Canada's Housing Bubble

Apr 07, 2010 Rolfe Winkler seekingalpha.com

So much for Canadian sobriety.

Recently the country’s chief bank regulator was in NYC to take a victory lap about successful bank regulation north of the border. Paul Krugman has argued that Canadian banks are superior to American banks because they are boring.

And yet a housing bubble is clearly inflating, and its cause — big household leverage — is familiar.

The latest news out of Vancouver, where the average price for a single detached home now exceeds $1 million, is that…

…prices have climbed 23.3% in just 12 months, and are now nearly 3% higher than they were before the housing market crashed.

But no one is worried according to Paul Kedrosky:

It’s okay, say local realtors and the like. Because of the economic rebound. And the Olympics. And the warm winter there. Vancouver is different.

Nor is the bubble limited to Olympic-site Vancouver, according to a previous article from Phred Dvorak in WSJ:

Dominic Carrasco first tried to sell his studio apartment [in Toronto] in January 2009. The only offers the 42-year-old massage therapist got were well below the 166,900 Canadian dollars he’d paid for it five years earlier.

Last month, Mr. Carrasco tried again. The condominium was snapped up by the woman in charge of posting the information to the real-estate listing site, for C$209,900, or US$196,003, 40% more than the highest bid last year.

The bubble has familiar causes as Simon White of Variant Perception told me in an e-mail recently:

Canada is very similar to Australia. Both economies weathered the recession very well, so risk-aversion among householders was not impacted too heavily. This was combined with pre-emptive fiscal stimulus in both countries, the First Home Owners Scheme in Australia and the Insured Mortgage Purchase Program in Canada. The combined effect meant that, while house prices declined 30% in the US and down over 20% in the UK, Canada’s house prices barely came off and are close to making new highs. In fact, they are up almost 20% from January 2009 to January 2010.

Household debt to GDP in Australia is now more than the US; and household debt to income in Canada is now more than in the US. All the usual metrics to gauge whether housing is overvalued, eg House Price/Income or House Price/Rent are at levels up to over 30% from their long-run average. These are normally consistent with an overpriced market that is due for a correction; the question is when, as often these things persist for much longer than most people dare to guess.

If Canada’s banks are behaving so responsibly, where are households getting so much leverage?