Canada's Housing Bubble

Jun 20, 2010 Garth Turner greaterfool.ca

As a honking, butt-ugly chain link fence circles the downtown core of the Big Smoke this week, you’d swear it was to protect our most precious assets in their soaring towers.

Rivalling that recent Olympic thing for jingoism, the country’s media and politicians are already praising our banks for sparing us from a US-style housing meltdown. Like this weekend gem, from the Associated Press: “There was no mortgage meltdown or subprime crisis in Canada. Banks don’t package mortgages and sell them to the private market, so they need to be sure their borrowers can pay back the loans.”

No, up here our banks sell all their high-risk mortgages directly to the government through CMHC. That way they can recklessly lend hundreds of billions to new homebuyers without any money or equity at ridiculous rates, and pass all the risk directly to the taxpayer. That sounds a lot safer.

Canada’s a fine country, damn straight. But it’s also in denial when it comes to real estate, which is in the early stages of a bad day. Once again the industry’s working overtime to manage the news. Apparently it’s working.

Days ago, for example, the Toronto Real Estate Board released stats showing sales in June tumbled 20% from last year while listings jumped 21%. Everywhere there’s evidence the market has fallen off a precipice – empty open houses, no bidding wars, stale listings, small forests of For Sale signs. This was confirmed by CREA’s always-suspicious numbers, showing sales dropped across the country and plunged in places like Calgary.

“The pace of existing home sales in the GTA has slowed to more normal levels,” said the Toronto realtors. “The seller’s market conditions experienced during the first few months of the year have given way to more balanced conditions.”

Normal. Balanced. Sounds so… Canadian. Stick that, you G20 economic harlots.

But when was the last time sales plunged, average prices rose and listings exploded in Toronto? Hmmm. Would be the autumn of 1989, just before the market tanked. It would take almost 14 years for the price of a home to recover. Anyone who listened to the industry and bought, ended up GTA road kill.

But wait. Here comes Canwest News. Apparently I have this all wrong.

“With yesterday’s report that home resales are cooling and price increases shrinking, we can finally put behind us the horror of Canada’s great imaginary housing bubble,” says business writer Jay Bryan. “What really happened is that Canada suffered a short, steep drop in home prices as the recession hit late in 2008. This was immediately followed by a steep rebound as it became obvious that the recession’s rock-bottom interest rates represented a rare chance to buy a home cheaply.”

Flawless logic. Except here in pristine, prudish, risk-averse Canada, we did our best to ape the subprime excesses of the States with 0% down (later amended to a mere 5%), variable-rate mortgages destined to reset at higher levels, liar loans, 35-year amortizations which rent rather than repay money and cash-back home loans (so much for even 5% down). And did I mention CMHC, which allows banks to largely ignore the credit ratings of borrowers?

This approach, now envied across the globe, combined with below-prime mortgages giving out essentially free money (loan rates less than inflation), allowed house prices to vault higher 23% in a single year. Now it takes five times the average salary to buy the average house, and in Vancouver that gets only the garage.

So, the swollen US housing market may have collapsed because of lax lending practices and speculative asset inflation. But ours, the product of lax lending practices and speculative asset inflation, is entirely different. Except for the same bits. Like what comes next.

Hopefully we will not repeat the American experience of a real estate correction followed by a tortuous multi-year melt. But then again, why wouldn’t we?

So, for the G20 leaders who are reading this (I know who you are), I’ll repeat my words to Canadians: If you have the bulk of your net worth in residential real estate, change that. Quick. If you don’t have your wealth in a balanced asset allocation, you’re at risk in the volatility to come. If you have cash, you’ll regret locking it away in a GIC. If you do just one thing for yourself in the next 60 days, get liquid. If you are confused, seek advice.

Or, of course, you could join the media.