Macleans: ‘The Canada Bubble’ – “Housing has gotten crazy, it’s a bubble. Prices are set to plunge at least 25 per cent.”

From The Canada Bubble‘, Macleans, 16 Mar 2011.
Read the whole article.
Excerpts –
“[David] Madani, a New Zealander, spent a decade with the Bank of Canada as a forecaster and policy analyst [and is an] outsider with an acute understanding of the inner workings of the Canadian economy. [His outlook] tends to get drowned out amid the Canuck euphoria. Last fall, he joined Capital Economics, a prominent U.K. investment research firm, to cover the Canadian market from Toronto. He says the boom in commodities is due for a reversal. More importantly, Canada’s red-hot housing market has soared into the danger zone. By his estimates, house prices are set to plunge at least 25 per cent, and will drag the economy down with them. “Housing has gotten crazy, it’s a bubble,” he says. “These things always have an unhappy ending, and Canada is not going to be any different.”

All of those benefits have fed directly into Canada’s apparently Teflon housing market. When the Great Recession hit, prices dipped briefly, but quickly rebounded as home­buyers borrowed heavily to get into the market. In fact, relative to incomes, house prices in Canada are now nearly as overvalued as they were in the U.S. at the peak of that country’s housing bubble, notes Madani.

[The] housing boom has also gone hand in hand with Canada’s household debt boom. Over the last decade, Canadians have doubled their consumer and mortgage debt loads, to more than $1.5 trillion. For every dollar of disposable income households earn, they now carry $1.50 of debt, a level higher than in the U.S. That’s a worrying stress point that could undo the high-flying Canadian economy if it hits turbulence—in exactly the same way heavy debt loads left American households exposed. “Canada’s success story is uncomfortably similar to the U.S. success story,” says Robert Shiller, a professor at Yale University who accurately predicted the real estate crash in the U.S. “It might be offensive to Canadians, but we’re like two peas in a pod.”

[After discussion on our dependence on commodity prices]. How secure should we be in assuming the commodity boom won’t turn into a bust? Not very, says Shawn Hackett, a commodity analyst in Florida who has dug into the sector’s long history of booms and busts. He analyzed the 10-year average annual rates of return for commodity prices dating back to the early 1800s. At no time have prices risen as fast and as high as they have over the last decade without being followed by a sharp decline. “If history is any guide, we’re higher than the 1980 top and much higher than the 1950 top,” he says. “Unless we are going to do something right now that defies 200 years of the way the rules of engagement have been in commodities, we’re due for a nasty spill.”

[It’s] Canada’s housing market, and those who have overextended themselves with massive mortgages, that stand to lose the most. The housing sector has become inextricably tied to the broader story of Canada’s elevated standing in the world. It’s a powerful and psychological link, says Shiller, who explored how bubbles form in his book Irrational Exuberance. “Bubbles are mediated by price increases and new-era stories,” he says. Any time you hear talk of a new era—such as Canada becoming the envy of the world, or that soaring commodity prices are here to stay—and it’s used to justify rising prices, it’s a good sign you’re in bubble territory. If a commodity bust does occur, one of the key foundations of the housing bubble would crumble along with it.

Commodities will not have to collapse for the Vancouver RE Bubble to implode but, if they do, it could be an absolute rout. We have ourselves been anticipating another deflationary wave since late last year.
The eventual price drops in Vancouver will be far greater than the headlined ‘25%’, with or without a commodity bust.
For Macleans to dedicate so many column-inches to bearish noises is noteworthy, not least of all from the perspective of sentiment. This may not evoke fear immediately, but it ‘primes the pump’ and puts that many more fingers on sell buttons.
– vreaa

24 responses to “Macleans: ‘The Canada Bubble’ – “Housing has gotten crazy, it’s a bubble. Prices are set to plunge at least 25 per cent.”

  1. A 25% correction would only bring prices for homes in my neighborhood back down to Dec 2010 levels.

  2. The bulls have dragged Madani through the mud in several forums already. It’s like they’re personally offended by his comments…

    • Restaurant Unemployee

      cognitive dissonance

      kill the messenger

      yes, emperor, your robes are cut of the finest material!

  3. Even if prices dropped 25%, that would only fuel even more HAM investing here, which will drive prices up again. I just don’t see prices dropping anytime soon due to this factor. I do agree, it woul dbe nice to see prices from 2003-2004 where westside sfh’s would go for 600-800k on average. It would be nice to have money left over from a paycheck for people who are spending 60-70% of income on housing.

    • Hot money speculators, of whatever origin, will leave the market when prices downturn. They are momentum investors, not value oriented contrarians.
      This action will decrease demand and simultaneously add to supply.
      This is one of the factors that could cause a rout.

    • Ah the old “foreigners will support current price levels” argument. Only someone with the memory of a goldfish could think this time is different.

      Here’s your next line, in case you forgot it: “You’ve been wrong for a decade therefore you’re wrong now.”

      • Restaurant Unemployee

        it’s literally like a hot stove

        the correction has to be painful enough to really burn them, teach them a lesson, (specifically the no-free-lunch-one) and if enough people see that person’s hand melted to a bloody stump with the bone protruding, they may just stay away.

        however, i use the term ‘may’ because it seems that every time we come close to a correction something is trotted out, whether it’s a meme in the propaganda or direct legislation/financial intervention that props it up again.

        on the plus side, we’ll solve the DTES housing crisis – they’ll all be able to squat.

  4. Okanagan Valley is in trouble:

    Building permits flattened out and the construction industry continued to atrophy. At its peak, 24 per cent of the local job market was construction. By last year, the number had dwindled to 17 per cent, and now it’s expected to fall further, perhaps meeting the provincial average of 14 per cent.

    But HAM (Hot Albertan Money) will come to the rescue:

    Albertans, it appears, are the not-so-secret ingredient for economic stability in the [Okanagan] Valley.
    “They’re our Chinese,” …

    And if that doesn’t work, then:

    Wine-fed beef—the three words behind the hubbub—is a concept that may conjure comical images, but there’s more to it than imbibing bovines, Fine was trying to explain.

      • pricedoutfornow

        I agree…it seems like many people have left the Okanagan in the past two years. All those construction jobs…gone. Many of my clients are complaining that they can’t find tenants for their rental properties and basement suites. It’s so cheap to rent there now! I recently saw a listing for a 4 bedroom house (with 2.5 baths) renting for $1400/month. I’m sure house prices are soon to follow down as inventory piles up.

    • As a faux indigene of the HillBillyRiviera with extensive regional ‘boots on the ground’ experience, Bubbly – I can assure you that – bar the post mortem – it’s all over in the Okanagan and has been for over two years. Albeit, KoolAidEffect diminution has not uniformly impacted all actors…

      As for the Albertans? Well, if you’ll forgive me a little analagous cinematic license – here’s how Okanagan RE has worked out for them so far…

    • More seriously, Bubbly – neither Okanagan cattlemen (winefed or otherwise) nor orchardists/viniculturalists are on a ’round-up’ to prosperity…

      [PentictonHerald] – Rancher guilty of neglect

      “Not being able to afford to feed his animals was not a valid excuse for an Oliver rancher at the centre of what is one of the largest seizures of animals in distress in B.C. history. On Thursday at the Penticton provincial courthouse Rudolph (Rudy) Harfman was found guilty of causing injury to animals being conveyed. He was handed a six-month conditional sentence and 30 months probation.”…

      [PentictonHerald] – B.C. apple growers left out on a limb

      “A year ago at this time, Okanagan orchardists were bleeding red ink because the cost of production outstripped the price of apples. Government was urged to help, but nothing of substance ever materialized. Now the situation is even more critical as the cost of growing apples is almost double what farmers pocket (22 cents compared to 12.6 cents a pound). With little capital readily at hand, it may be difficult for some growers to prepare this year’s crop. Some may just pull out their trees and walk away.”…

      • Restaurant Unemployee

        i hope this kills the obnoxiously pretentious wine market.

        since we know bubbles cause the misallocation of resources in society,

        to what extent is the BC wine industry (ahem 75% of grapes being Chilean, of course) the by-product of intoxicated homeowners tipping back a few glasses of chardonnay and thinking all is right with the world?

      • They’re ‘self-medicating’ at this stage, RU… and not without good reason…

        From the same people who brought you StockwellDay… The HillBillyRiviera’s next/aspirant ‘GreatWhiteHope[s]’… A FreeRangeChristian Realtor… or a banker who occasionally dabbles as President of the local Chamber of Commerce. Take your pick.

        [PentictonHerald] – Two more join Conservative race

        “Penticton and Wine Country Chamber of Commerce president Jason Cox and local realtor Marshall Neufeld both announced Thursday that they will seek the Okanagan Coquihalla Conservative candidacy for the next federal election… A political science and history graduate from Okanagan University College, Cox has lived in the Okanagan for over 20 years, working in the banking industry since 2002. The father of two has served on several civic and community committees and worked in Ottawa in a senior cabinet minister’s office. He has also done campaign work with Brian Mulroney, Kim Campbell, Peter MacKay, Tom Siddon and Sue Irvine… Born, raised and educated in Penticton, Neufeld currently serves as one of two councillors from B.C. on the national board of the Conservative Party of Canada. A former parliamentary assistant to Day for two and a half years in Ottawa, he has also been active in the local riding association as chair of its policy committee, riding president, CEO and secretary. Beyond politics, Neufeld has also served as the vice-chair of the Penticton Christian School Board…”…

  5. About 90% of BC red wine is pure crap. Like watered down vinegar. Barrel scrappings. With so many excellent foreign wines at better value, you’d have to be insane to buy local. But we’re aware how BC consumers are insane.

    • Restaurant Unemployee

      well you have to remember that ‘bottled in BC’ means that the wines are actually NZ and latin american wines, so really it’s just marketing.

      why, as a geographical area, are we the idiots of Canada?

  6. A vote grabber! Someone has dropped this line on the internet:
    “after Clark introduces the measures to control the real-estate market in next few months, house prices will drop 10%-20% in Greater Vancouver.”

  7. My cousin, who is dual US-Canadian citizen, recently purchased a nice house in Blaine – with nexus pass, it is not too bad of a commute to his job in Surrey: great family homes for ~150K.

  8. Some one once said, “when China’s real estate collapsed, then our market will too.” This must be it.
    20110321 collapsed building Zhuhai-Guangdong-province

  9. Both red and white are poor quality for the price that BC wineries charge. Of course there is the ridiculous govt markup. Even still, they are asking too much for mediocre wine.

    Much better value in south American Reds and NZ whites.

  10. As home prices in Vancouver rise so will property taxes. The city must be rubbing their hands together, but home owners will have to find some extra part time work to put towards the $10,000 plus per year tax bill.

    • Bill -> Property taxes don’t rise proportionate to the rise in RE prices; they are adjusted according to proportion payable of necessary tax revenue. Thus, property taxes haven’t risen anything like as far or as fast as prices.

  11. The bubble is going to burst in Vancouver. I wish Vancouver had an expert, like Paul Murad from Las Vegas, who could tell you not to worry, that condos are a great investment…..that the city is just in the first phase of
    Manhattanization while giving you great ideas to profit from. Paul Murad knows. HE undertands,

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s