Housing bubble: listening for the pop

The fact is, no one is really sure what to make of the many natural laws of housing prices

by Colby Cosh

Here’s a blog post that is going to be worth exactly what you paid for it. I promise. Like the rest of you I’ve been reading a lot of “pro” and “con” material about the possibility of a Canadian housing bubble. Including the dramatic material from our latest issue. And I have a couple of problems many of you will have shared in trying to follow the debate. One, my own involvement in the housing market (and we’re all involved, on one side or the other) makes it difficult for me to set aside wishful thinking. Two: the data are awfully slippery. A lot of what we hear is anecdotal; a lot more of what we hear, even from informed sources, seems little better than anecdotal; and where there is solid information about things like debt-to-income ratios and movements in good indices of housing prices, it’s hard to interpret.

The fact is, no one is really sure what to make of the many natural laws of housing prices whose existence has been asserted and whose revenge upon us (us owners) has often been promised. Though we do now know that one formerly popular law, “Housing always goes up”, ain’t much good. (Damn. No free lunch, you say?)

What I decided to do was this: to look for some data—any data would do as long as it seemed ostensibly meaningful—that, presented pictorially, show the U.S. housing bubble happening; and then look at the same picture for Canada, using like-vs.-like information, to see if our situation looks roughly the same. In other words, the simplest, dumbest analysis you can imagine, but performed, at any rate, without prejudice.

This, I think, is a pretty good picture of the US housing bubble, complete with the burst phase.

[Source: US Bureau of Economic Analysis.] “Net stock of residential fixed assets.” This is, if I understand the methodology notes right, an estimate of the total value, at the nominal prices current for each year, of American housing, without counting the land. The “old” parts of the stock are depreciated, dwindling toward zero gradually, and units are taken out entirely when they are demolished. This seems to me to be a useful measure if you correct it for population growth, as I have here, and as so many “anecdata” about rising home prices don’t. It tells a story that we would expect to have seen, and doesn’t treat a brand-new home as equal to a 50-year-old one.

I’m sure there are 20 different important problems with using this as an indicator of “bubbliness”. (If you can name some of them it would be useful for you to put them in the comments.) But the bubble is certainly there, popping in 2006. And if this is an indicator you’d started watching in 2002 or 2003, you’d have known enough to become worried before the catastrophe happened.

So what does Canada look like on roughly the same scale?

[Source: Statistics Canada.] It’s a good-news bad-news picture when you compare it to the American one. In the U.S., the per-capita value of the housing stock got wayyyy above trend in 2003 and 2004, climbing by 22.5% in just two years. Canada never did get that out-of-control over any short period of time, by this measure. At the same time, though, we did have five consecutive years (2003-07) of 7%+ growth. The U.S. has more or less reverted to trend, and we haven’t: we’ve merely cinched in the growth rate (working against the allure of cheap mortgages as best we can by means of lending policy) and hoped that no radical adjustment will be necessary. A few years of slow growth would be excellent news for us, given that the alternative might be the more-or-less wholesale destruction of entire conurbations that has been happening in the U.S.

I don’t think there is much doubt that Canada may have some local bubbles. If you look at the data for British Columbia, for example, you find that the Olympics combined with the general climate of insanity from 2003-06 to drive 9%+ growth for the whole province every year, with a peak of 11.3% in 2006. But then, as top economist Steve Pomeroy recently pointed out in The Mark, we know that was a bubble because it already popped in the faces of naïve buyers: with the market awash in Olympic housing, the per-capita residential asset stock stalled in 2008 (+0.5%) and dropped in 2009 (-1.1%). Harm that has already been done, and that is therefore behind us, is good news for those who fear the Condopocalypse.

Housing bubble: listening for the pop

  1. Colby, prices may have dropped in BC after the Olympics, but that was a blip for that area.  There was basically less demand for those condos which forced prices to fall.  Less demand is one way housing prices can drop, affordability is the other.  Our economy is still in a lull, and interest rates are well below normal.  There are plenty of people locked in to mortgages right now that are treading water.  Sure, if these people don’t sell, then condo prices will remain where they are today.  My argument is that since our interest rates are at an all time historical low, people loaded up on debt.  When interest rates eventually rise, people won’t be able to afford the payments.  If the banks foreclose and sell these condos, that will flood the market with cheap units forcing condo prices to fall.  Again, there is still a difference between a voluntary sale and a forced one, but I’m betting there will be quite a few forced ones.  I think until we see what happens when interest rates rise, saying that the condo bubble is behind us is wishful thinking.

    • Keep in mind that the figures you call a “blip” are nominal amounts. So in real terms the buyers of 2008 lost a half point in nominal dollars by 2010 along with three full points of inflation; and that’s just on the non-land portion of the property investment.

      • I guess the point I was trying to make was that in 2008, nothing fundamentally changed in Canada.  The dip had more to do with fear that we would follow the same path as the US and that didn’t materialize… yet.  Since then, home prices have continued to rise in an environment where interest rates are at their historical lows.  I’m not a doomsday prophet, nor am I wishing for a collapse, but I think it’s a bit naive to think that Vancouver has already went through a correction when in the period from 2008 to 2010 interest rates actually decreased allowing builders to crank up the price of homes and condos.  The real test will come when money is no longer cheap, and we haven’t crossed that bridge yet.

  2. I think – hope? – that if housing crisis occurs, it’s going to happen with new homes built since 2000. 

    Me and missus bought shiny new home in suburbs seven yrs ago and it was diabolical – we hated it – and only lasted a few years and then we sold. It turns out neither one of us is suburbanite. Quality of those new homes is questionable – many new homes will be falling down in 20-30 years and I wonder value then. We bought a 19th century home close to centre of town, it was significantly cheaper per sq foot and we like it much better. We don’t think of our home as an atm or pension, it’s old and built to last and we paid less for it. 

    Also, Canada is much more conservative than America is. I don’t know for certain but my impression is that we are not giving mortgages to same kind of risky people as Americans did. I read Lewis’ Big Short a couple of years ago and, as far as I know, in Canada there are no live-in nannies who earn $22,000 a year and own four homes or whatever it was. Didn’t America go on bigger credit fueled spending spree than Canada during 2000s? 

    I think there is a major bubble, but not as bad as American one, and correction won’t be as severe. 

    conservative~disposed to preserve existing conditions, institutions, etc.,or to restore traditional ones, and to limit change

    •  I suspect that the issue of giving mortgages to high risk individuals was more of a consequence of the bubble in the US than a cause.  Selling mortgages to high risk individuals allowed the bubble to be sustained longer.  But I don’t think it was a cause. 

      • If you read the “Big Short” the financial institutions where making huge money bundling Mortgages and selling them.  When there wasn’t enough mortgages to bundle they started lending to people who couldn’t afford them to create risky debt that they could sell on as investment vehicles to other firms as Grade A debt.  This available debt was then used by individuals to buy homes which increased demand for homes which drove up prices which drove up demand for credit as more people wanted in.  Only problem, eventually a large number of people weren’t able to pay their mortgage and that Grade A debt was found out to be the sham it was. Foreclosures caused increase supply so prices drop.  As prices dropped more people wanted out of their mortgages so they could cut their losses and buy another house at the lower end.  This has increased demand and sustained the drop.  I think in the US it is easier to walk away from a mortgage.  I think the the greed for the financial institutions was the cause but the individuals who took on the debt they couldn’t afford were also equal to blame. 

        • Is it really easier to walk away from a mortgage in the US? What is the reason for that? I’ve seen two people claim that here, but I’ve no idea why that would be true.

          • Because Canada (with the exception of AB) has so-called “recourse mortgages” whereby the banks can go after your other assets if you foreclose on your place and the bank sells at a loss. For example:

            -You have $300,000 balance remaining in your mortgage
            -You default on payments, and the bank forecloses on the property. Let’s pretend the bank gets $260,000 during the sale of your property
            -There is a $40,000 difference between the balance on the mortgage and what they were paid during the judicial sale
            -The bank goes after your other assets (savings, etc.) to get the remaining $40,000 you owe them

            In the USA and in non-insured AB mortgages (i.e. no CMHC), the banks aren’t allowed to pursue your other assets and have to eat the $40,000 loss.

            If you have an AB mortgage that is CMHC insured, however, CMHC can still go after you.

          • Florida was recourse as were many other states that were heavily hit with price declines - do your homework.

          • its easier to walk away in the US because unlike in Cda,  it has no long term negative impact on your credit -it does not affect your other assets. -you just lose your home. And if you are “underwater”  on your mortgage ie owe more than current value,  walking away is a common strategy.

          • Apparently this is not entirely true.

            I looked it up and found a good article.

            Some states allow a deficiency judgement which allows the bank to sue for the difference in foreclosure sale price vs the amount owed on the mortgage. Other states do not. So it depends on the state. I do recall reading about some lenders doing this in some states.

            Also, a foreclosure in the USA does have a big impact on credit scores, which is the reason why many opt for short sales instead. It will be removed from the credit score after seven years.

            http://www.usatoday.com/money/economy/housing/2010-03-25-underwater25_ST_N.htm

          • Megan McArdle, June 2009 ~ Sink And Swim:

            AMERICA IS THE most bankrupt nation on Earth.

            You’d think that title would be one we’d gladly relinquish. But in fact, America leads the developed world in bankruptcies because for more than a century, we’ve worked hard to build the best—and, not coincidentally, the most generous—bankruptcy code in existence. We didn’t do it by design, but in fits and starts; the hodgepodge of innovations that have helped systematically ensure that debtors get a fresh beginning were as much the brainchildren of grasping creditors as of beleaguered debtors.

            Nonetheless, our system works so well that other nations are trying to move away from their harshly punitive treatment of insolvent debtors, and closer to our free-and-easy, all-is-forgiven model.

            Our leniency toward those with unsustainable debts helps not only profligate debtors, but the rest of us as well. Less onerous bankruptcy procedures boost rates of entrepreneurship: reduce the cost of failure, and people become more willing to take risks. America’s business environment is much more dynamic than that of Europe or Japan, for many reasons—and our generosity to capitalism’s losers is one of them.

          •  Interesting.  I do like McArdle as well, her journalism is honest and interesting.

      • Yes and no. There is virtually no evidence to suggest that lending to low income individuals sank the market. However, there is some evidence emerging that the ease with which people, who already had a mortgage, to take on a second or third mortgages help sink the market.

        New York Fed “At the peak of the boom in 2006, over a third of all U.S. home purchase lending was made to people who already owned at least one house. In the four states with the most pronounced housing cycles, the investor share was nearly half—45 percent. Investor shares roughly doubled between 2000 and 2006. While some of these loans went to borrowers with “just” two homes, the increase in percentage terms is largest among those owning three or more properties. In 2006, Arizona, California, Florida, and Nevada investors owning three or more properties were responsible for nearly 20 percent of originations, almost triple their share in 2000.”

        No default loans, mortgage “innovation” and minimum down payments created the perfect environment for people to bet on the housing market.

        Speculators were far more likely than owner occupiers to take on a sub prime mortgage. This makes sense. If you plan to flip a house and you have the option of walking away from it should things go sideways, the type of mortgage that you want is one with a low introductory interest rate and one requiring you to put nothing down.

        •  Yes, I agree with your points.

          In fact I noted in another comment that “One of Colby’s links is about a cab driver who was flipping condos in
          Vancouver.  In Toronto, a huge percentage of condos are being purchased
          by investors.”

          It does seem that the speculators/investors are the people that cause a bubble to accelerate.  It’s sort of like the stock market bubble in the 90s, where more and more people were borrowing money in order to buy stocks and pocket the difference.  Maybe speculators are a necessary ingredient to any bubble.

    • Talking to my friends back in Toronto, many of whom are just entering the housing market, I’m afraid I’ve heard a lot of these types of arguments. People sort of realize that housing is overinflated, but they’ll say:
      -my condo is by the lake, where there is intrinsic demand.
      -this is a good area with good schools.
      -a lot of new immigrants move into my neighbourhood, and would want a starter house like this one.
      -maybe, but if something was wrong, we’d see Vancouver tip first.

      The problem that a bubble isn’t a case where something with no intrinsic worth is valued highly. It could be one where things of high intrinsic worth are valued very highly. Many of the tech companies listed on the Nasdaq in 2000 were good companies – they just weren’t as good as the market suggested.

      As for credit-risks, that isn’t a necessary condition for a real estate crash. For instance, Tokyo real estate was way over-valued in the 80′s, as a function of a stock market bubble. The Japanese Imperial Palace was appraised as being worth more than all the real estate in California. When the stock bubble burst, real estate fell as well. If the value of your home gained as a result of the bubble, those gains will probably be lost and then some. When bubbles pop there are usually second-order effects that ensure that.

      And looser credit has clearly happened in Canada. You have near-zero interest rates, you have the CMHC backing way more mortgages, and skyrocketing debt as people (not you, but many) use their homes as a personal ATM. We’ve surged past the US and Australia in homeownership rates. A crash in real estate probably wouldn’t have the same effects it did in the US, in that our banking system probably wouldn’t freeze up. However, you would have a lot of people in underwater mortgages with a lot of debt. That could mean second-order effects like people abandoning homes, with deleterious effects on property values around them. It would mean the feds would be on the hook for billions, which means austerity. It would undoubtedly mean lower consumer spending too.

      • People who have bought homes in the past few years have to rationalize their decisions and I am one of them. I think there has been a housing bubble for most of 2000s and people are going to feel pain, no doubt.

        I live in town of 120,000 housing market is not overheated where I am and I bought an older home that cost less than new homes. We probably overpaid but we plan to stay long term and I am certain we will make money long term unless something cataclysmic happens to housing market. 

        Also, American laws are different because Canadians can not walk away from their homes/debts like Americans can. People are stuck with their homes in Canada, much more so than in America, and I think that helps as well.

        • Wrong – many states have recourse mortgages including Florida – one of the worst. 

  3. You just bought, didn’t you Mr. Cosh?
    ;)

    • Last summer, yeah. Hence the frustration over the epistemological impenetrability of this issue.

      • Hedge your bets - make investments that short housing.

        • I’ve guarded against overweighting in my portfolio. Or, to put it in plain English, I bought as little property as I could with as much down as I could and it’s not way the hell out in a suburb.

  4.  Good article and an interesting metric I haven’t seen used before.  It may be interesting and more meaningful to index the gains to 100 to see the relative increase in both countries, then adjust the increases for inflation to produce the real increase, and also adjust for gains in incomes and GDP.  Without a reference to underlying fundamentals, the metric used in this chart doesn’t tell us too much. 

  5. The best data showing the US bubble that I have found is Shiller’s graph of real house prices.

    http://www.econ.yale.edu/~shiller/data/Fig2-1.xls

    I am not aware of anything similar done for Canada.  If there were such a graph, then I believe it would likely show a clear bubble.

    As for whether there is a bubble in Canada, I think it is almost certain.  Just like in the US, it is concentrated in certain areas.  In the US, it was concentrated in areas that include Florida, the Southwest, California, and some urban centres in the east.  The midwest and central areas had no bubble.  Dallas and Denver had no bubble.

    http://blog.redfin.com/files/2012/02/Case-Shiller-Redfin-Markets_2011-11.png

    In Canada it is concentrated in Vancouver and Toronto.

    At the same time as the US bubble, there were also bubbles in Ireland, the UK, Spain, and other locations in the world.  Meanwhile, other areas like Germany did not experience a bubble at all.  In my opinion, the bubble in Canada was delayed in comparison to the ones in the UK and US.  Perhaps that is because in those countries the bubble was able to accelerate more quickly.  A faster run-up will lead to a sooner crash.  A faster run-up would be caused by a larger proportion of people willing to invest in the housing market as an investment.  I think that may be the reason why Vancouver and Toronto bubbles are rising quickly – there are more condo and house flippers than elsewhere.

    • Whoops, looks like you beat me to the punch on Shiller.

      A lot of the European countries that didn’t experience real estate bubbles have distinct sets of policies from us. There is a lot more social housing, which addresses the sub-prime issue, while they don’t have the same sort of policies that encourage homeownership. They also tend to have more multigenerational family-owned homes that pass through generations. 

      • But it is interesting that multiple countries did have huge housing bubbles at the same time.  So there is something in common in those places.

      • Funny how Shiller managed to produce data for the stock markets that nobody else was providing, then later with Case he did the same for housing.  I don’t even agree with all of his ideas (he appears to be somewhat Keynesian), but he’s done a lot of good work.

        •  s_c-f: Liking your posts a lot. I don’t totally agree, but usually dif only by degree. Multinational housing market ‘crashes’ (esp as pushed by The Economist) by and large, just didn’t happen. Some nations, no doubt, but many didn’t. One thing is clear to me, at least so far: Canada is an exception to many.

          The question is: Is this allayed reaction (lag, hysteresis?). Or is it *inherent stability*?

          I suggest a large part is the latter. A number of US experts agree, not the least the Good Dr Wachter, here featured on the Finance Dep’t website (this file is a story in itself. It disappeared for a while, until a few protests and letters to the Globe later, it appeared again. Odd that….)(This Gov wouldn’t screw with CMHC terms….would they? Phhhhhhh….)
          http://www.fin.gc.ca/consultresp/06rev_40-eng.asp

          Btw, you might wish to access Univ of Penn website to see the Good Doctor’s full accreditations.

          • But I’m not so sure the Canadian housing market is currently heading for continued stability. Certainly house prices in relation to incomes are higher than they’ve ever been, particularly in Toronto and Vancouver. But people are paying those prices anyway, by borrowing gargantuan sums of money. Doesn’t seem stable to me.
            Your link is about the stabilizing effects of mortgage insurance. If there is a crash, insurance may be beneficial to homeowners, but I don’t think insurance can ever be a panacea. In the USA during the crash, one of the high profile victims was AIG, one of the biggest insurance companies in the world, and it was because they were insuring bogus mortgage securities.

    •  Good post. I’d fine-tune some points, but you’ve got a good overview of Van and TO, the latter being a *Condo* bubble…at the expense of detached homes and quality of life downtown. I agree with a certain density, but not a ghetto. Already it’s splitting neighbourhoods (Queen West, etc) just in the different demographics alone. So TO’s situation *in general* is not that much out of the norm. Condos, however, are. Way out of the norm. The question, really, is can the condo market fall in TO…to the *benefit* of stability of neighbourhoods? I think so, the laws of supply and demand alone will tend to center and stability.

      Even loft space, *real* loft space, artists’ studios,could come alive again. Not such a bad scenario at all.

  6. The severity of the contraction is going to depend on the global economics.  There are two very big issues brewing, the coming Euro/Greece/PIIGS (and how about Japan?…..) banking liquidity issues/sovereign debt, which leads directly in to US and Canada Banking Systems. 

    We have gone from “Sub-Prime Housing Lending” to “Sub-Prime Sovereign Debt Lending”…  we are on the verge of a massive “global deleveraging event”.

    This is a wonderful little graphic information with a visual scale that most people can grasp.
    http://demonocracy.info//infographics/eu/debt_piigs/debt_piigs.html
    It gives you the Names of the Banks, the amount of Euro’s loaned and to what country.

    Kyle Bass has an interview on You Tube it explains this “global”situation in “clear detail” (the meat of the interview starts 5 minutes in

    http://www.youtube.com/watch?v=5V3kpKzd-Yw

    Reggie Middleton has excellent “forensic analysis” on the Euro Banks.

    http://boombustblog.com/index.php?option=com_k2&Itemid=200069&id=5786&lang=en&task=5786&view=item

    It is not the end of the world but changes are coming…

    The second issue is a coming Iran/US&NATO conflict…

  7. Why only look at the last 30 years? That is the same kind of short time horizon that led people to make many of the mistakes that drove the subprime mortgage crisis. If you look at long-term data on the real, constant-quality price of homes, going back to 1890. Here is the series: http://www.ritholtz.com/blog/wp-content/uploads/2008/12/case-shiller-chart-updated.png

    What the data strongly suggests is that prices tend, in the long-run, towards 1. None of the historical booms in housing prices sustained themselves. We need to stop thinking of residential homes as investments.

    • Well, first of all, we don’t have that kind of Shillerian data for Canada going back to 1890, or for that matter 1990. Secondly, the “long run” you are referring to is evidently a REALLY long run, one that may not exert equilibrating force for 20 or 25 years at a time. And, thirdly, we’ve seen a lot of apparent “laws” of economics break down under pressure from both multigenerational tides of change and short-run tail conditions lately. It’s hard to know how much weight to give the “tendency” you’re describing but it’s certainly not the sort of thing that guarantees a quick, vicious snapback to historic price trends. That’s why they call it a “bubble”: because it bursts quickly, not in the long run.

      •  Well, according to the Shiller data, the housing bubble in the US
        started in 1998 and  popped in 2006, a period of 8 years.  It’s also not
        completely unwound yet either, 6 years later.  So the bubble has lasted
        14 years, and may last another couple more before prices finally
        stabilize.  The stock market bubble in the 90s lasted close to a decade.  So you need a long run view to see the bubble.

        I think hosertohoosier has a point, you need the long run to make any kind of guesstimate whether prices have a sound relation to the fundamentals of supply, demand, and and costs for a good, rather than people buying stuff they can’t afford and speculators purchasing things they don’t want or need in order to sell them for a higher price.  The long run allows one to see if prices might be a reflection of the fundamentals.

    • To put it another way, if your answer to “Is there a bubble?” begins with “In the long run…”, you’re doing it wrong.

      • I take it you are not a fan of Garth Turner – his book “A Greater Fool”  has been predicting a crash since published in March 2008.

        • I have very good reasons for not castigating hysterical catastrophists who predicted a crash in 2008! https://twitter.com/#!/natemuhly/status/175625991383814144

          • The crash was prevented by emergency low interest rates and about $108 billion in mortgages being air lifted off the banks books courtesy of the CMHC. This allowed the banks to keep lending and lower their mortgage rates down to their current absurdly low levels. I dare say those bullets have been spent. 

      • No, the answer to “is there a bubble?” is almost certainly yes. I mean what intrinsic factors made Toronto/Vancouver homes 35% (or however much they went up) more attractive over the past few years? That people are buying an asset which has a historic long-term return of zero, in the expectation that it is an investment (and one with fairly high returns) suggests strongly that there is a bubble.

        The question is when the unsustainable (ie. driven by speculation, not fundamentals) rise in housing prices will reverse, and the bubble will pop. 

  8. They Olympics had zero to do with home prices. Zero.

  9. so if there is any sort of bubble I think it is in the bigger centres Here on Vancouver Island  especially outside of the biggest city Victoria…we have had large market corrections already…if you bought in 2008 or early 2009 you would be hard pressed to get your money back out…condo are overbuilt in quanity especially in downtown Vancouver

  10. For people who have no mortgage, a drop in house prices means nothing. When we moved in 2009, house prices in our area had dropped 16 %. We theoretically lost 16 % on our house sale, but the house we bought had also fallen by 16 % in price, so the price differential was the same . We probably saved a few bucks in realtor fees.

    • A drop in house prices never means nothing.

      1. if you’re downsizing, that’s not true that it means nothing.  16% of 500k and 16% of 200k is not the same thing.  So if house prices jumped 16% and you downsized from what was a 500k family home to what was a 200k retirement condo, then you would have gotten back 300k, but thanks to the price rise you’ve actually gained 580k – 232k = 348k. 

      Similarly, when prices decline, you lose money when downsizing.

      2. If you’re moving elsewhere, it makes a big difference.  Moving from Vancouver to pretty well anywhere else in Canada essentially allows you to pocket a huge amount of money because Vancouver prices have risen far more than anywhere else.

      Eventually, your home will be sold at a time when you’re not buying another, either when you retire, or when your estate is dealt out according to your will.  So eventually you or someone else will pocket the difference between what was paid and what it was sold for.

  11. I submit that the fact we’re talking about a potential bubble is what will prevent it, as opposed to the unfettered enthusiasm that brought down the US housing market. The price of everything, including homes, has risen dramatically since the 80s, and while property values may fluctuate a bit from year to year, we won’t be seeing any major drop off anytime soon, if ever.

    •  I think that’s wishful thinking.  One of Colby’s links is about a cab driver who was flipping condos in Vancouver.  In Toronto, a huge percentage of condos are being purchased by investors. 

      • Agreed s_c_f. There is definitely a bubble. No market EVER rises the way real estate has without a dramatic reversal. The biggest problem we have is that banks allowed, hell, ADVISED and PROMOTED canadian home owners to jump on the HELOC wagon. So now the smiths who had a 180G mtg just 6 short years ago have a new mercedes, BMW and a new mtg for twice that amount or more. at 3% they are doing OK, but they did have to make some budget cuts to accomodate the higher payment. But when the smiths have to renew their mtg at 5%+ things get a little tighter…they slow down spending, less eating out, less wants are purchased, retailers are seeing this and feeling the effect..some even have to layoff employees, others still have to close their doors. the snowball grows. Sorry folks, but Canada is not in a good place right now as they would have you believe. and unfortunately, the longer they keep interest rates at all time lows, the bigger the bubble will grow. Rock and a hard place. and the worst thing…we the cdn tax payers get to foot the gigantic bill that is insured CMHC mtgs. I hope the US is picking up steam, cause I’ll be damned if I am going to stick around to pay my hard earned money into fixing something I could see happening 4 years ago. What goes up, must come down, and when the US sneezes, Canada catches a cold. When the rest of the world sneezes Canada may just find itself on it’s death bed.

    • Have you talked to any kids buying their first home recently? “Unfettered” doesn’t even begin to describe it. They sign up for a life time of debt servitude in the amount of time it takes them to select a new pair of Nikes online. And the banks are more than accommodating. 

  12. I think the idea that the country as a whole will experience some kind of pop is wrong. Canada is too big and too different from west to east. Toronto sprawls like a US city making its condo market vulnerable. Plus without an economy and a government on drugs the skills and trades are moving out. 
    Vancouver on the other hand sprawls but with limits. Mountains to the north, Mountains to the east, ALR land that hopefully will remain, water to the west and the border to the south. Eventually the way to go is up. Skills and trades are moving in and the offshore money just doesn’t quit. Vancouver will slow down at some point but not pop. Southern Ontario though, I’ll leave that comment to the locals.

    •  @d1415731241019d27498561680b97bae:disqus ,
      Tokyo has less land and more people.  You can fit four $600K East York semis onto a single $2M West Vancouver lot.  Your comment is a sign of west coast delusion or west coast arrogance.  Time will fix both.

      • But it is difficult to know just where the mainland Chinese factor fits within all this.  There was a stat that came out recently that said that 74% of buyers in Vancouver’s West side last year were Mainland Chinese.  That’s such a huge elephant in the room, and it has nothing to do with whether locals can or can’t afford to buy.

    • Vancouver will pop, that’s not even in question any more. Don’t ask me when, I don’t do timing. 

  13. I think that the trend on both of those graphs is showing a bubble in the US starting to form in the late 90′s and one starting to form in Canada in the early 2000′s.  It would be nice to see this data extending back another 20-30 years so that we could get a better sense of the overall trend.  

  14. Don’t forget another significant difference between the US & Canada markets – in the US, you can get tax deductions for mortgage interest (although they may have closed that loophole since 2008, or have at least talked about closing it).

    •  I agree that it’s a big difference.  But it’s not a “loophole”.  You don’t get it unless it’s your primary residence.  So it cannot be used by speculators or investors. 

      Effectively you can think of it as a reduction in the interest rate on the mortgage.  So if you pay 5% on the mortgage, and 30% income tax, then the 30% tax that you would have paid on that 5% is nullified from your income, thus it’s like having a mortgage rate of 3.5% instead (a reduction of 30% of 5%).

      • Your analysis of the impact is spot on.   However, you actually can get the deduction for a second home, too.  But not a third.  This deduction, and the similar deduction for property taxes, are big advantages for homeowners.  They do encourage homeownership, perhaps to an unwise degree.  There is recurrent talk about limiting or even eliminating the deductions but it would be very difficult politically to actually do so and it would cause a further crash in the housing market.

    • I used to believe those differences would protect us. But what’s happened is that our bubble just took a few more years to inflate. Ultimately, we got to where they were, we just took a little longer to get there. And if you don’t believe we have subprime loans, get a load of the “cash back” mortgages being offered by the major banks. 7% cash back on a 5% down payment, for a -2% equity stake. That’s a hell of a way to start out your life. 

      • Though this sort of thing on the surface *sounds* US-Bubble-Popping-Underwater-Mortgages-OMG-Detroit scary, I’d like to have clearer picture as to who is actually being approved for these sorts of mortgage products before I’d consider them to be fundamentally frightening. Their availability, after all, does not mean that just anybody can have them. 

  15. If you expect something will happen it probably won’t happen.
    Markets are irrational and illogical and don’t follow the people’s expectations.
    My take on this is why would anybody want to buy a million dollar house in Canada with all the bad weather anyway.

    • Cause it’s more heated space than the 500k one.

  16. It appears fearful by looking at symbols and numbers. do we believe that we here in Canada have stronger fundamentals than our southern neighbour? Taking Alberta as an example, the employment is still in high demand as long as the energy consumption is kept at the same level; people in workforce are well paid so they can afford the second homes, are less concerned about the debt ratio. The aggressive progression of housing here is well lubricated by high employment rate, so I don’t foresee localized housing collapse in any time soon. In BC or ON, it may be a totally different story – lacking employment is a key concern.
     

  17. I think the shoddy workmanship will also contribute to the bubble. Where I live (surrey)the homes are so poorly built. they have design flaws, out of square, poor foundations, hinges to the outside of an outside door. Where are the inspectors. You cant be expected to pay half a million dollars for this junk !!!

  18. I will get slaughtered for this heretical opinion, but I wouldn’t get too hung up on “data”. Watching people’s behaviour is often a better indicator of what’s happening. Anecdotal it might be, but anecdotes are real, especially when you can observe them in the first person. Young couples are taking on mountains of debt to become home “owners”, and those mountains just keep getting bigger relative to income. I don’t need data to tell me that much, I just need to talk to some of the youngsters at work – in their 20s and taking on more debt than I’d ever dream of taking on, despite earning less than me. 
     That isn’t sustainable, and there will be a reckoning. 

    • I’d like to think that you’re right there.  But our governments now seem to have signed on to this seemingly permanent position that Cheap Money Must Be Maintained at All Costs.  As long as money is stupidly cheap, this will continue.

  19. The real estate business does not seem to have caught its breath’ It seem to be gasping for air. All the hupla years and years ago about being in the housing market was the best thing that could ever happen to you. I can can picture the young real estate agent’ the banker waiting for the buyer to sign on the doted line chuckling when someone suggested that real estate could maybe not be the greatest investment in the world. So over confident that you could smell it in the room.

  20. 80% of Canadians live within 100 Miles of the U.S. Border…My co-worker has been looking for a house to rent in the Lower Mainland of B.C. and is willing to pay $2000.00 a month…he’s been looking for 3 weeks and can’t find anything suitable or the places are already rented. People have tolive somewhere and interest rates can’t go up very much or very fast in this weak global economy.

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