Canada's Housing Bubble

Jan 07, 2010 Garth Turner greaterfool.ca

In the cold, barren, frozen city of Ottawa, where it’s also quite cool this time of year, 2009 ended on a high note for houses.

Sales were up more than 7%, and prices ahead 5%. Why?

The action, says head realtor Pierre de Varennes, came ‘when Canadians realized this country didn’t share in the subprime mortgage woes of the US, and was in better shape than most when those problems helped trigger a global credit crisis.’

Really?

Meanwhile Royal LePage’s Phil Soper’s been out harvesting headlines again with his company’s prediction prices will continue to rise. ‘Appreciate significantly during the early months of the new year,’ he says. In fact, LePage claims Vancouver prices, for example, will be 7.2% higher in 2010, which would add another $66,000 to the value of the typical $920,000 standard two-storey boring house.

Now, I actually happen to agree with my buddy Phil. Prices will go up some. How could they not? Everyone knows mortgage rates will be higher in September than in February, that minimum down payments may rocket ahead to 10% in March and the HST is coming in July. What normal, house-lusting hormonal young couple still able to fog a lender’s mirror would not go out and buy before this stuff hits?

And what sane homeowner every remotely thinking of selling wouldn’t list in the next six weeks? I mean, this is the top of the mountain. The only direction for the Sherpas now is down.

More interesting in all this is the persistent claim Canadians – especially our realtors, lenders, seller and buyers – are different from those to our south. ‘Subprime’ now seems to be code for ‘Americans’, and it is a grossly unfair slur. After all, we’re just as bad. And that leads me in a moment to a conclusion.

US buyers got in trouble by paying too much for houses that were considerably over-valued. Just like we’re doing. Many of them were lured into home ownership simply because teaser interest rates allowed them to qualify for purchases that normal financing would not. Yeah, just like us. American mortgage lenders allowed some buyers to get financing without verification of their income. Just like the CIBC and others do here.

US homebuyers were able to secure properties based solely on their cash flow, without having to come up with down payments. Just like Scotiabank and TD Canada Trust practice here (and others). In the US, mortgage lenders were open to giving money to equityless buyers at the very lowest rates, because the loans were guaranteed by government entities. Wow, just like here. It encouraged record amounts of mortgage loans that were high-risk and high-ratio, like in Canada.

But mostly in the United States the Subprimates were told that real estate was an endlessly good investment whose price would continue to rise, which meant their debts would shrink by comparison. Kind of like here, right Phil? I mean, if the average Vancouver house is now guaranteed to go up $65,000 in a year (must be true…it was in the newspaper), then what fool would not buy it with nothing down, sell and make sixty grand?

My conclusion: When this is all over in a couple of years, Bay Street may not lie in the same ruins that housing left Wall Street in. There are differences in institutions and we did learn something.

But the hurt caused to families will take a generation to heal over. Middle-class households have been forced to commit a seriously greater amount of money to housing which they’ll likely never get back. Recent young buyers have been put at risk of being wiped out, starting over. Parents have diverted tens or hundreds of thousands into shelter instead of their kids or their future financial security. The debt of an entire nation has been plumped for assets that will only shrink.

There will be lots of blame to go around. Subprimers all.