Sharks circle Canadian housing

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By Leith van Onselen

December’s house price results, released yesterday by Teranet, revealed that Canadian house values rose marginally over the month (+0.1%) to a new record high, with prices also up 3.8% over the year and 30% above their April 2009 trough:

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In real terms, Canadian house prices also hit a new peak, with prices 21% above their April 2009 trough:

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Price performance across the major markets was mixed, however, with solid growth recorded in Vancouver (+0.6%) and Toronto (+0.4%), whereas values in Montreal fell by 0.6%. Price momentum is also strong in Vancouver, whereas Montreal is weakening (see next chart).

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For a number of years now, Canada’s housing market has been the strongest performing developed market, which has also made it the world’s most overvalued according to the Economist, the OECD, and Deusche Bank (see below table).

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Household debt in Canada also continues to rise, recently hitting an all-time high of 164% of disposable incomes, which raises the risk of a disorderly unwind. Meanwhile, unemployment has also worsened, increasing by 0.3% to stand at 7.2% as at December (see next chart).

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With risks clearly building, hedge funds are now circling the Canadian housing market. But the market has looked dangerously overvalued for years and there’s no telling when the market will follow its southern neighbour into decline, if at all.

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Unconventional Economist

Comments

  1. So DB Global are reporting Australia is only 40% overvalued while Canada is 60%?

    The fatalist in me concludes that our property bubble is going to inflate yet another 20% until we catch up to Canada.

    • They’re not entirely dependant on a slowing China.

      Plus, they’re not constantly burning or flooding.

    • Interest rates in Canada can be chased to pretty low levels with a little negotiation. Currently 2.95% with HSBC.

      That would be a driver.

  2. Not only is Can UE rate at 7.2% but it hasn’t been below 6.9% for the last 2yrs!

    What on earth is driving house prices higher?

  3. I spend a bit of time at a ski resort in BC Canada. Last year prices were dropping back to 2002 prices.

    I just had a check of a few websites and it appears things have bounced back to what they were in 2012.

    Lifestyle and holiday properties are normally the first to be sold off in a down turn, so Canada is looking stronger at the moment.

    Things can change and sometimes in a hurry so it will be interesting to see what happens in the future.

  4. The use of averages to history is subject to bubbles in the history. Japan’s history has the 1990 bubble of all bubbles. What if you take that out of the averages if there is no corresponding bubble in other histories?

    A significant part of the increase is due to the double effects of lower interest rates for nearly 30 years. The two effects are:
    1. increasing the PE ratio for houses for investors (capitalisation rates increase/required yield rates decrease so for the same net rental earnings, the price of the property goes up
    2. The lower interst rates mean taht the amount that can be paid of over say 25 years has increased dramatically so the price of the house may not have risen at all in terms of number of years of work that are required at the acquisition date to pay it off at the interst rates at that date.

    In addition people in Australia are often buying bigger houses than was previously the case and they have more facilities so cmparison across time is difficult.

    There is also the impact of greater acceptance of double incomes in determining borrowing capacity.

    Productivity increases from adoption of robotics and IT and globalisation have also reduced, in real terms, the cost of many other items, allowing room for expenditure on better housing (and services)

    Many of these things may well have approached a “zero bound” status so growth from the last 30 years may be a very poor indicator of likely future growth. This might eventually have a limiting factor on prices, but prices will still be supported by the costs (and inflation thereof) of producing dwellings, including of land subdivision.

  5. I know there are several readers on this site, but Garth Turner’s greaterfool.ca site is an excellent read.

    He uses a great expression which I really like: “HAM” for “Hot Asian Money”. He’s discussed Chinese buyers in the Canadian context and he’s not convinced that they’re a big influence, though in this particular case the Australian experience really might be different.

    However many of the other aspects are the same: overleveraged boomers with no other assets, real estate spruikers and untrustworthy statistics, dodgy off the plan condo offers, for example.

  6. Has anyone seen this apparently well meaning think tank, talking about volunteering property value owned, in exchange for cancelling mortgage debt and tax liability?

    http://www.systemicfiscalreform.org/Home/location-value-covenants

    It seems to make sense at first, but one wanders away feeling manipulated and trapped by what appears to be a clever left wing strategy.

    They also claim to integrally fix the banking and monetary problems too.

    Can you believe it?

    • Excellent suggestion and it is good that there is some thought being given to an alternative to the rubbish system we have. Anything that kills the banking system is a fine idea.

      Better than being manipulated and shafted hard from behind by the banks. I like this and from an economic perspective I also like the idea of a land tax.

      Housing policy should reflect the diverse needs of society not just those of greedy and feckless amateur hour investors and narrow interest groups that are leaching of the taxpayer.

      • But name a single bank that forced a mortgage onto a home owner? Blaming banks is for the hypocrite and the blind with all due respect.

        You see, its not the banks fleecing us. Its “WE, The People who are rent seeking”. Get your head around this astonishing, unanswerable, observed fact and start to see some amazing things just fall into place, which our noble academies of learning are there to blind us to.

        These blogs and our professors are only here to stop us thinking about the root cause complicity of The People. Banks are merely exploiting a system The People willingly vote for every time and good luck to them, if the people in general are so ignorant and selfish.

        MeltFund is doing the same, but consider the banks relatively timid and lacking confidence. Not to mention feckless given they allow it to crash every time. But they do listen to professors and are often educated in university of course so no wonder they are clueless about markets.

        A land tax is one of the most evil policies we can imagine. Each time government tried to force it onto the people, across history, (you can even find examples in the bible! and Egypt) there is world war in response -“the temple is burnt down”.

        Those LVCs look remarkably like a mortgage, so we can go with that. But like we say, The People prefer to gamble using the bank system, knowing full well family home owning gambles will make the lives of our children a struggle. So we cannot see them ever being volunteered for.