The End is Nigh

Numbers don't lie.  But people may.  The numbers tell me that the Canadian credit bubble is coming to a peak, and will be followed by a credit contraction, similar to the American one.  We are behind the Americans by 3-5 years, but we aren't different, smarter, or immune from the same economic constraints that apply people of all nations. 

The Canadian credit bubble is evident in personal loans, credit card balances, and most importantly in the over-priced housing market.  Read Jonathan Tonge's AmericaCanada blog to get good background data.  And lately the credit bubble has shown up in increasing federal and provincial debt as the politicians attempt to prevent or at least delay the inevitable economic downturn.   As soon as the bubble in one form of debt pops, the deleveraging will move into all forms of debt, and general defaults will occur in places people never thought would be a problem.

Today three Canadian banks announced they will be increasing some mortgage rates as much as 60 basis points (0.6%) tomorrow.  This is no big deal.  I don't expect rates to go up much in the next few years because the Canadian economy is in much poorer condition than is publicly aknowledged, as is the American economy.  I expect the second half of a "double dip" recession to begin later this year in both countries, further eroding middle class wealth.   (But I could be wrong and the government officials, who would never deceive you, could be right.) 

In the early 1980s I recall people rushing out to lock in 18% mortgages, to ensure they got that rate before those rates went over 20%.  But of course 18% ended up being the top.  A decade later my co-workers were envious of one guy who had a 10% mortgage.  The long term average Canadian mortgage rate is in the 8% area.  So I don't see today's little rate announcement as slowing down housing sales.  Rather, it will increase sales as people rush to lock in sales before some mortgage qualification rules change on April 21, and before Ontario and BC introduce their HST (which will increase the tax load on real estate transactions in those two provinces).  The sellers are laughing all the way to the bank.

Garth Turner is on a roll on his "The Greater Fool" blog.  I particularly liked his latest post, entitled Condo Cowboy.  It turns out that in 2007 this guy, Danny, in Calgary put a $20,000 down payment on a condo (not yet built)  priced at $420,000.  I can't begin to outline in how many ways that could be problematic.  (Calgarians mailed their keys in to the banks en masse in the early 1990s because of an economic downturn in Alberta, and Danny is old enough to remember that.)  So now his condo is ready, but it is appraised at only $335,000.  Danny can't get financing and the developers are suing him for failure to carry out his end of the deal.  They want their $420,000.  Danny (in a CTV video clip) seems to feel that he's being treated unfairly; I doubt he would feel that way if the current appraised price were $500,000.  Nope.  Danny would feel he's a very smart man, a financial whiz who recognized value and bought it.  After all, housing always goes up.  Danny is what happens when the market runs out of greater fools to flip a property to; Danny is the last greater fool in the chain.  But he'll be better educated after paying his dues in court to learn the basics of contract law.

Garth has another post where some American analysts calculate the average Canadian house is 27% ($71,000) over-valued.  At the end he links to a video highlighting Laura, an 18 year old in Toronto, who was successful in buying what I assume will turn out to be an over-priced piece of junk.  Laura and her co-signing mommy are about to learn a very expensive lesson.  But there is no housing bubble in Canada ;-)  Many thousands of young people have just trapped themselves in a house they can't get out of.  When the price drops the value will likely be less than their mortgage and they will not be able to come up with enough money to sell at a loss.  So they're trapped even if they have a job opportunity in another location.

And Ontario is not going to be a place young people will be going to for jobs.  It could be an economic disaster zone in the making, like Indiana and Illinois.  But they have the votes and business leaders who can force all sorts of back door bailouts from the feds (that would be you and me paying).  "Mish" had a decent blog article today comparing Ontario to California.  California is a bankrupt basket case, but Ontario may be worse.  Mish gets carried away with blaming everything on the unions, but is rated as one of the top three American economic bloggers as I recall.  I read him daily.

This is funny.  As I was preparing a salad a few minutes ago I was listening to some .mp3 downloads.  I download from various sites like howestreet.com regularly, and this interview with Danielle Park was the next in my backlog.  I first met Danielle at an investment conference in Toronto in 2007 where she impressed me with her knowledge and common sense approach to investing.  I then bought her book Juggling Dynamite which I would recommend.  In 2008 I got her to autograph my copy at another conference in Calgary.  Anyhow, this interview is worth listening to because it focuses on the Canadian housing bubble;  her thoughts and observations are similar to mine.  In fact, she also linked to Alexandre Pestov's study (see my previous post), apparently about the same time I did.  I guess we all find the same things at about the same time when we watch the markets.