Canada's Housing Bubble

Canadian Real Estate:

Canada’s home prices have skyrocketed in this recession. When the dollar was at 97 cents US a couple weeks ago, average Canadian home prices hit roughly $320,000 US – an all-time high. Residential mortgage debt has over doubled since 2002. We will surpass the US in per capita residential debt within the next year. In 2009 alone, we will add 100 billion in fresh residential mortgage credit (equivalent of about 1 trillion in the US on a per capita basis)

The average price of a detached Toronto home has approached $600,000. I have attached a home listed at $559,000. The home is about a 15 minute drive from downtown in an average location. It is clearly overvalued. Yet its more than likely that the property will receive 20-30 bids and finally sell at over $600,000.


The sales-to-listings ratio in Toronto, the fifth largest city in North America, has surpassed the late 1980’s bubble. Moments after that point Toronto’s housing market crashed losing 25% of its value and the country went into a deep recession. Toronto’s housing market took 12 years to recover, and needless to say its recovery was brought on only by a massively inflationary credit environment. That type of credit environment is unlikely to be repeated for a couple generations.

In the greater Vancouver area, our third largest metropolis after Montreal, the average price of a detached home in March 2008 was $921,000. In fall of 2008 the market tanked, but only to find itself growing again in 2009. By September 2009 the average price was back up to $904,000. Average household incomes in Vancouver hover somewhere around the $70,000 mark.

All of these prices are one hundred percent attributable to ultra low interest rates and a government insured credit market. CMHC is the equivalent of Fannie and Freddie and has expanded securitization of mortgage debt to nearly 100% of the credit market in Canada. The government of Canada insures the securities.

The healthy banks in Canada are bragged about internationally since have fewer loans on their books then they did in 2007. This is despite the credit market growing by 30% since then. Why do you think the banks don't want to touch this stuff? Please read CMHC, Canada's Breaking Point

The Bank of Canada has already admitted to a real estate bubble in Canada. Mark Carney, head of the BOC, has threatened to manipulate the mortgage market if borrowers don’t come to their senses.

Carney is not saying that he will institute new regulations to slow the market down. Rather he is saying he will potentially remove the massive stimulus that is CMHC. CMHC mandate is to help provide affordable housing. Yet it has only served to fuel the credit markets, increasing the price of homes well beyond affordable levels.

Some of you might be asking what affordable housing prices look like. Well Texas is a state that never saw a housing bubble. Here is what $349,000 will buy you:

"Gorgeous Home in lake Community, immaculate condition, dramtic entry, 2 story ceiling in formal dining, study can be 6th bedroom downstairs.Tons of upgrade includes double beveled glass doors, plantation shutters, marble floors in most of downstairs, hardwood, upgraded tiles, granite tops in kitchen and master bath, marble backplash, kool-ply roof deck, balcony deck off gameroom, sprinkler system, plus many more, must see to appreciate. Easy access to FM1960, 290 FWY, close to all shoppings." (REMAX - Texas)

The home has 5 bedrooms and 4 bathrooms in Houston Texas. Houston was recently featured in The Economist as an economic powerhouse and surviving the recession quite nicely. Perhaps that's because they don't have all their money tied up in real estate.

Here is another:

These are easy to find. Just go into Google and type Remax and the city in question. Start your search at $50,000  and select 5 bedroom. You'll find hundreds of similar properties.

Canadian Exports under Buy America:

Exports to the United States have fallen nearly 50%, in part thanks to “Buy America”.


In the armpit of Ontario lurks an economic and political disaster. US Steel purchased Canada's largest steel manufacturer known as Stelco two years ago. They made the purchase just after Stelco had received hundreds of millions from Ontario’s provincial government to keep operating. Within days of “Buy America”, US steel shut down the Canadian Stelco plant.

A few months ago the benefits for the laid off workers dried up. The union notified US Steel that they would have to either bring the workers back or retire them and pay out their pensions. The company had no interest in paying out the pensions.

US Steel decided to bring the Canadians back to a make-work project. Instead of making steel they painted all the buildings in a fresh coat of blue paint. If you understand the size of the Stelco plant and buildings than you can understand what a formidable task this was. A couple weeks later all the buildings were blue. The workers benefits have been renewed and they were laid off again.

You'd never know that most of the workers are gone. The steel mill sends billows of smoke the size of clouds up into the air. Neon red flames a hundred foot high burn at the top of the stacks.

I have been told by some locals that the US Steel sends its iron ore to the plant to be refined - hence the flames. Once refined it is put back on the ship and sent to one of their US plants – most likely in Gary Indiana – to be turned into steel. So we get the pollution up here but none of the profits or labour. The government of Canada has taken US Steel to court for $10 million per day for breach of contract.

Only weeks later, the harsh acids rains and polluted air that surrounds the area has already peeled off the blue paint on the building. It is clearly evident that US Steel purchased the absolute cheapest paint possible. This should be evidence to most that they have no intentions of reopening this plant.

Wait until more Canadians find out about this. “Buy Canada’, or more plausibly, “Do Not Buy America” will gain steam. We’re a free trade country by and far, but “Buy America” has been a hard hit below the belt for most of us. Having said that, I would never support a "Buy Canada" initiative.

Deficits:

Ontario is a province with 1/3 the number of citizens as California yet is running a 25 billion deficit. The trend seems to revise this deficit upwards of 10 billion every few months so who knows what the final amount will be for 2009 and 2010.

The government unions make obvious attempts to side with Keynesian economics citing that massive deficits are actually good for the economy. They remember nothing of the hardship that Canada went through in the 90’s when our debt-to-gdp topped 100%, our country went into deep recession, and we lost our triple A rating. Or at least in their own self interest they choose to ignore it.

As an example of this ludicrous spending Ontario has, despite the record deficit, just passed all day kindergarten. The program is a concoction of the teacher’s union who insisted that the all day program shall be taught by university educated teachers. These teachers can earn up to almost $100,000 per year. The program is expected to serve around 100,000 students and cost up to $1.5 billion per year. That’s $15,000 per year per child to receive an additional half day of kindergarten class.


You could argue that education is priceless. But who is to say that shoving children into an all day structured class is good for them? Furthermore, who says that someone who has a two bachelor degrees is better suited to teach young children then say an ECE?

A child needs someone who loves them, who is attentive and keeps a close eye out at all times. They need to play and explore. Furthermore, they need as much time with the parents as possible.

That $15,000 would have been much better spent supplementing parental income so that both parents weren't forced to go out to work. Or perhaps reducing taxes on families. Both parents usually go out to work not of choice but because they don't take in enough after tax income from one person.

Afterall, programs like all day kindergarten cost alot to run and thus require massive taxes to support - making families poor.

As further proof, 15 year old teenagers in Finland lead the world in the OECD's PISA tests. In Finland, children don't start compulsory school until the age of 7.

Between our federal and provincial governments we will run deficits well over 100 billion. On a per capita basis, that is the equivalent of the US running a trillion dollar deficit. This is the fastest and most significant meltdown of our national finances in a single year in history. Last year almost everything was operating in surplus.

Conclusion:

Most recent home buyers believe that inflation is right around the corner. But it's deflation that will grip Canada. It's nearly impossible for Canada to experience inflation over the next decade. With a looming credit collapse, I think most Canadians are in for a real treat.

Thirty years ago we used debt to prop up our domestic economy in response to the deflationary forces of globalism. This credit expansion merely kept incomes stagnant. Please read The Inevitable Collapse for more information.

In the meantime consumers gasped at the resulting inflated, domestically-made products. Smartly they decided to buy cheaper foreign made products. Essentially we borrowed as much as possible to prop up our incomes so that in the end we weren't competitive. All that credit cycled through the global economy until it was sucked up by assets.

Despite what we're told, deflation is a good thing. It brings down the cost of goods and brings down incomes, making us competitive with global competition such as China. Deflation will save jobs.

However deflation poses risks to credit. Since credit is a fixed nominal amount, it does not vary with inflation or deflation. In an inflationary market, credit can be good. But in deflationary market, it's a disaster.

So the Keynesian model is dead wrong. You should never inflate your way out of a deflationary environment. Credit is fixed and therefore an enemy in a deflationary environment. You should do the exact opposite: deflate and default on your debt if necessary.

Most Canadians have thought the odds of a depression are behind them. Unfortunately the risks of a world-wide deflationary depression are higher today than ever before. Depressions after all are caused by an unsustainable credit level in a deflationary environment.

There is no way of avoiding another massive shock to Canada's economy. Credit is expanding at a record rate in 2009 thanks to stimulus. The decisions that the government has made in the past year will exponentially increase the odds of a depression - not reduce it.

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