Reading time: 1280 words, 3 to 5 minutes
“Time to panic about the Canadian housing market” is the by-line Macleans magazine uses in their article “You’re about to get burned” in its latest issue. You’ll notice they don’t use a question mark in the title.
In other words, a reliable member of the Canadian media is telling us to hit the panic button. However, they do use a question mark on the second by-line “Why is everyone ignoring this unfolding disaster?” That’s my question also. I’ve been ranting about the Canadian housing bubble for a long time. Below is a picture of a typical Canadian home owner hoping, “It’s different here.”
The American housing bubble peaked in 2005 and began its long steady descent in 2006 – that’s six years ago and no bottom is in sight – before losing $30 trillion in asset wealth. That’s T for trillion.
Do you think it can’t happen here? Let’s see: at their peak, Americans owed $1.30 in debt for every dollar of income. Canadians today owe $1.53 for every dollar earned. That Canadian debt has increased 40% in 10 years. That’s way more than can be accounted for inflation.
Canadian home ownership rates are also approaching the heady levels the Americans had prior to their bubble busting. High levels of home ownership indicate too many home owners cannot afford their homes. On home ownership levels, Macleans says, “about 68% of Canadians mirrors closely the 69% at the top of the U.S. market.”
USA Today in their article “Homeownership rates fall to 66% as downturn nears a bottom”
reports that American home ownership is now back where it was in 2003. That percentage drop is people who lost their homes or who bailed out because they can no longer afford them. By the way, there’s a lot of optimism (the SPIN I’ve been warning you about) in their title “…as downturn nears a bottom.” They’ve been saying that for years. If they keep saying it long enough, some year they’ll get it right. Even a broken clock is correct twice a day.
There are other similarities between Canada today and the U.S. at its bubble peak. Over-building is one of them. New building permits in December reached a 4.5 year high. And, this is at a time when home sales are falling; they’re down 4.5% in January. Just like in the U.S., Canadian builders build until the bottom falls out of the market and then they go bankrupt.
As I’ve long been ranting, Canadian home prices are in bubble-bubble land. They’ve DOUBLED since 2002 and have still risen 13% since the Great Recession of 2008. I won’t repeat what I’ve long said, but do yourself a favor and check out Garth Turner’s website.
Here in pictorial form is what a bubble looks like. I shamelessly stole this from Garth Turner’s article “Probably won’t end well”
“For example, here’s what $1.5 million buys in a part of Toronto 40 minutes (by subway) north of downtown:”
“Here’s what $1.5 million buys in a top neighbourhood in Dallas.”
Turner says, “BTW, the property taxes are deductible from taxable income. So is mortgage interest. Oh yeah, and there’s no state income tax. Or HST.” He asks, “Is this even the same universe?”
Canadians, like the Americans, have been using their homes as ATMs. Second mortgages (also called HELOCs – home equity line of credit) have skyrocketed in Canada where homeowners use the equity in their homes to obtain lines of credit to pay for vacations, renovations, granite countertops, stainless steel appliances, etc..
It’s Canadians who mortgaged their homes that helped pull Canada out of recession. Canadian home equity withdrawals amounted to 3% of the country’s GDP. In B.C., ground zero of the bursting bubble, home equity withdrawals accounted for 4.5% of GDP.
Combined, Canadians have pulled a staggering $220 billion out of their homes’ equity. This is THREE TIMES larger per capita than the U.S. at their peak. Do you still think it can’t happen here?
At the end of 2010, Canadians had just 34.3% equity in their homes. That’s a 20% drop in just four years. Do you still think it can’t happen here? Don’t look now but IT IS happening here.
And, just like in the U.S., residential real estate became a major part of the economy. The Canadian construction industry at 7.4% of the labor force is higher than the U.S.’s 5.5% at its peak. Don’t look now but IT IS happening here.
Macleans says, “Add in other housing-related industries, such as real estate agents, mortgage brokers and insurance companies, and the sector represents a staggering 27 per cent of the Canadian workforce. In the U.S., those same numbers peaked at 23.5 per cent.” Still think it can’t happen here? IT IS happening here and the bubble is bigger than it was in the U.S. before it burst.
There is one difference between Canadian and American residential real estate and it’s going to hurt. In the U.S. it’s easier to get out of a home whose mortgage is underwater. In Canada it’s a lot tougher to throw your house keys over the finance company’s counter (“jingle mail”). This means the Canadian housing correction will be longer and more painful than the American. It will be harder for Canadians to pull the pin and move to where the jobs are. This will make our recovery much longer than the U.S.
Another Canadian website I highly recommend Ben Rabidoux’s THE ECONOMIC ANALYST . He says, “We are far more dependent directly and indirectly on this current housing boom than they were in the U.S.. How are you going to orchestrate a soft landing?”
Oh, by the way, here’s something else you won’t hear until it’s too late. Rental rates are increasing in the U.S. Although more investors are buying homes at distressed levels in order to use as rental income, so many people have lost their homes that demand for rentals has skyrocketed resulting in higher rates. This will probably happen in Canada as well. Word to the wise: as I’m advocating anyone considering selling their home in the next 5 to ten years to SELL NOW while you still can and rent for a few years before buying another home at reduced prices. Make sure you sign a long term lease to lock in rental rates.
Long time readers will remember me waxing philosophical with my monkey analogy. For millennia, philosophers have debated what separates humans from the rest of the animal kingdom. Various attributes have been put forth as uniquely human only to have them fail one by one as we learned more about other animals; communication, language, tool use, opposable thumb, complex societies, etc..
I maintain there is only one attribute that separates us from other animals. A monkey might try to fool another monkey, but a monkey won’t fool itself. Only humans are capable of self-deception. Only a human can fool itself. Macleans says, “One really terrible narrative we’ve developed is that Canada is somehow better than the U.S.” I fear we are about to make
monkeys oops, humans of ourselves.
Yes, it can happen here; IT IS happening here. Garth Turner calls it the boomer curse – house lust. Bend over Canada. We’re about to get it good and hard and we’ll have no one to blame but ourselves.
February 29, 2012
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