hear, or watch on TV is basically an infomercial promoting the housing industry.

CREA is the Canadian Real Estate Association.  Repeat after me:  "Now is a good time to buy; real estate always goes up in the long run; buy now before you get priced out of the market!"  Congratulations!  You are now a Canadian real estate professional.

THE AMERICAN SITUATION vs. CANADIAN
I started monitoring the American housing market seriously in 2005.  It was apparent there was mass delusion present, like the SoCals who thought house prices would continue up 22% per year for the next 10 years.  They were already at a median house price of about 10x median income in L.A. at the time, roughly equivalent to Vancouver metrics today.  David Rosenberg, chief economist of Merill Lynch stated there was a housing bubble, and everyone jumped all over him as being a "gloom and doomer".  This article was a typical response.

I hope you actually read the articles linked in the above paragraph.  Now read this one.  See any similarities?

Note in the Canadian article how 91% of Canadian "homeowners" "believe" housing is a good investment.  "Believe" is a good word to use in this context, because Canadians (like Americans) are financial illiterates; they are severely numerically challenged.  I would expect that at least 90 out of that 91% could not do an accurate calculation of the annualized net percentage gain (or loss) they have made on any property they have purchased.  One of the greatest scams of all time, foisted on gullible people worldwide, is the myth of housing being a good investment.  And anyone who thinks buying a house in Canada in any of  the major cities in 2010 will ever turn into a "good investment" is clearly delusional (or severely uninformed).

The article also states that 15% of 18-24 year-olds expect to buy a house in the next two years.  BWAAAHAAAHAAAHAAA!  Break out the popcorn and pull up a housing bubble blog!  Over the next five years you're about to see the greatest incidence of personal bankruptcies of Canadians under 30 years of age ever.  Many will be under 25, and we might even get a few sub-20-year-olds committing financial suicide.  And a lot of these Echo Boomers are going to drag down Daddy Boomer and Mommy Boomer with them, because most of them will need a co-signer.  These are clearly the last of the greater fools needed to sustain a Ponzi scheme like the current Canadian housing market; after the 18-24 year olds buy, who is there left to sell to?

And "26 per cent expect their home to be their primary source of income when they retire".  That's sad.  A house is not a legitimate retirement plan.  Never was, never will be.  Ask the American boomers how their "retirement house" plans are doing.  Don't rub it in about the huge increase in dependence on food stamps and soup kitchens from those who thought they had it made. 

I read David Rosenberg's daily economic reports (Gluskin Sheff), and find them quite thorough, reasoned, and educational.  He was ridiculed for calling a housing bubble in America in 2004, but he was correct.  In a recent Canadian Business Magazine article stating housing is not necessarily a good investment he is quoted as stating the various Canadian Markets are 15-35% over-valued.  I enjoyed  reading the reader comments under the CB article.  Talk about poking a wasp nest with a sharp stick!  Canadians don't like hearing that buying a house is not the secret key to untold wealth!  I particularly liked the lengthy discourse by some clown who identified himself a PhD economist; his illogical criticisms of the article (disguised as supposed economic theory that mere mortals cannot hope to understand) almost had me wetting my pants with laughter.  Most economists have no clue of how the real world works (which is proved if they ever start their own business), but they have some really nifty theories and mathematical models that somehow never seem to predict future economic conditions accurately.  Most of their models have to be modified even to predict the past.  Stick with the reliable economists with a track record like Rosenberg and Michael Panzner.  Otherwise go to a Taro reader or chicken entrail decipherer to get your economic forecasts. 

THE AMERICACANADA BLOG

This is a blog that everyone interested in Canadian housing should bookmark.  It has several articles with actual data in them.  You know, those factual "thingys" that inconveniently go against much of what 91% of homeowners "believe".  It requires one to actually read and think, rather than sign the mortgage and sink.  Here is one article that everyone should read, because it deals with Canadian personal debt, and dispels the widely held myth that Canadians are fiscally prudent and well off.  Canadians today are roughly in the same position Americans were in in 2005, and we'll soon be joining them in the multi-decadal downward spiral.

ALEXANDRE PESTOV'S ANALYSIS OF THE BUBBLE

Alexandre is an MBA candidate at the Schulich School of Business in Toronto, and has written what I consider to be a very good analysis of the Canadian housing market, focussed on four metropolitan areas.
  This is worth reading front to back (all 52 pages), and storing for future reference.  It can be accessed here in Scribd format, or downloaded as a PDF document (which I find easiest to read). 

Anyone considering buying a house should read and re-read this report until everything in it is fully understood.  Sadly, few will.  We live in a society where almost everyone believes proper education is fundamental to making good decisions.  Most people study how to buy, yet very few ever take the time to educate themselves on the fundamentals of the housing market (which tells you whether buying makes sense).   And a house purchase is the largest financial personal transaction most people will make.  Go figure.

GARTH TURNER'S BLOG
I left Garth's blog to the end because he tends to be a polarizing figure.  Some people really like him, others not so much.  I read his blog occasionally because it is a refreshing antidote to the incessant housing cheerleading from the Canadian media.  Reading the comments below his articles gives an insight into the thinking of others, and can sometimes be educational as well.  From what I have read recently I would put Canadians' attitudes to the current housing markets as roughly where the Americans were in 2005-2006.  And we all know what happened next.