Canada's Housing Bubble

Nov 30, 2010 businessinsider.com

A Canadian housing bust

"We remain concerned that Canada experienced some sort of housing bubble in 2009 and into 2010. We are worried about looming default risks but have been pleasantly surprised by the fact that the real estate market has eased, rather than busted. Be that as it may, a more pernicious turndown in real estate values cannot be ruled out, especially if the Bank of Canada follows the market and resumes in its rate-hiking program early next year. As it stands, the Teranet-National Bank House Price Index (HPI) deflated 1.1% in September – the first decline since the depths of despair in April 2009. Some cause for pause."

Canadian household leverage is worrisome

"Canadian household leverage — debt ratios are as high as they were in the U.S.A. at the peak in relation to income (the debt/asset ratio for now looks better here). This is a longer-term concern, especially if interest rates were to be raised further in the future. I see this is a very big intermediate-term concern for the consumer spending outlook."

The weak Canadian economy

"Lack of productivity growth in Canada. This is a key source of debate — but we contend that the U.S. data are overstated and the Canadian data are understated. How can we be a productivity laggard when we have practically the same underlying inflation rate as the U.S.A. with a comparable unemployment rate that is nearly three-percentage points lower."

The Canadian dollar is overvalued

"The Canadian dollar. In our view, it is still overvalued by a nickel even with the recent firming in the commodity complex, though strong international capital inflows are providing a very firm floor under the loonie. That said, the Canadian dollar is impeding growth in the local manufacturing sector and clearly dampening domestic export competitiveness — Canada’s record current account deficit attests to that view."

Currency wars...

"The perception a month ago was that Bernanke was aimed at debasing the U.S. dollar. Some emerging market countries have already slapped on quasi capital controls. China still refuses to allow its currency to float more freely. Japan has intervened to reverse the yen’s strength, with some moderate success. Australia just stated that it is contemplating reviews of foreign investments into its rural economy and food products sector. This follows the Canadian government ruling over the Potash file. President Obama failed to secure a trade accord with Korea last month too. So the trends toward globalization not only has stalled but may be reversing and this means: (i) government procurement, (ii) disruptions of global supply chains, and (iii) possibly trade wars. All of this is very positive in terms of establishing a floor under resource prices and should also add some lustre to precious metals as a hedge against any resulting “cost-push” inflation pressure."

Source: Gluskin-Sheff