Canada's Housing Bubble

Jan 2, 2010 Jonathan Tonge  americacanada.blogspot.com

Congratulations Canada. If we haven't passed the $1 trillion mark yet, then we will any day now.

CMHC published the December 2009 Housing Now report and we have an update on where mortgage debt stood at the end of the third quarter.

CMHC reports that there has been a dismal 6.7% year over year growth in mortgage debt. Sure it is about 6% higher then the CPI and about 11% higher than economic growth, but big deal. What am I so worried about you ask?

Well that 6.7% figure is useless. It reflects the near absence of credit growth at the end of 2008 and beginning of 2009. The growth rate in mortgage debt in Q3 2009 is in fact an all time record.

First note that in the CMHC table above the annual and quarterly data is an average over the period. Therefore we need to use some approximations to come up with how much mortgage credit was lent in Q3.

To be generous let's assume that Q1 2009 started the period off with 910 billion and ended with 917 billion which led to the average of $915,635,000,000 as shown in the CMHC table above.

That would mean that Q2 2009 would have started with 917 billion and ended with 927 billion, leading to the average of $922,397,000,000 as shown in the table.
So for Q3 where does that leave us? Well we started with 927 billion and ended with something that led to an average of nearly 947 billion. So it is safe to say that we ended Q3 with at least $965 billion in mortgage debt ((965+927)/2=946).
40 billion in fresh mortgage debt leads us to at least a 12.9% growth rate in mortgage debt.

The fact that mortgage debt accelerated throughout Q3 of 2009 indicates that it was growing closer to 14-15% (annualized) by the end of the period. That's up to 20% higher than Canada's economic growth which stood at -5% YOY at the end of Q3. .
Given  that the third quarter of 2009 saw an increase in mortgage credit of approximately 40 billion and that the last three months of 2009 had record home sales then I'd say it is a safe assumption that by the end of Q4 2009 we surpassed the $1 trillion mark. If we haven't yet, then it is only a few days away. Congratulations.
NHA and Conventional Mortgage Loans Approved

As expected, Q2 of 2009 saw a record amount of NHA and conventional mortgage loans approved (see below). At nearly 75 billion, it beat the 2007 and 2008 Q2 records by about 10 billion.

What makes this mortgage debt more startling is that new home sales are down. So while in 2008 and 2007 saw record new home sales, 2009 did not. Almost all of this mortgage debt wound up in existing residential.

This mortgage growth has led to price appreciations of well over 20% YOY in existing residential even though the price of new home construction fell about 3%. This is a bubble and it will pop.

All tables were extracted from CMHC December 2009 Housing Now report. Please visit CMHC's Publications and Reports section of their website for more information . Click here.