Canada’s bubble goes mainstream

By Leith van Onselen

Friday’s article, Canadian Bubble Trouble, noted how the mainstream media (MSM) appeared to be turning from cheerleaders of the rapid rise in Canadian house prices to warning of a possible bubble and/or projecting falling housing prices.

Over the past few days, the Canadian MSM appears to be shifting into overdrive, headlined by the dire warnings of the nation’s leading current affairs magazine,, which has the following front cover for its upcoming March issue:

Talk about alarmist. “You’re about to get burned… Why it’s officially time to panic”.

The upcoming Macleans front cover ups the ante on Canadian Business’ effort on its January 24 to February 20 issue:

In addition to the above magazines, there was an swag of newspaper articles published late last week and over the weekend warning about Canada’s record level of household debt and the risk of falling house prices.

Much of the latest coverage of the Canadian housing market has been driven by the Bank of Canada’s release late last week of a series of papers examining household debt, house prices, and consumption in the economy.

I read these papers over the weekend, and if you read between the lines, they paint a worrying picture of a nation of highly indebted households that are highly exposed to falling house prices, as well as an economy that is too reliant on unsustainable debt-fuelled consumption.

Some key quotes and charts from the Bank of Canada papers are highlighted below.

First, there’s this quote and chart from the paper on Canadian house prices:

After more than 10 years of appreciation in many parts of the country, house prices have reached a historically high level relative to income and, given the increase in household indebtedness, the exposure of households and the financial system to fluctuations in house prices has increased markedly…

Note the huge run-up in prices in Canada’s bubbliest provence, British Columbia, which is home to one of the world’s most expensive housing markets, Vancouver.

And from the household debt paper, the Bank of Canada notes that the strong growth in overal household debt has been driven by both higher mortgage debt as well as personal debt primarily secured against rising home values (called “home equity lines of credit” or HELOCs). Just like the Americans did, Canadians have been using their homes as ATMs:

As shown in Chart 2, the ratio of consumer debt to disposable income was relatively stable until the mid-1990s when it began to move persistently higher. The predominant source of this upward trend has been secured personal lines of credit (PLCs), which grew at a much faster pace than more traditional forms of consumer credit such as credit card debt. Secured PLCs, which are mostly secured by housing assets (i.e., home-equity lines of credit), have risen sharply both in absolute terms and as a share of total consumer credit. In 1995, secured PLCs represented about 11 per cent of consumer credit; by the end of 2011, this share was close to 50 per cent (Chart 10).

The Bank of Canada paper on household borrowing and spending brings the above points together and highlights the key risks now facing the Canadian economy from falling house prices:

The sizable increase in the ratio of household debt to income in Canada over the past decade has coincided with a period of sustained strong growth in house prices. The main driver of the rise in household debt has been home-equity extraction — household borrowing against equity in existing homes through increases in mortgage debt and draws on home equity lines of credit…

…if increases in household debt are used primarily for spending, a fall in house prices that reduces home equity could decrease household borrowing and consumption (i.e., owing to a reduction in the value of the collateral)…

The evidence indicates that a significant share of borrowed funds from home-equity extraction was used to finance consumption and home renovation in Canada from 1999 to 2010. Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in house prices…

Simulation results suggest that a 10 per cent decline in house prices can generate a peak drop in consumption of about 1 per cent…

These findings suggest that household indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to substantial negative economic consequences in the event of a correction in house prices.

The Vancouver Sun, which published an article summarising the Bank of Canada’s findings, also quoted the Canadian Finance Minister, Jim Flaherty, who warned Canadians that the current level of mortgage interest rates – currently at all-time lows – have nowhere to go but up:

“Interest rates are going to go up. They have nowhere to go but up. So people need to ensure that they can afford higher mortgage interest, for example,” he told reporters in Toronto. “It isn’t necessarily for everyone to have most expensive house they could possibly buy, maxing out the 10-year mortgage they can get from a financial institution.”

Finally, the below video extract from the Canadian Broadcasting Corporation provides a nice quick overview of the issues highlighted by the Bank of Canada:

It looks like interesting times ahead for our friends in the north.

[email protected]

Unconventional Economist
Latest posts by Unconventional Economist (see all)


  1. And Gillard’s first order of business to appease the populace who despise her, is to introduce Australia’s version of Canada’s CMHC…….

      • Quick question, who is Australia’s version of the CMHC/AIG. Less than 20% deposit means you pay insurance on behalf of the bank.

        Who is the big insurer within Australia?

        • We have two main private mortgage insurers in Oz – QBE LMI (used to be American-owned PMI) and American-owned Genworth. Both are prudentially regulated by APRA.

          Remember, the CMHC operates two types of guarantees: (1) mortgage insurance for mortgages over 80% LVR; and (2) the ‘credit wrap’ advocated by Joye and Bouris whereby the CMHC buys pools of mortgages, securitises them and then re-sells them as AAA government-backed securities to investors.

          • darklydrawlMEMBER

            Wow… Plan B (option 2) sounds a lot like what got the US into a lot of this trouble to start with….

          • Yep, the second guarantee they operate is just bad, no matter how you look at it. But I see how it could appeal to a Govt desperate for some positive poll action.

          • Dont forget the captive LMI’s UE; the banking group retains the risk of loans that are insured with a captive LMI.

            I am keen to see how that one plays out…

          • On the whole securitisation thing, currently reading Extreme Money by Satyajit Das and the chapters on this are eye opening.

            We truly are the masters of risk /sarcasm

          • And those who like a chuckle might look at the share price of QBE, a world-class insurer which sailed through the GFC and bought PMI just in time for it to tank.

            The shorts couldn’t (yet) take down the 4 banks, but look at destruction they heaped on QBE.

            Be very afraid, bank shareholders.

            Disclosure: I own ANZ, the only bank doing anything useful (Asia) with its monopoly profits.

            Don’t Buy Now!

          • David – the LMI providers are doing just fine – I don’t know where you get your volumes of misguided information from.

  2. In 2001 we were planning to move to Nelson BC, and a four bed new two story home was approx 168K on the outskirts, and at that time friends in Melbourne built a similar place for 300K and from what I saw not as nice, or good stuff like double glazing. We also looked then at Vancouver and it was similar prices to Melbourne from what I saw, but again I thought much better build quality. We didn’t move in the end as there were fewer jobs in high tech.

    Lucky for us the RBA, government and REIT think were only going to go up, or flatline for a bit. Nothing to worry about hey?

  3. You’ll no doubt be aware that Vancouver is the wet-dream location for many Chinese property buyers, who have been bidding up prices in that area for quite some time. I believe the Chinese (a lot of which Hong Kong money) represent something like 25-30% of buyers in Vancouver.

    • When I was staying with friends there in 1989, this process was already well underway. Chinese would buy an existing 2-storey house, knock it down and build a 3-storey house that covered every square inch of the block they were allowed to build on.

    • Google the words google trends
      Go to the google trends web page
      Enter the search terms Sydney Real Estate
      Drill down the regions to Sydney Australia.

      Look at the pattern of falling interest from 2005 with 1 big blip and then more falling.

      Look at the proportion of searches in Chinese. Its about 35 to 40% of the total from eyeballing the graph.

      Maybe the results aren’t accurate, but they gave me pause for thought!

      • Pretty interesting. Although the absence of any Chinese language searches for ‘Melbourne real estate’ makes the accuracy seem a bit questionable. Surely there should at least be a blip of Chinese language showing up for Melbourne?

  4. One way in which we are different: I can’t imagine the Australian MSM running stories like this. But maybe the same could’ve been said of the Canadian press until recently.

  5. Jumping jack flash

    “if you read between the lines, they paint a worrying picture of a nation of highly indebted households that are highly exposed to falling house prices, as well as an economy that is too reliant on unsustainable debt-fuelled consumption.”

    Wait a minute, where have I heard this one before..?

    • Exactly. The best the MSM can do here is proof-read the advertorials they are handed by their real estate advertising partners.

      Eg I see that Melbourne actions were reported as being over 60% on the weekend. As per usual, there were over a 100 results ‘missing’. Figure that one out. Anyhow, this was branded as being due to a strong and resilient market etc etc.

    • That’s a great link.
      Check out the World Oil Consumption meter at bottom of page.
      BTW – I miss that little car that used to bob up and down at the top of the MB page (I think it was something to do with price of oil). I found it quite amusing (small things amuse small …)

  6. I spent a year in Vancouver on a working holiday in the 90’s.
    It is an absolutely breathtaking place to live (mind u i house shared in a leafy ‘near-downtown’ suburb).

    So it breaks my heart to see current real estate prices there and hear about the Chinese taking over and ruining the atmosphere of the community.

  7. Saw this short doco on previous Canadian bubble bursting at TAE.

    “Watch in the video how quickly that psychological shift unfolds, how ephemeral prosperity can be and how quickly society can shift into long-lasting malaise. Exporting commodities into the teeth of a bubble is not a guarantee of eternal wealth, as modern commodity exporters are set to discover over the next few years.”

    “Canada is vulnerable again, as is Australia, and other exporters into the current Chinese bubble. So are all those who are betting on continued rises in commodity prices.”

    • Er, looks like you have a major bug there MineBot. Back to the RineSoft labs for some reprogramming!