Be Very Afraid Of The Canadian Housing Bubble

Posted: 04/16/2012 11:14 am Updated: 04/16/2012 11:18 am

I want you to be afraid. Very afraid of the Canadian housing market.

I want people who are considering buying a house in Canada to be the most frightened. People who just bought a house also have every right to be nervous. But even if you don't have a stake in the property market, I would like you, too, to be fearful of a bubble in Canadian property.

I'm frightened myself. A lot of smart people are. But I should make it very clear I've no desire to be the Nouriel Roubini of the Canadian housing market.

Roubini, for those who didn't notice, rose from B-team academic to A-list fame and fortune by predicting the U.S. housing and market collapse of 2008.

Before the crash, he was just one more Chicken Little – that children's story character, who, after being whacked by a falling acorn runs about shrieking, "The sky is falling, we must run and tell the King."

After the crash, Chicken Little no more, Roubini was Solomon the Wise. Having demonstrated his credentials, Roubini is still travelling the world, dining out as The Man Who Got It Right.

When doomsters are right, they are showered with honours. Think of how religious enthusiast Harold Camping's star would have risen had the world actually ended last May.

But I don't want that for me. I just want you to be frightened.

Time to panic?

Right now in Canada we are at the Chicken Little stage. The real estate industry and the banks say there is no bubble. Our finance minister, Jim Flaherty, has warned repeatedly about high debt levels, but even he is on the record saying there's no bubble.

I don't want you to listen to them. I want you to listen to the Economist, Canadian Business, the Wall Street Journal — each of which have sounded scary warnings. Macleans magazine went a step farther with a screaming headline saying it was "Time to Panic."

When I saw that one, I pictured readers taking the advice – wide-eyed, shrieking, hyperventilating, running aimlessly back and forth – and wondered at the advantages of being advised to panic, no matter what horror might be in store. But I liked the tone. It was frightening.

The investment site Seeking Alpha had a wonderfully terrifying chart. Using the same kind of analysis that warns of flu outbreaks before health officers know they are coming, the chart analyzed Google data to show a rising number of searches in Vancouver, Toronto, Calgary and Edmonton for the term "housing bubble."

The chart shows that a similar searching pattern happened in 2007 at the epicentre of the U.S. property earthquake.

Now here is my dirty little secret: I am not convinced we are in the midst of a property bubble.

I have lived in Hong Kong. I have lived in southern England. I have seen property prices go very, very high and, apart from little downward blips, stay high for years. I know that middle-class Canadian homeowners will do almost anything to avoid defaulting on their mortgages.

Canadians different from Americans

Unlike in the United States, it is very hard for Canadians to walk away from their mortgage responsibilities. Mortgage insurance protects your bank, not you. Here, a default is not a get out of jail free card.

In Canada, mortgage interest cannot be deducted from your taxes. Instead, we only benefit by getting tax-free capital gains after you sell.

I know that the Canadian mortgage market is not the wild west that it was in the United States in 2007. I know that the U.S. central bank, which effectively controls our mortgage rates, is planning to keep money cheap until at least 2014.

I know that markets can go up, and up, for a long time without crashing. I know that the only proof of a bubble is when it pops.

But at the same time, when I look at my own neighbourhood, my fear grows. Houses listed for sale are gone within a week. "Sold over asking price" shingles dangle from the real estate signs. Condos climb out of the ground everywhere and the builders say they have buyers.

It seems clear to me that people haven't been listening to the dire warnings.

And that is why I want to spread fear. Because though we may not be in a bubble now, if we keep this up, we are going to be. And if a bubble pops, that is something really worth being frightened of.

Look at this sentence from last Thursday's main editorial in the Financial Times: "When house prices rise because households gorge themselves with debt, IMF researchers found, the ensuing recession is much deeper and more protracted than busts not preceded by such debt accumulation."

The logic is not too hard to see.

First-time buyers in jeopardy

When a housing bubble pops, first-time buyers with large mortgages are really screwed. Leverage is great when assets are rising, but a decline of even five percent can quickly wipe out a young family's nest egg. A drop of 10 or 20 per cent leaves many homeowners tens of thousands in the hole. Even homeowners without mortgages feel poorer – the so-called inverse wealth effect.

According to the IMF, when that happens, spending dries up for five years, and stays flat for years after. In Canada, a popped bubble will really hurt us all.

If you've suffered from government cuts, you ain't seen nothing yet. If you're unemployed, it will only get worse. If you're poor, expect to get poorer.

I hope you are truly frightened now. But no matter how frightened you are, it may be there are too many forces pushing us in the opposite direction.

Despite deep fears of their own, banks are still crazy to lend. Just as Hertz makes its money by renting cars, banks make money by renting money. They just can't help themselves. They have shown it again and again.

Low interest rates held down artificially by central banks in an attempt to jump-start the economy make the math for borrowing to buy look good, for now at least.

Longstanding folk wisdom learned from your parents and grandparents like "Why pay rent to somebody else?" or "They ain't makin' any more land" or "Safe as houses" is deeply embedded in the popular psyche and hard to shake with rational arguments.

And perhaps the worst thing: No matter how many times central bank governor Mark Carney or people like me cry wolf, the housing market disproves us, year after year, rising far above the return on other investments. But I fear that eventually, just like in the story, the wolf will come.

I don't want to become famous for predicting a bubble in the Canadian housing market. I will forego the honours. Because of my fear, I don't want it to happen at all.

But maybe fear is not enough.

Don Pittis, CBC News

Also on HuffPost:

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  • Canadian Household Debt By Region

  • 6. Atlantic Canada: $69,300

    Number represents the average among those households that carry debt. Source: <a href="http://www.statcan.gc.ca/pub/75-001-x/2012002/article/11636-eng.pdf" target="_hplink">Statistics Canada</a>

  • 5. Quebec: $78,900

    Number represents the average among those households that carry debt. Source: <a href="http://www.statcan.gc.ca/pub/75-001-x/2012002/article/11636-eng.pdf" target="_hplink">Statistics Canada</a>

  • 4. Manitoba & Saskatchewan: $84,900

    Number represents the average among those households that carry debt. Source: <a href="http://www.statcan.gc.ca/pub/75-001-x/2012002/article/11636-eng.pdf" target="_hplink">Statistics Canada</a>

  • 3. Ontario: $124,700

    Number represents the average among those households that carry debt. Source: <a href="http://www.statcan.gc.ca/pub/75-001-x/2012002/article/11636-eng.pdf" target="_hplink">Statistics Canada</a>

  • 2. British Columbia: $155,500

    Number represents the average among those households that carry debt. Source: <a href="http://www.statcan.gc.ca/pub/75-001-x/2012002/article/11636-eng.pdf" target="_hplink">Statistics Canada</a>

  • 1. Alberta: $157,700

    Number represents the average among those households that carry debt. Source: <a href="http://www.statcan.gc.ca/pub/75-001-x/2012002/article/11636-eng.pdf" target="_hplink">Statistics Canada</a>

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    THE 10 COUNTRIES DEEPEST IN DEBT

  • 10. United Kingdom

    <strong>Debt as a percentage of GDP:</strong> 80.9 percent <strong>General government debt:</strong> $1.99 trillion <strong>GDP per capita (PPP):</strong> $35,860 <strong>Nominal GDP:</strong> $2.46 trillion <strong>Unemployment rate:</strong> 8.4 percent <strong>Credit rating:</strong> Aaa Although the UK has one of the largest debt-to-GDP ratios among developed nations, it has managed to keep its economy relatively stable. The UK is not part of the eurozone and has its own independent central bank. The UK's independence has helped protect it from being engulfed in the European debt crisis. Government bond yields have remained low. The country also has retained its Aaa credit rating, reflecting its secure financial standing. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 9. Germany

    <strong>Debt as a percentage of GDP:</strong> 81.8 percent <strong>General government debt:</strong> $2.79 trillion <strong>GDP per capita (PPP):</strong> $37,591 <strong>Nominal GDP:</strong> $3.56 trillion <strong>Unemployment rate:</strong> 5.5 percent <strong>Credit rating:</strong> Aaa As the largest economy and financial stronghold of the EU, Germany has the most interest in maintaining debt stability for itself and the entire eurozone. In 2010, when Greece was on the verge of defaulting on its debt, the IMF and EU were forced to implement a 45 billion euro bailout package. A good portion of the bill was footed by Germany. The country has a perfect credit rating and an unemployment rate of just 5.5 percent, one of the lowest in Europe. Despite its relatively strong economy, Germany will have one of the largest debt-to-GDP ratios among developed nations of 81.8 percent, according to Moody's projections. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 8. France

    <strong>Debt as a percentage of GDP:</strong> 85.4 percent <strong>General government debt:</strong> $2.26 trillion <strong>GDP per capita (PPP):</strong> $33,820 <strong>Nominal GDP:</strong> $2.76 trillion <strong>Unemployment rate:</strong> 9.9 percent <strong>Credit rating:</strong> Aaa France is the third-biggest economy in the EU, with a GDP of $2.76 trillion, just shy of the UK's $2.46 trillion. In January, after being long-considered one of the more economically stable countries, Standard & Poor's downgraded French sovereign debt from a perfect AAA to AA+. This came at the same time eight other euro nations, including Spain, Portugal and Italy, were also downgraded. S&P's action represented a serious blow to the government, which had been claiming its economy as stable as the UK's. Moody's still rates the country at Aaa, the highest rating, but changed the country's outlook to negative on Monday. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 7. United States

    <strong>Debt as a percentage of GDP:</strong> 85.5 percent <strong>General government debt:</strong> $12.8 trillion <strong>GDP per capita (PPP):</strong> $47,184 <strong>Nominal GDP:</strong> $15.13 trillion <strong>Unemployment rate:</strong> 8.3 percent <strong>Credit rating:</strong> Aaa U.S. government debt in 2001 was estimated at 45.6 percent of total GDP. By 2011, after a decade of increased government spending, U.S. debt was 85.5 percent of GDP. In 2001, U.S. government expenditure as a percent of GDP was 33.1 percent. By 2010, is was 39.1 percent. In 2005, U.S. debt was $6.4 trillion. By 2011, U.S. debt has doubled to $12.8 trillion, according to Moody's estimates. While Moody's still rates the U.S. at a perfect Aaa, last August Standard & Poor's downgraded the country from AAA to AA+. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 6. Belgium

    <strong>Debt as a percentage of GDP:</strong> 97.2 percent <strong>General government debt:</strong> $479 billion <strong>GDP per capita (PPP):</strong> $37,448 <strong>Nominal GDP:</strong> $514 billion <strong>Unemployment rate:</strong> 7.2 percent <strong>Credit rating:</strong> Aa1 Belgium's public debt-to-GDP ratio peaked in 1993 at about 135 percent, but was subsequently reduced to about 84 percent by 2007. In just four years, the ratio has risen to nearly 95 percent. In December 2011, Moody's downgraded Belgium's local and foreign currency government bonds from Aa1 to Aa3. In its explanation of the downgrade, the rating agency cited "the growing risk to economic growth created by the need for tax hikes or spending cuts." In January of this year, the country was forced to make about $1.3 billion in spending cuts, according to The Financial Times, to avoid failing "to meet new European Union fiscal rules designed to prevent a repeat of the eurozone debt crisis." <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 5. Portugal

    <strong>Debt as a percentage of GDP:</strong> 101.6 percent <strong>General government debt:</strong> $257 billion <strong>GDP per capita (PPP):</strong> $25,575 <strong>Nominal GDP:</strong> $239 billion <strong>Unemployment rate:</strong> 13.6 percent <strong>Credit rating:</strong> Ba3 Portugal suffered greatly from the global recession -- more than many other countries -- partly because of its low GDP per capita. In 2011, the country received a $104 billion bailout from the EU and the IMF due to its large budget deficit and growing public debt. The Portuguese government now "plans to trim the budget deficit from 9.8 percent of gross domestic product in 2010 to 4.5 percent in 2012 and to the EU ceiling of 3 percent in 2013," according Business Week. The country's debt was downgraded to junk status by Moody's in July 2011 and downgraded again to Ba3 on Monday. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 4. Ireland

    <strong>Debt as a percentage of GDP:</strong> 108.1 percent <strong>General government debt:</strong> $225 billion <strong>GDP per capita (PPP):</strong> $39,727 <strong>Nominal GDP:</strong> $217 billion <strong>Unemployment rate:</strong> 14.5 percent <strong>Credit rating:</strong> Ba1 Ireland was once the healthiest economy in the EU. In the early 2000s, it had the lowest unemployment rate of any developed industrial country. During that time, nominal GDP was growing at an average rate of roughly 10 percent each year. However, when the global economic recession hit, Ireland's economy began contracting rapidly. In 2006, the Irish government had a budget surplus of 2.9 percent of GDP. In 2010, it accrued a staggering deficit of 32.4 percent of GDP. Since 2001, Ireland's debt has increased more than 500 percent. Moody's estimates that the country's general government debt was $224 billion, well more than its GDP of $216 billion. Moody's rates Ireland's sovereign debt at Ba1, or junk status. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 3. Italy

    <strong>Debt as a percentage of GDP:</strong> 120.5 percent <strong>General government debt:</strong> $2.54 trillion <strong>GDP per capita (PPP):</strong> $31,555 <strong>Nominal GDP:</strong> $2.2 trillion <strong>Unemployment rate:</strong> 8.9 percent <strong>Credit rating:</strong> A3 Italy's large public debt is made worse by the country's poor economic growth. In 2010, GDP grew at a sluggish 1.3 percent. This was preceded by two years of falling GDP. In December 2011, the Italian government passed an austerity package in order to lower borrowing costs. The Financial Times reports that according to consumer association Federconsumatori, the government's nearly $40 billion package of tax increases and spending cuts will cost the average household about $1,500 each year for the next three years. On Monday, Moody's downgraded Italy's credit rating to A3, from A2. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 2. Greece

    <strong>Debt as a percentage of GDP:</strong> 168.2 percent <strong>General government debt:</strong> $489 billion <strong>GDP per capita (PPP):</strong> $28,154 <strong>Nominal GDP:</strong> $303 billion <strong>Unemployment rate:</strong> 19.2 percent <strong>Credit rating:</strong> Ca Greece became the poster child of the European financial crisis in 2009 and 2010. After it was bailed out by the rest of the EU and the IMF, it appeared that matters could not get any worse. Instead, Greece's economy has continued to unravel, prompting new austerity measures and talks of an even more serious default crisis. In 2010, Greece's debt as a percent of GDP was 143 percent. Last year, Moody's estimates Greece's debt increased to 163 percent of GDP. Greece would need a second bailout worth 130 billion euro -- the equivalent of roughly $172 billion -- in order to prevent the country from defaulting on its debt in March. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

  • 1. Japan

    <strong>Debt as a percentage of GDP:</strong> 233.1 percent <strong>General government debt:</strong> $13.7 trillion <strong>GDP per capita (PPP):</strong> $33,994 <strong>Nominal GDP:</strong> $5.88 trillion <strong>Unemployment rate:</strong> 4.6 percent <strong>Credit rating:</strong> Aa3 Japan's debt-to-GDP ratio of 233.1 percent is the highest among the world's developed nations by a large margin. Despite the country's massive debt, it has managed to avoid the type of economic distress affecting nations such as Greece and Portugal. This is largely due to Japan's healthy unemployment rate and population of domestic bondholders, who consistently fund Japanese government borrowing. Japanese vice minister Fumihiko Igarashi said in a speech in November 2011 that "95 percent of Japanese government bonds have been financed domestically so far, with only 5 percent held by foreigners." Prime Minister Yoshihiko Noda has proposed the doubling of Japan's 5 percent national sales tax by 2015 to help bring down the nation's debt. <a href="http://247wallst.com/2012/02/14/the-tencountries-deepest-in-debt/#ixzz1mSdyJAeo" target="_hplink">Read more at 24/7 Wall St.</a>

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