Canada's Housing Bubble

Jul 01, 2010 Garth Turner greaterfool.ca

You’ve gotta hand it to the US media. Once they get their teeth into a story of deep public interest, there’s just no mercy.

Brangelina. Lady Gaga’s dangly bit. The Canadian Housing Dream.

As mentioned here a few posts back, the myth is building fast that Canada embodies everything which could have saved the American middle class from the liquefaction it’s now going through. This was goosed along by the recent Toronto summit, which proved we have world class thugs, cops and real estate values. Bored with smoke and flames, inured by a lack of political news, US reporters fanned out to discover why houses cost 250% more than in, say, Nashville.

The result was a textbook in why journalism’s in a death spiral. Last week I parsed an Associated Press story which featured an interview with a typical Toronto homebuyer who stated, ‘we don’t like leverage’. So, he’s putting down 40% and will pay off his house with a mortgage amortized over 15 years. Turns out he’s a corporate mergers and acquisition lawyer, partner in a prestigious firm, and likely making 200 large.

Not exactly typical at a time when the average downpayment is just 6%, the average mortgage for 94% and the most popular home loan term is 35 years. But it did support the theory du jour that in Canada, it’s different – exactly what the industry would like to believe.

But that was just media foreplay. CNBC’s property babe, Diane Olick, has now delivered the definitive Canadian snow job, published and broadcast just hours ago.

This time the story hangs on the experience of one typical Toronto seller, who unloaded his property in one day – stunning to American homeowners whose houses now languish for months on the market. But, it turns out the average Torontonian is Lloyd Atkinson, former chief bank economist on Bay Street, whose North Toronto home is in a hugely sought-after area.

However, the ignored bit of info is irrelevant to the story’s three main points: While US lending standards were being flushed away with subprimes, “Canadian standards never swayed.” Second, three-quarters of all loans Canadian banks make remain on their books and are “not securitized”, so lenders are more cautious. Third, it’s a cultural thing – like people kissing with their noses – “in Canada buyers are more conservative.”

To support this thesis, Olick interviewed an economist from a big bank (which still makes loans without income verification), the country’s top house-flogger (LePage boss Phil Soper) and one of his glitziest agents (who sold Atkinson’s house).

Now, Canada is not America and Toronto is not Chicago, but greed and house lust are just as pervasive and destructive here as they were in pre-crash USA. They caused banks to lend to people without money at teaser rates destined to rise. They created a house mania, fueled by cheap money which indebted the middle class and encouraged by a government that spent tens of billions buying up dodgy mortgages from the banks. And as for the conservative culture in Canada, we have been merrily paying between 5 and 10 times income for houses when the US market collapsed at a more modest level.

The only real difference is that we’re apparently r-e-a-l-l-y slow learners. After watching the American real estate market implode in 2005-6, then suffer radiation sickness for the next five years, we seem destined to rinse and repeat. Now ever-cautious Canadian households match those to the south in terms of consumer debt, a flaccid savings rate and stagnant incomes. Tapped out and living in houses never worth more (or with larger mortgages), we’re as exposed as the cock-sure property bulls who snapped up houses in Phoenix or Miami circa 2004.

But whadda I know?

I’m still in shock over that dangly thing.