Canadian house prices have continued to recover, with the Teranet repeat sales index registering a 0.2% increase nationally over April, the second consecutive monthly increase after six straight months of price falls (see next chart).
Canadian house prices have now fallen by -1.2% since values peaked in August 2012, but remain 26% above their April 2009 low.
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The correction has been sharpest in Canada’s third biggest city and bubbliest (and most supply-restricted) market – Vancouver – where prices have fallen by -4.4% since values peaked in June 2012, with prices down -0.8% in April. By contrast, Canada’s two largest cities – Toronto and Montreal – have experienced milder corrections, with values retracing by -1.3% and -0.9% respectively since peak, following rises of 0.4% and 0.5% in April.
In real (inflation-adjusted) terms, Canadian house prices have fallen by -2.2% since peak, with Vancouver down -5.5%, followed by Toronto (-2.0%), and Montreal (-1.9%):
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Despite the recent recovery in Canadian house prices, analysts appear to be getting more nervous. An article published earlier this week in CNBC captures the increasingly bearish mood:
All over Canada there is fear that the country is in a housing bubble that is now in the process of popping. In March, Montreal saw sales decline 17 percent year over year, even while inventory continues to climb. In Ottawa, sales have fallen 16 percent.
The bubble seems fairly obvious, even if it’s existence is still disputed within Canada. Canadian home prices are up nearly 100 percent since 2000. The price-to-rent ratios in major urban population centers are through the roof…
Although Canada has a reputation for having conservative banks—its banks weathered the global credit crisis without any bailouts—low interest rates have fueled a sort of mortgage and borrowing mania. Household debt has risen to a record 165 percent of disposable income. Total mortgage debt stands at $1.1 trillion…
Some of the loopholes people use to avoid the mortgage restrictions are quite extraordinary. For example, although the government requires buyers to purchase private mortgage insurance on mortgages with 100 percent loan-to-value ratios, eHow says this can be avoided just by getting two mortgages, each for 50 percent of the home value.
Canadians are also allowed to borrow against pensions and life insurance policies to fund their down payments. Even credit cards can be used to fund down payments. So it’s very possible that the total housing debt is actually much higher than the official mortgage debt numbers…
Half the mortgages in Canada are government insured, which means that the lenders don’t bear the default risk. The moral hazard inherent in that situation is supposedly addressed by regulation—but as we saw in the U.S., regulations can often be avoided by fraud, guile and financial innovation.
…home buyers are using home equity lines of credit to finance the purchase of their homes. Because the rules for HELOCs are less stringent than those for mortgages, they are able to borrow far more. This essentially means they have floating rate, interest only mortgages. Because they aren’t making principal payments, they can afford much larger mortgages on more expensive homes.
Meanwhile, warnings about a potentially severe housing correction are coming thick and fast from well known investors and hedge fund managers, amongst others. For instance, Steve Eisman, whose adventures shorting the US housing market is featured in Michael Lewis’ book, The Big Short, last week warned that Canadian house prices could crash noting “It’s too late for a soft-landing”. Mark Faber, editor and publisher of The Gloom, Boom and Doom Report, was similarly negative about Canadian house prices, warning that there could be significant depreciation in real estate values ahead.
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Canada’s once famed banks, which frequently rank amongst the safest and most prudent in the world, and the Government-owned Canadian Mortgage and Housing Corporation (CMHC) are also coming into focus. Earlier this week, Morningstar published a report claiming that the banks’ financial health is substantially worse than commonly believed, with average loan-to-value-ratios (LVRs) in Canada similar to what prevailed in the US just prior to its housing bust, with the percentage of loans with an LVR greater than 80% higher for Canada today than was the case in the US in 2007. And with the majority of high LVR mortgages backed by the CMHC, Morningstar also warned that taxpayers could soon be on the hook for billions in the event that Canadian home values fell significantly.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
