Canada's Housing Bubble

Mar 12, 2010 Garth Turner greaterfool.ca

It has a million people, an average temperature of 82 F, mountain ranges on three sides, a rapid growth rate, and a median house price of $150,000. In fact, the cost of houses has actually eroded in the past year. Last winter (normal February temp, 64 F) the average home was changing hands for $177,500 – 15% more than today. Indeed, prices have crashed $15,000 in the last two months.

And unlike Vancouver or Toronto where a shortage of listings means higher real estate values, in this city the number of houses for sale is on the decline – off 10.5% in a year – while prices crumble. Moreover, mortgage delinquencies have recently doubled, while the number of properties taken over by lenders for non-payment of loans is up 75%.

This city’s moribund housing market is also at odds with the economy, which is supported by a massive university, a famous military base on the edge of town, and companies such as Raytheon, Texas Instruments, IBM, Intuit, Universal Avionics, and Bombardier Aerospace. There are so many optoelectronics companies that the area’s called ‘Optics Valley.’

So, why is Tucson so cheap?

I mean, they have bargain mortgage rates. It ain’t a one-horse town, like Detroit. It’s in a desirable sun belt state. The unemployment rate, at 8.2%, is two points less than the US average, and the same as here.

Paradise, it’s not. Actually, it’s a desert. But why does a house in Toronto cost $450,000; in Vancouver $750,000; and in Tucson $150,000?

The best explanation is probably investor psychology, since Tucson (like Phoenix, Vegas, Stockton or Dade County) is a place where people don’t believe in real estate any more. Sure, there are still multi-million dollar palaces with soaring mountain backdrops, but the average family doesn’t look at a house the way a Canadian does.

Here, we see real estate as (a) a social statement about our inherent worth, (b) a retirement plan, (c) something to lord over your relatives, (d) a ready pool of accessible capital, (e) a perpetual money machine and (f) a place to put the kids at night. In the majority of American cities, houses are in the same category as cars – useful assets which may or may not appreciate in value, and therefore should not be slobbered over.

It’s valuable to bear this in mind. Our two countries share many things. So when the US middle class went delusional over real estate, created a bubble and now – five years later – still reels from the gasbag blast, maybe we should pay attention. Real estate is now judged by 72% of the American population as being a poor place to invest money, Meanwhile last week’s RBC survey showed 92% of Canadians swear to just the opposite.

Perhaps the emotional pendulum swung too far in the States after the bubble burst. Maybe people are just irrational and bitter after being bitten so hard and losing so much. But by the same token, there’s little doubt when 9 of 10 Canadians lust after a house at its highest recorded price, we’re equally nuts.

As I have said before, this basic disconnect between the two countries poses one hell of an arbitrage opportunity. Sell Canada, buy America. Markets here are vastly overvalued as they are vastly undervalued in US. Both have but one direction in which to go.

Dollar at parity? Our national bird should be the vulture.