Canada's Housing Bubble

Nov 19, 2010 Garth Turner GreaterFool.ca

Well, so much for that.

Barely 24 hours after the nation’s realtors, bank-employed economists and sycophantic media pronounced housing had bounced off the bottom, with a triumphant return to, say, 2006, trouble blew into town.

I mean, was it only Monday the TD Bank was declaring peace in our time? “If you’ve ever wondered what a soft landing in housing looks like,” cooed one of the gurus from the economics department, “this may well be it.” Apparently he failed to look outside and count the bodies. He should have. He might have said a less stupid thing.

In recent hours stocks have been chewed up. Gold plunged again. The dollar stumbled. Commodity prices crashed. Bond yields soared. So did the US dollar. This wasn’t in the game plan of those who thought economic shocks were passé, Yankee dollars were going to zero, gold was on its way to two grand an ounce or real estate was in nascent renaissance.

As you may know the latest news is that (a) Ireland fibbed about being okay. It’s pretty much screwed and headed for a debt crisis. (b) This has all of Europe flubbed and could cause a massive plop in the Euro. “We are in a survival crisis,” said the EU Council president. (c) This restores last spring’s debt crisis and now we have to worry about the profligates in Greece, Portugal and Italy again. Enough already. Get a job. (d) China’s overheating and has raised rates once, with more to come. (e) It’s bad news for commodity prices and places with commodities (like us) as Chinese demand wanes. (f) Worried money has streamed into the US dollar, like it always does. That clobbered everything denominated in greenbacks, like gold and our dollar. (g) Yields for US bonds have jumped to the highest level in most of a year as the spectre of a global debt mess rears its unpleasant head.

So what does this mean in, like, Etobicoke or Airdrie?

Only that you should never call a game too early. For example, those long-term mortgage rates which have been inching down – taking a five-year mortgage to less than 3.5% – are on their way back up. (Remember that VRMs are dictated by the Bank of Canada and bank prime while fixed-rates follow bond yields.) So, you might want to get that borrowing done this week…

It also means trouble for a hunk of the Canadian economy, heavily dependent (as is the TSX) on the resource sector. As you know, this has been one of the brighter spots, as soaring commodity values helped wipe away some of the pain of lost manufacturing and export jobs in the wastelands of central Canada.

Mostly, though, it rattles people. Coming two years after all this financial meltdown stuff was supposed to have climaxed, it may remind them what they’ve spent all this time doing. Putting their affairs in order? Paying down debt? Getting diversified and more liquid? Bailing out of real estate at the top, when the bailing was good?

Yeah, right.

Instead, you well know what your neighbours and useless relatives have been doing. Lines of credits, HELOCs and mortgages have gone crazy. Last year people borrowed $41 billion against homes they already owned, for example. Car sales have leapt higher. Savings rates have collapsed. Household debt’s in record turf.

Endless bad decisions have been made by young couples buying houses without money and by the banks which let them use mortgage cash-back funds for down payments. Unemployment’s still at recession levels and household incomes are comatose, and yet people are borrowing and spending like fools.

Why? Don’t they know about Greece and Ireland? The US real estate depression? Ottawa’s $50 billion deficit? The HST? The housing bubble? The recession? Or did they forget the panic they felt in the winter of ’09?

Try all of the above. Most people have had so much sunshine blown up their rear ends they glow in the dark. And it happened again this week, thanks to the economists. The house pumpers. The economists. The politicians. Bereft of possible actions, they know the best chance of staving off worse times is to convince the common folk to borrow and spend, rinse and repeat.

But the more it works, the greater the inevitable.

Hard to say if the next debt crisis will mushroom or be contained. But the lessons should be obvious.

* Be a seller, not a buyer, of housing.
* Pay down debt in a panic.
* Keep real estate under 40% of net worth.
* Own bonds, equity ETFs, preferreds, REITs.
* Max your TFSA in growth assets.
* Worship liquidity.
* Don’t ever be Ireland.