Canadian bubble trouble

By Leith van Onselen

In the years following the global financial crisis (GFC), the Canadian and Australian housing markets were among the best performing in the English-speaking world. While housing markets in other English-speaking nations- most notably the United States, Ireland, the United Kingdom, and New Zealand – remained in a funk, Canada’s and Australia’s powered on to new all-time highs.

Whereas Australia’s house prices peaked in mid-2010, and have been deflating ever since, Canada’s powered on led by its third largest metropolis, Vancouver, British Columbia:

By mid-2011, the Canadian authorities were growing nervous, culminating in a captivating speech by Canada’s central bank governor, Mark Carney, in which he pointed out some home truths about the bubble-like situation that had developed in Canada’s housing market.

In his speech, Mr Carney showed that the growth in house prices had easily outpaced Canadian inflation and incomes, and questioned whether this growth in housing values had made Canada better off:

Canada is arguably no better off because of it [higher house prices]. That’s because while homeowners may feel wealthier because of this rise in prices, housing is not net national wealth. Some Canadians are long housing; others are short. Housing developments can have important implications for equality both across and between generations. Though some people in this room may have been enriched, their children and neighbours may have been relatively impoverished.

Mr Carney also showed that Canadian house prices relative to rents were near all-time highs:

Which is a view supported by the International Monetary Fund (IMF), which shows Canada’s ratio of house prices-to-rents to be the highest in the developed world:

Carney also warned about the high levels of household debt in Canada, which had been rising inexorably and had for the first time risen above 150% of personal disposable incomes:

Financial vulnerabilities have increased as a result. Canadians are now as indebted (relative to their income) as the Americans and the British. The Bank estimates that the proportion of Canadian households that would be highly vulnerable to an adverse economic shock has risen to its highest level in nine years, despite improving economic conditions and the ongoing low level of interest rates.

Carney warned that some segments of Canada’s housing market (Vancouver in particular) were experiencing bubble-like behaviour:

Given such developments, one cannot totally discount the possibility that some pockets of the Canadian housing market are taking on characteristics of financial asset markets, where expectations can dominate underlying forces of supply and demand. The risk is that expectations become extrapolative, prompting the classic market emotions of greed and fear—greed among speculators and investors—and fear among households that getting a foot on the property ladder is a now-or-never proposition.

And suggested that the ‘wealth effect’ positive feedback loop from house price movements could shift into reverse if house prices correct, reducing consumer spending and lowering economic growth:

…while changes in housing values may not lead to changes in net wealth, they do influence consumption by affecting households’ access to credit. Through this “financial-accelerator” effect, homeowners can borrow more against increases in home equity to finance home renovations, the purchase of a second house, or other goods and services. Such expenditures can accelerate the increase in house prices, reinforcing the growth in collateral values and access to borrowing, leading to a further rise in household spending. Of course, this financial accelerator can also work in reverse: a decrease in house prices tends to reduce household borrowing capacity, and amplify the decline in spending.

Since Mr Carney’s speech, the Canadian housing market has finally begun to turn down, falling -0.3% nationally in the two months to November (-0.6% in Vancouver in the three months to November) according to Teranet. And it seems the national mood might be changing too, with a wide range of publications recently warning of a possible bubble and/or projecting falling housing prices, including:

  • The esteemed national magazine, Macleans.ca, declaring: “Yes we’re in a bubble and it will probably pop soon.”
  • The Economist asking readers: “Are Canadian house prices a bubble waiting to burst?”. Nearly two-thirds of readers responded in the affirmative.
  • TD Bank predicting that price growth will slow in 2012, with a correction taking place in 2013.
  • Bloomberg reporting that Canadian housing is poised for a “severe correction”.
  • Sharply rising foreclosures in the city of Kelowna, British Columbia, which is home to 180,000 Canadians.

Meanwhile, rental growth across Canada has reportedly flatlined, and there is a flood of new apartments being built in the nation’s largest metropolis, the Greater Toronto Area.

On the other hand, many commentators and analysts still do not believe that Canada’s housing market will suffer a severe correction, citing Canada’s ‘conservative’ lending practices and its ‘world’s best’ banking system, which was ranked safest in the world by the 2011-12 World Economic Forum Global Competitiveness Report.

Peak under the hood, however, and you find: (i) that the Canadian banks have arguably received their world-beating ‘safe’ status because most of the credit risk on their loans is being carried by Canadian taxpayers who, via the Canadian Mortgage Housing Corporation (CMHC), are the guarantors of a significant portion of Canada’s riskiest mortgages and are on the hook to lose billions should the Canadian housing market ever falter; and (ii) a system entwined in moral hazards and questionable lending practices.

CMHC: the Great Enabler:

The government-owned CMHC is Canada’s national housing agency. CMHC works by acting as the guarantor for mortgages where the purchaser is unable to pay a specified amount as a down payment (20% for residential properties).  The CMHC also assists the financial sector by buying pooled mortgages and reselling them to investors as AAA government-backed bonds, giving banks and other institutions an immediate source of cash that they can re-lend.

In its role as guarantor, the CMHC protects the lending institution in the event that the buyer defaults on their mortgage and the bank is unable to recover the full value of the loan by selling the home.

For example, imagine a home buyer purchases a $500,000 home with a 5% down payment, leaving a mortgage of $475,000. Since the home buyer does not have the required 20% deposit, they pay CMHC a few thousand dollars as an insurance fee and CMHC then guarantees that they will cover any losses if the borrower defaults, thereby ensuring that the lending institution makes a profit. A year later, the economy enters a downturn causing house prices to fall 10%. The borrower loses their job and is no longer able to make their repayments, thereby defaulting on the mortgage. The bank takes possession and sells the house for $450,000 (10% discount), leaving them with a $25,000 loss (less any principal repayment). The bank approaches the CMHC, which promptly hands over the money to the bank.

You can see from the below chart that the value of guarantees provided by the CMHC – both from its role as mortgage insurer and securitiser – has exploded and were valued at $541 billion CAD as at 30 September 2011:

It’s also not hard to see from the above discussion that Canada’s mortgage system contains high levels of moral hazard. In a mortgage market free of government manipulation, a lending institution would carefully consider what interest rate to charge a person.  They would take into consideration their credit worthiness, payment history, and down payment, since negative equity is one of the important determinants of default rates. However, with their default risk removed via the CMHC, Canada’s banks are more willing and able to lend to people with little money, a poor savings history and little prospect of repaying their loans. Put another way, CMHC enables the banks to provide the cheapest, lowest mortgage rates to those with the highest default risk.

Sound familiar? The CMHC is in effect similar to the United States government-sponsored Federal National Mortgage Association (Fannie Mae) and the Federal Home Mortgage Corporation (Freddie Mac), which provided insurance against default risk to a large proportion of risky low-deposit loans in the United States and whom required massive taxpayer bail-outs following the bursting of their housing bubble.

Canadian Taxpayers: on the Hook for Billions

A series of reforms over the past decade significantly increased CMHC’s exposure to mortgage default risk.

In 1999, the National Housing Act and the Canada Mortgage and Housing Corporation Act were modified, allowing for the introduction of a 5% down payment.

In 2003, CMHC removed the price ceilings limitations, thereby insuring any mortgage regardless of the cost of the home.

In 2007, CMHC allowed people to purchase a home with no down payment and ammortise it over 40 years. This was changed back to a 5% down payment requirement and a maximum amortisation of 35 years in late 2008, and then 5%/30 year maximum amortisation requirement in March 2011.

Finally, in an effort to support the housing market in 2008 (when affordability fell sharply and the economy slumped), the Canadian Government directed the CMHC to increase approvals of high-risk borrowers in order to keep credit flowing. As a result, the approval rate for these higher risk loans went from 33% in 2007 to 42% in 2008. By mid-2007, the average Canadian home buyer who took out a mortgage had only 6% equity in their home, suggesting the risk of negative equity is high even if there is only a moderate correction.

As you can gather from the above analysis, Canada’s mortgage underwriting standards are not exactly conservative. While the current CMHC rules now dictate that borrowers must provide a 5% down payment in order to obtain financing (reduced from 0% in 2007-08), many Canadian banks are side-stepping the CMHC rules by offering 5% to 7% cash-back offers, thus effectively providing 100% finance (click to see examples of the banks’ cash-back offers).

With mortgage rates in Canada near cyclical lows (see above chart), with nowhere to go but up, there is potential to generate significant mortgage stress and a wave of defaults amongst recent highly leveraged buyers, particularly the 30% of CMHC-insured borrowers with less than 20% equity in their homes (see below chart). There is also the risk that many recent buyers could find themselves in negative equity, whereby home values fall below borrowings, leading to a sharp drop in consumer spending, a reduction in economic growth, and job losses.

However, perhaps the most worrying aspect of Canada’s mortgage system is that the CMHC appears to be significantly under-capitalised, potentially exposing Canadian taxpayers to significant losses should Canada’s housing market enter a protracted down-turn. As at 30 September 2011, the CMHC had only $11.5 billion CAD of shareholder capital but a whopping $541 billion CAD of outstanding insured loans, which works out at only 2.1% equity against its overall exposure. In fact, the CMHC’s capitalisation is only slightly better than the US Government-sponsored Fannie Mae, which in 2007, at the peak of the US housing bubble, backed up US$2.7 trillion of mortgage-backed securities with US$40 billion of capital, or 1.5% equity against its overall exposure.

Should a severe housing correction occur, and significant defaults take place, there is very little capital available to absorb losses. Rather, like in the United States, Canadian taxpayers might be called upon to stump-up funds to bail-out the banks for their risky mortgage lending.

Canada’s mortgage monster:

Concerns about the CMHC prompted Canada’s leading weekly news magazine, Macleans.ca, in 2011 to publish a damning article entitled The CMHC: Canada’s mortgage monster, in which Macleans questioned the CMHC’s opaque disclosure practices, lack of regulatory oversight, and risk to taxpayers should a significant housing correction ever occur. The below quote from the Maclean’s article summarises the key issues:

It’s a familiar-sounding story to American ears. “The Canadian government mortgage apparatus echoes uncannily our experiences down here with Fannie and Freddie” says Jim Grant, author of the widely read Grant’s Interest Rate Observer newsletter. “CMHC has distorted the housing market by making homes, especially ones that are on the pricier end of the spectrum, more affordable and encouraged a lot of people to get in over their heads”…

What bothers Grant is that the CMHC’s government-backed guarantees encourage banks to feel they have less to lose if loans go bad. “The risk has been shifted, rather than reduced, from the stockholders and depositors of the big Canadian banks to the Canadian taxpayer,” he says. And if house prices fall and borrowers get into trouble, the ripples would run far and wide. “A sharp break in Canadian house prices would inflict terrific damage to consumer confidence, would hurt the Canadian labour market, and ultimately produce a lot of the unpleasant results that have been America’s burden to bear since 2007.”

Similar concerns were articulated by the Fraser Institute, which released a study in 2010 highlighting the risks to taxpayers from the CMHC-insurance system and explicitly recommended that Canada instead look to emulate the Australian privatised mortgage market structure. This study also confirmed that the taxpayer risk from a housing collapse is greater in Canada than elsewhere.

A ticking time bomb?

Only a year ago, the mainstream view in Canada was that the housing market was bullet-proof and that a US-style meltdown was highly improbable. Now sentiment appears to be changing following a slowing of sales, a build-up of inventory, and early signs of a price correction.

While it’s impossible to know what the future holds for the Canadian housing market, it appears that the risks are now on the downside. With any luck, Canadian house prices will deflate gradually, minimising damage to households, the economy and taxpayers alike. Perhaps such is possible given Canada, like Australia if less so, has seen a big shift in its terms of trade owing to the rise of China. But there is also a risk that prices will burst violently, as they did in the US, potentially exposing Canadian taxpayers to billions of dollars of losses.

As we explained on Wednesday, Mark Bouris and Christopher Joye from Yellow Brick Road Wealth Management have been campaigning hard for the Australian Government to ‘reform’ Australia’s banking system by implementing the CMHC (and Fannie Mae and Freddie Mac) system of guaranteeing pools of mortgages aggregated from all banks and non-bank lenders. Such a system is expected to end up costing US taxpayers between $120 billion and $190 billion, and from the above analysis, there are legitimate concerns that Canadian taxpayers could end up losing billions of dollar too from the CMHC.

Leith van Onselen writes as the Unconventional Economist. He is an economist that has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs. Leith can also be found on twitter: twitter.com/leithvo. Find a selection of other posts below:

Australian Housing Valuation Report

How the RBA undervalued housing

How Germany achieved stable & affordable housing

Look to Texas to solve Australian housing supply

The Housing-Retail Link

China’s morbid dependency

China’s summer of discontent

The century of old age

The Demographic timb bomb

Demography is destiny

Retail pain is here to stay

A full list of his posts is available here.

Comments

    • +100

      CMHC = AIG + Fannie + Freddie.

      It is inconceivable that any entity, private or public, can offer insurance without reserving adequate capital for payouts. Taxpayers will be rightly outraged that their budget is used to backstop the capital of a virtual catastrophically risky insurance company.

      Since Mr Chris Joye is such a big fan of CMHC, I hope to see an equally considered, data driven response from him defending the CMHC model.

  1. This is a great article, well done. It’s spot on for accuracy.
    My partner is Canadian and we had planned to buy a house in Toronto as Sydney is so unaffordable.
    That was in 2009. They’ve almost doubled in price since then in the few pockets we looked at.
    Two other things to consider are that lots of Canadians live and work in the US and have begun to return home in droves due to situation in US economy.
    Other thing is the Canadian government essentially pays pensions, or superannuation at a much more generous rate than Australia for public sector employees.
    That and the cost of pensions is expected to triple when the boomers retire, putting more pressure on Canadian taxpayers.

    • Yes, I doubt there is a blog anywhere in the world better than Unconventional Economist, for housing bubble analysis.

      Canada is exactly the same case as what THIS guy says:

      “…..When Alan Greenspan suggested that some regional and local housing markets were exhibiting “froth,” he underestimated the impact that a boom and bust in SELECT MARKETS can have on the broader economy…..” (my emphasis).

      http://www.cato.org/pubs/journal/cj31n3/cj31n3-9.pdf

      The Demographia Surveys show that Canada’s bubble is mostly in Vancouver, and contributed to by Toronto and Montreal. There is still plenty of affordable cities.

      But the question also needs to be asked, eg about Australia, how much worse is a bubble and bust when there is NO cities in the entire country, left out of it?

  2. Great article Leith.

    Being unfamiliar with the Canadian housing/mortgage market it was very interesting reading.

    You mention an elevated amount of housing stock on market, is there a data supplier like SQM or RP Data who provide these statistics for the Canadian market?

    • One thing though outside some core bubble cities, housing is quite cheap.
      http://www.remax.ca/index.php

      We, unfortunately have inflated prices in crapholes 800km from civilisation.

      I used to go on skiing hols to British Columbia (Air Canada flys from Sydney) and the joke used to be BC stands for “Bring Cash”.

      • While I am no expert on Candian planning policies, my understanding from what I have read is that Canada only operates “smart growth” urban containment policies (urban growth boundaries, etc) in a few major cities. The rest use the “traditional” approach to planning (similar to the non-bubble US states)where rural land can more easily be converted to urban land. This helps to keep land prices lower as well as helps mitigate the formation of bubbles.

      • Exactly, and it also gives the lie to the oft-heard excuse that “only places with high demand because of pleasant climate, have these bubbles”.

        As if the UK’s cities weren’t already enough counter-example (and Australia’s…! Velociraptor puts it well – “….We, unfortunately have inflated prices in crapholes 800km from civilisation…..”). But Toronto? Why would anyone be buying property at inflated prices there instead of a more affordable city in Canada? Pacific Coast climate it AIN’T.

      • Classic….!

        The old “our property is expensive because we have created a city full of such desirable amenity and vibrancy, yadda, yadda, yadda”.

        I have argued this till I am blue in the face, with planners and local politicians all over the place. Growth boundaries, rationing, supply and demand, basic economics – all a closed book to them.

    • I don’t know of specific sites on Canadian stock on market etc, but from various media reports as well as non-public sources, stock on market in Vancouver in particular is on the rise and sales have slumped. And Toronto’s market is facing a flood of condo (apartment) supply, which are being built predominantly for buy-to-let investors.

      • In Montreal the prices are cheap and amazing, unbelievable. Two bed rooms apartment or condo is only around and even below $120000. Obviously the greed is much higher in the English part of Canada than in the French one.

      • But numbers of beret’s, blue and white horizontal stripe T shirts, and pencil moustaches is probably higher in Montreal.

        Probably a lot more people trapped in an invisible box there too.

      • hmm…well there you go getting me all excited,again…n,talking about invisible beds covered in plastic,the room all taped-up,all your work pictured …you better stop it,I’m thinking about a visit
        tonight..I’ll bring the slides…
        Cheers JR

  3. people should be reading Garth Turner’s hilarious daily blog on the Canadian Housing market.

    a brilliant writer, financial commentator and ex pollie, his wry look at the ridiculous overblown market over there lends itself very well to the australian housing market and our similar coming falls in prices…
    as good as MB but with a few more giggles

  4. Great post.

    It will be a cold day in hell when an Australian politician says:

    “…is arguably no better off because of it [higher house prices]. That’s because while homeowners may feel wealthier because of this rise in prices, housing is not net national wealth… Though some people in this room may have been enriched, their children and neighbours may have been relatively impoverished.”

    He talks about Canadians ‘short’ housing. LVO do you know how they are doing that?

    • of course not remember aussie pollies are committed to housing affordability, as long as house prices don’t go down of course

    • Short: You borrow the asset rather than own it.

      I can only dream of a politician in Australia caring about more than just themselves let alone future generations, vulnerable groups of society and the country in general.

      It’s all power struggles and politics in Canberra – don’t rely on them to make things better. They seem to always do the opposite especially when it comes to housing.

  5. Is there a Canadian Christopher Joye writing blogs about how Canadian houses are affordable and aboot all the price rises can be explained by wage growth and interest rate declines?

    Does said Canadian Christopher Joye challenge Jeremy Grantham to bets that would have cost him aboot several millions by now, probably bankrupting him (unless the government was back stopping his gambling) had Grantham taken him on?

  6. Yep. I read an article the other day about how even a tiny old cottage in the wind swept freezing prairie lands of Manitoba costs almost twice what the same house (in a more congenial weather climate) would cost over the border in the USA.

    • Unfortunately I agree with this. There’s always ways to stop bubbles popping if you have warning. Better for the country for the housing bears to be quiet and let the leaders of this country to be complacent.

      Probably the only way to stop the growing debt and malinvestment in this country.

    • The mainstream believes in the China storey, if China slows down, even if a hard landing is avoided the detriment to sentiment in Australia will pop the bubble.

      Imagine when Mr Joe & Jane Smith open the Daily Telegraph and read about mining closures in Australia, projects put on hold, iron ore prices falling. Once this news hits the mainstream, coupled with, every increasing costs of living, carbon tax, Europe’s problems, our manufacturing problems, rising sea levels and the end of the world in 2012, how will this not pop the bubble.

      The China storey is the only thing thats stopping housing entering a US style crash, for now its just slow stagnation with a possibility of entering a “positive feedback loop” but if China slows, its good game Australia.

      • Markets don’t need to be exactly the same in the details. The rough rule is, follow the median multiples. They can’t inflate from around 3 – 4, to 6 – 8, in a decade or less, and not come back down again eventually. Ireland took 2 years. Japan took 20. There are now several examples of house price bubbles and crashes in recent times, and the details differ widely between them – the only thing they ALL have in common, is urban growth CONSTRAINTS. The only thing that bubble-proof cities have in common, is “freedom to build”. All the other details might be present – easy credit, innovative mortgage investment securitisation, tax and insurance incentives, etc etc. But no price bubble. But can you get any more than about 1% of pundits to notice this or admit it is important?

      • It is as obvious as the nose on your face. Demographia have the statistical proof for all you data-demanders out there.

      • Not quite. Our government the power hungry populist people they are will not let their investment properties or their banks fall. They would rather die first.

        I will suggest some ideas that at first may seem ludricious however remember the Australian Government usually is.

        1) Chris Joye’s idea of having another Fannie Mae/Freedic Mac in this country
        2) Print money to buy mortgages
        3) Boost immigration from foreign countries diluting the debt per person
        4) Relax superannuation fund requirements to allow even more of our little savings as a country to go into more housing debt
        5) Print money and give it to desperate young people using them as a step-up for your own investments
        6) Guarantee all banks and print money for free to give to them when they fail

        Wait a moment – the government did most of these things the last time this happened. It was SO successful that other countries tried to emulate it after their houses started to fall especially step 5.

    • Few Australians that I meet even acknowledge the possibility of a real estate bubble. Everyone keeps telling me that now is a great time to buy a house as prices will soon be shooting up again. Australians are like frogs in slowly heating water–they will only recognise a real estate bubble when it is too late to hop out of the boiling water!

  7. Great article, thanks.

    However you said interest rates only have one way they can go.

    This is just not true.

    People were saying that about US interst rates when US10 year bonds were 4%, now they’re around 2%. Japanese 10 year rate is around 1%. Germany is around 2%.

    The evidence for this is everywhere that politicians face elections – they will sacrifice future generations to maintain power by keeping the bulk of the current generation happy.

    When the crap hits the fan, interest rates will fall.

    Remember that the proportionate fall from 10 to 5 as inflation was driven out of the system is only the same as 4 to 2%.

    The proportion of income to service average new mortgage is about the same as it was when rates were about 10%.

    The current average cost in dollar terms and proportion of income will fall significantly if home mortgage rates fall from say 7% to 5%.

    Rates can go down still in both Canada and Australia. We are nowhere near zero bound. And when we are zero bound all along the curve, monetary policy won’t work, we’ll adopt MMT quietly to keep unemployment from spiking above 10%.

    But for the moment we have an inverted government yield curve and plenty of room for the RBA and Government to reduce short term rates (and with more difficulty and controversy, long term rates), which they can always do under a fiat money system (that doesn’t mean there aren’t possible consequences in the longer term.)

    • Here’s Canada’s central bank governor, Mark Carney, on the level of Canadian mortgage rates:

      “Rates will not remain at their current levels forever. The impact of eventual increases is likely to be greater than in previous cycles, given the higher stock of debt owed by Canadian households. At a 4 per cent real mortgage interest rate—equivalent to the average rate since 1995—affordability falls to its worst level in 16 years. As I have observed, some markets are already severely unaffordable even at current rates.

      …households will need to be prudent in their borrowing, recognising that over the life of a mortgage, interest rates will often be much higher.”

      Official Canadian interest rates are currently 1%. So there is not much scope to lower mortgage rates much further.

  8. Great information. From the rental returns it would appear that the Canadian situation is much worse than ours, especially when the commercial reality of NG is factored into the day to day cashflow analysis. (not necessarily long term, but short term yes)

    To compare us to other economies is it useless to use the USA and Ireland etc, but Canada, Brazil, and South Africa might be useful, although I would expect the latter two to be more extremist financially.

      • Yep Nomad – it’s a shocker isn’t it. You obviously have much better information on SA than I have, so can I ask if that sudden run up is as a result of many thousands of original residents suddenly growing wealthier and wanting the good life.

        I mean that in any society that suddenly improves it’s hip pocket position, coming for a level of poverty, many have a tendency to spend with less discipline, and that there will be a lesson that comes later as the wealth gets distributed and people begin to understand what they didn’t have before.

      • OUCH, that HAS to attract the attention of the world’s number one bubble analyst. I am talking about Leith.

    • +1

      A good observation Peter. The downside of this of course, is that while there’s currently a slow melt in Australia, the size of bubbles in other comparable economies would suggest that renewed confidence from an external shock (rate cuts, stimulus etc) could trigger renewed reinflation of house prices here 🙁

      • outsidetrader – honestly it would need the discovery of a new goldmine in everyones back yard to restart the housing boom here anytime soon.

        Whilst I often state that I’m not sold on the slow melt, I mean that in nominal terms. In real terms house prices MUST fall, although that may mean marking time in nominal prices over 5 years whilst we see robust wage growth. That’s a nationwide expectation though, and regional areas will move according to regional/suburban pressures.

        House prices will move like share prices except that price corrections are like watching glaciers. You know where it’s going, you can see it happening, but everyone else seems unaware of it.

        Effectively the higher LVR loans stop people selling their homes to cash up because there may not be any cash left after the sale, and they would then have to rent anyway, so what’s the incentive to sell, get into financial difficulty with all of the associated stigma, and then be little better off.

        So they stay there for years until prices improve. That’s what Australian do. Other cultures may be different.

      • Peter, for the first time in a long time, I agree with everything you just said!

        Especially like your comment about people’s reluctance to sell. I have many friends who purchased properties in Melbourne over the past couple of years who, once you factor in transaction costs, are definitely in negative equity territory now.

        Some of them have come to realise that property prices will probably continue to fall and they will probably go further into negative equity in the short term BUT rather than cut their loss by selling, they accept more losses to “save face”. IT’S CRAZY!

        At least I don’t have to hear “you have to buy property, it’s a sure thing” anymore — my friends are all strangely silent on that topic these days.

      • El Greco – and there was I thinking that we were soul mates.

        It’s just maths really. Even in the good times if you buy on a 95% LVR and then sell immediately you will probably walk away with nothing when you take stamp duty etc into the calculations, so why bother?

        In a negative equity situation – to sell a house and be left with a residual debt is a whole minefield that people just don’t want to go into, it becomes a very stressful situation. If the alternative is just to stay put and wait for prices to rise again, it becomes the easiest option.

        If you look at Stapletons graph, can you find any period in time when prices didn’t rise if you waited long enough.

        The incoming tide floats all craft.

      • Makes sense Mr Fraser, but…….

        As has been proven on this blog and many others, unemployment follows falling house prices.

        Falling house prices means you slow up on your discretionary spending meaning less money in the economy.

        As less money flows around then business’s stop earning as much money and start laying off employees’s.

        As more people lose their jobs, house prices continue to fall.

        Small business account for “almost 3.6 million people, 49% of all private sector employment”

        Many small business’s have their property tied to it as collateral. As houses prices keep falling and small business’s shrink there is immense pressure on business’s owners.

        This is what will cause the rush to the exists. The negative feedback loop (or positive, to keep the engineers happy)

      • “As has been proven on this blog and many others, unemployment follows falling house prices”

        Sorry georgie, nothing of the sort has been proven – it hasn’t happened before in Australia in modern times, and it won’t happen at all. (post great depression)

        There is NO evidence that you could possibly present that would convince me to agree with that comment. It’s simply incorrect.

        Unemployment has to precede falling house prices.

        Guys I’ve got some work to do…

      • georgie – hardly – as unpopular as this may make me, I disagree with Leith on this.

        It’s true that falling house prices would cause a freeze with many small business operators, but to say that will lead to mass layoffs is not correct.

        Unless you are capable of moving Australia to one of the countries mentioned – then the assumption will be wrong – but I don’t have time right now to argue the point.

        PS – one point of view no matter how learned is not concrete evidence.

      • Spain, Ireland, USA all had price dops precede unemployment increases.

        When 70% of the economy is services and the biggest employer retail, just add one credit fuelled housing bubble where rising home equity feeds the largest part of the economy.

        Stir gently over a low heat and voila.

      • one point of view no matter how learned is not concrete evidence

        what evidence would make you change your view?

        List it and let them produce it (evidence) …assuming it isn’t contained in the UE article — the link was dead.

      • statistics after the fact in Australia in the post WW2 era

        I thought the discussion was referring to outcomes in the post easy credit world.

  9. Good article. My understanding from colleagues is that Canadian house prices vary greatly from location to location (far more than here, where a shack in the bush still costs relative to what/where it is) – interested to know if this can be verified (could never understand the rise in rural prices here).

    For those that haven’t seen this, Crack House or Mansion – Vancouver homes.

    http://www.crackshackormansion.com/

  10. Nice article. I’m going to assume “Peak under the hood” was an ingenious play on words. 🙂

  11. Just waiting for the Govt to introduce an Australian version of the CMHC, to try to keep our bubble from deflating.
    I really hope not….

  12. I have been wondering since a while about housing bubble in Australia but i am currently in Malaysia, a close neighbor.Prices here are crazy even by Australian standard ($AUD1M for a very ordinary townhouse in KL suburb ), with Malaysian incomes its just ridiculous.

    When I see the situation here&Singapour, our aussie bubble could still have some legs.

    • Lower income, but also lower living costs and much lower tax rates.

      Plus Singapore has the mother of all planning constraints and KL/Malaysia has some very questionable practices throughout every sector of its economy that reduce efficiency and inflate costs.

      • Yeah, India has the same problems. These economies with their corrupt officials etc will keep hitting glass ceilings until they sort out the reasons that land is forever inflated and there are speculative bubbles every so often.

        But there is not a lot of difference between outright corruption, and “urban growth constraint” as an official policy, in the economic and socio-economic effects.

  13. Garth Turner’s blog makes great reading but beware – he appears to be a shortage-denier.

    From my readings it appears that Canada has higher prices in Vancouver and Toronto than we have in our capital cities. However other places in Canada have affordable housing.
    Also V and T have a higher price:rent ratio than Oz cities. This indicates that prices could crash harder and faster there. Also it indicates that there is less of a shortage of housing there than in say Sydney.
    Interest rates are much lower in Canada which must play a part.
    Another difference is that prices apparently rushed up in the last few years, whereas in Sydney prices have been on a near permanently high plateau since 2003. While on that topic could one of the resident shortage-deniers here look up a chart of Microsoft Stock over 30 years and tell me if that is a crash or a high plateau. Will Vancouver follow Microsoft? Will Sydney follow Ireland or Spain? So many experts around but no one can tell me what comes next.

    • he appears to be a shortage-denier.

      Thanks, that alone would now make me want to read Garth Turner’s blog.

    • Claw, I am with 90% of what you say, but there ARE markets, especially in Ireland and Arizona and Nevada and Spain, where initial price inflation was followed by definite over-supply that however did not bring prices down for some years, leading to the biggest possible crash. This is because the initial slow supply response due to govt created barriers, creates expectations of rising prices of raw land as well as property, PLUS govt at one or more levels gets involved in capturing “planning gain” – govt becomes “pro growth” only for the sake of REVENUE.

      This phenomenon is probably the very LAST thing that bubble experts of all kinds struggle to “get”. Even some who should know better, such as Susan Wachter, have concluded, far too hastily, that “under supply” was not an important factor in the bubble epidemic after all. Arizona and Nevada are the smart growth apologists favourite exhibits against the “supply side cause” housing bubble experts. Even Randal O’Toole has weakened over this argument.

      • “there ARE markets, especially in Ireland and Arizona and Nevada and Spain, where initial price inflation was followed by definite over-supply that however did not bring prices down for some years, leading to the biggest possible crash.”

        I’m not surprised. I already had Ireland, Nevada and Spain in such a list. Perhaps we can add Toronto, but not Vancouver. The key is to look at rents. From Garth’s blog I have gleaned that rents are affordable in Toronto but expensive in Van. Therefore Vancouver suffers a shortage similar to Oz cities. Prices could still crash, but not down to truly affordable levels.

      • Excellent, Claw, glad you’re so clear, we need more of your kind.

        Yes, rent levels are a helpful indicator if clear undersupply is the problem. But I still think that there is differing indicators in different cycles of bubble markets – i.e. the first cycle they experience after messing with “supply”, MAY still involve rents being left behind property prices, as speculators chase capital gain on almost anything without bothering about tenants, and young people stay at home with their parents or cram into flats together. This latter effect can bury the “undersupply” influence on rent for several years.

        After a first bubble and deflation (which Vancouver already had in the 1980’s and 1990’s) it can be expected that ongoing and worsening undersupply will drive rents up too – Britain has had several cycles since the 1950’s, with shortages worsening every time, and their rents are relentlessly expensive along with prices.

        And markets with ongoing under-supply ultimately turn out like Britain. And I don’t mean London (London is a unique city), I mean Liverpool, Manchester, Newcastle, etc etc. “Rust Belt” plus unaffordable housing (unlike the USA’s Rust Belt). This is the risk for Australia in the long term, if land supply issues are not addressed.

        Markets with price appreciation AND over-supply will have very large price declines (as Demographia shows re Ireland, Nevada, and Arizona). Possibly these price declines will aid recovery, but expect further bubble trouble in future unless they sort the supply side out.

        The Irish reaction so far, as far as I know, has been to say “let’s tighten the restrictions so developers can’t create a bubble again……”

        Completely missing the point. They will hit economic glass ceilings again and again unless they LEARN.

    • HEY, that’s an amazing blog you linked to.

      Nice to discover that there are SOME very sane people still out there in the world. He knows about Aussie too, and Canada.

      His conclusion:

      “……..It is simply mind-boggling that the world is back to blowing massive property bubbles so soon after the U.S. and peripheral European housing bubbles popped and caused such incredible economic carnage. The Western and Northern European housing bubble is proof that we are living in the era of The Bubble Bubble (a bubble of bubbles) as well as an era characterized by the most outrageous arrogance and hubris that humanity has ever experienced. The 2008 global financial crisis should have taught everyone their lesson once and for all, but we are clearly living in a world filled with excruciatingly slow-learners. More punishment is coming our way and will keep coming until we finally learn from our mistakes. Sadly, by the time we learn from our mistakes, it will likely be too late…..”

      HEAR, HEAR.

      And see what he is saying about bubbles in markets other than housing, too. I am afraid he is right.

      http://www.thebubblebubble.com/

  14. Being a Canadian Citizen, living in Melbourne, I can tell you that there is really a “two speed” housing market in Canada. Prices in T.O. and Vancouver are insane. Anecdotally I know of people living in Vancouver who pay so much towards their mortgage that they can barely afford to do anything else! Similar to Melbourne, both TO and Vancouver have huge amounts of foreign (mostly Asian) investors – if you ever go to Singapore have a look at a newspaper and you will see full page property adds for Vancouver High-rises (right next to the docklands ones in Melbourne). On the other hand, in Winnipeg, Manitoba, you can purchase a 1,000 SQ Ft house (plus a basement) on a nice sized block of land, in a good neighbourhood and close to the city for $250,000

    Culturally I believe the biggest difference is the mind-set of the average Canadian vs. the average Australian. Australians are a very confident people (as a generalisation) and for the most part have not even considered the possibility of a housing bubble. Even those who don’t own mostly would if they could afford. Thus it is not discussed as a legitimate possibility in the MSM or in the government, whereas in Canada you are now seeing articles in one of the most highly reputable/read magazine (McLaens), and the concept is openly discussed in MSM and by Politicians – not that everyone agrees. Note ‘openingly discussed; means it is not dismissed out of hand as it is done in Aus by MSM and citizens alike!

    The mindset is the most dangerous thing to creating a bubble (in my opinion) – the longer it goes on without a fair debate in the public domain, the longer the particular belief is dogmatically held!