Sunday, April 22, 2012

New Zealand Points at Canada's Bubble

The Kiwis (who are in the midst of a massive housing bubble) would like to point out that the Canadians are in the midst of a massive housing bubble. Neville Bennett is worried a major housing bubble in Canada may cause international distress
I think Canada is in for a terrible fall because it is gripped with a manic fervour for real estate.
Funny the clarity of an outsider. Watching the bidding wars and line ups in Toronto reminds me that bubbles don't end without a) bold intervention (see China) or b) having already sucked in every last possible participant. The explosion won't burn out until it runs out of fuel. Only this explosion doesn't leave behind ash, but debt.
Canada has weakened lending criteria too much. Private debt is huge in NZ and Canada (about 150% of GDP). This degree of debt lowers credit worthiness. Standard and Poors have revised NZ’s Banking Industry Country Risk form Group 2 to Group 3 (with Italy, the US and UK). Private debt also lowers consumption and deepens recessions.
CMHC seems to be highly geared: it had only $11 bln of assets in 2000, and most of its assets now are MBS insured by itself. It seems as leveraged as Fannie Mae which had US$2.3 trillion in guarantees backed by a mere $44 bln in assets as it folded. CMHC is very vulnerable to a small fall in house prices.

Consumer confidence rises when house prices rise. Consumers borrow to expand their spending. In less than 10 years, consumer spending has risen from 58% to 65% of Canadian GDP.

In 2011 homes became ATM’s, and the average homeowner had only 34% equity in their home, a fall from 55% only 4 years ago. Meanwhile, Canadians owed $1.53 for every dollar they brought home. Canadians have pulled $220 bln out of their homes in revolving home equity lines of credit (HELOCs): on a per capita basis, this is about three times as much as the Americans borrowed at the peak of their boom.
I could keep quoting. But I do want to note problems with the graph he cites from The graph compares home price to family income. But it does not adjust for the accelerating income gap in the 2000s that left the middle class with less income relative to inflation. Not more. The US market is still overvalued, not undervalued as that graph shows.

Hat Tip: Epte at VREAA

1 comment:

Fortunate Fool said...


It turns out that this article is, for the most part, greatly inspired and even plagiarized for some parts, from an article I wrote for a european think tank called GEAB called:

"The Canadian real estate insanity, a repetition of the US mistakes – Towards a 15% to 25% fall in prices from 2013
In this anticipation on the evolution of the Canadian residential real estate market, LEAP/2020 shows that the economic “miracle” is nothing more than a mirage, based on excessive private debt that created a gigantic real estate bubble that is about to burst."

Have a look at this link
right column "contents" refers to this article.

If you have an email address you could provide publicly, I can send you a copy of this article.