Canada's Housing Bubble

Apr 12, 2010 Garth Turner greaterfool.ca

It was a perfect media moment.

Interviewer: The price of a SFH in Van has recently hit $1 million. Doesn’t that look like a bubble?

Bob Dugan, Chief Economist, Canada Mortgage & Housing Corp: “Well we’ve certainly looked at the question of a bubble and we haven’t been able to find any evidence yet of housing prices being out of line with fundamentals in any of the markets in Canada. Price growth has been fairly modest overall… in a longer term context”.

There is news in this nugget. First (of course), Mr. Dugan is either lying or an idiot. Neither seem great creds for the position of chief economist of a $600-billion corporation. Second, the fact this statement went unchallenged tells you a lot about our media, and BNN in particular. Third, this could be California, circa 2005, as the head economist of the National Association of Realtors denies a bubble which would soon eat America.

Fact is, no ‘fundamentals’ support an average seven-figure single detached house price in any Canadian city. By every international measure, Vancouver’s grossly unaffordable. To buy there takes almost 10 times a local family’s annual income, with home ownership now consuming more than 70% of all disposable income.

Worse, mortgage rates are going up. Taxes, too. The provincial government is bleeding red ink, ensuring fewer services and more levies. Meanwhile family incomes have flatlined, job creation everywhere is stalled, and house values have just increased by 20 times the inflation rate in one year.

The bubble in Vantown, like Cowtown and Hogtown, is the direct result of two things (neither of which are ‘fundamentals’): emergency interest rates and CMHC. One has made mortgages so cheap house prices can soar, while the other has encouraged reckless lending to buyers without money.

How will this end? As it did after industry talking heads reassured America there was nothing to worry about.

By the way, close to 20% of Tampa Bay homeowners haven’t paid their mortgages for at least three months. One in four American families with a mortgage are under water – owing more on their homes than their houses are worth. Prescient Yale economist and forecaster Robert Shiller is warning of a new dip in housing prices across America after May when federal incentives run out. Much-watched commentator Mike Shedlock says Ontario’s bubble-trouble economy rivals that of California (where some properties have lost 70% of their value). And Americans are being told now to buck up for a ‘sustained period of rising interest rates’ which will kneecap housing yet again.

So, Bob Dugan, aren’t ya just a tad concerned?  Do you think it might be prudent to be using media interviews as a chance to talk down a dangerous market? Send out a signal to all those newbies now rushing to buy before mortgage rules tighten a little in six days? Or how about firing off a warning to those big banks which are now luring first-time buyers with the crack candy of cash-backs on their fat new mortgages?

CHMC, as you know, insures most high-ratio, high-risk home loans in Canada – protecting the lenders against defaults. So, in essence, taxpayer resources are used to take the risk out of lending to risky borrowers. CMHC’s debt ceiling has exploded higher, and now rivals the country’s national debt – all so tens of thousands of new buyers can ‘own’ homes through the use of extreme leverage. It means any housing price correction of 20%, 15% or even 10% would wipe out their equity.

Even in Van. On $1 million houses. Or Toronto, where recent bidding wars have caused some homes to sell for $150,000 over the asking price.

In the House of Commons on Monday, MPs should have been calling for Mr. Dugan’s head on a stick.

But Helena beat him to it.

No bubbles here.