Blogger From South Of The Border – “There’s no question that Canada’s gigantic housing bubble is going to burst. It’s just a matter of when.”

“There’s no question that Canada’s gigantic housing bubble is going to burst. It’s just a matter of when.
Housing prices in Canada have more than doubled in the last 10 years, and in cities like Toronto and Vancouver, prices are up more than 140 per cent. But the soaring prices have nothing to do with wages which have remained relatively flat during the same period. What’s really driving housing prices is debt. Low interest rates and lax lending standards have created a speculative frenzy that’s pumped up a monstrous asset-price bubble that threatens to crash the economy and send unemployment skyrocketing.”

“We’ve seen it all before, right, in Ireland, Spain, UK, the US and now Canada. And every time, the government twiddled its thumbs while the little guys were ripped off by speculators. 

On May 22, 2012, the Organization for Economic Co-operation and Development (OECD) called on the Bank of Canada to raise interest rates saying that “negative real short-term rates are stoking a housing bubble.” 
Naturally, the recommendation has been shrugged off, as has any attempt to stiffen lending rules to put a damper on speculation. So, what should we make of this? Why are policymakers–who have access to the same data as us– refusing do anything to mitigate the effects of what is likely to be a very excruciating meltdown? 
Could it be that it’s all part of a plan to use the crisis as a means to dismantle the welfare state and reduce Canada to 3rd world poverty? 
Yup. That sounds about right to me.”

– excerpts from ‘Canada’s Housing Market Smackdown’, Mike Whitney,, 15 Jun 2012 The author “writes on politics and finances and lives in Washington state.”
[hat-tip to S, who sent this link via e-mail]

We are in agreement that there is a large bubble, agree it will inevitably burst, but disagree that there is a “plan” to induce a “crisis” and then use it for political advantage. Policymakers have far less control than people imagine. We believe the BoC and the politicians would dearly love to organize a soft landing (they benefit from the status quo, after all) but that they’ll be unable to do it.
Also, in Canada, the little guys have been the speculators, too… every housing market participant has been a speculator.
– vreaa

20 responses to “Blogger From South Of The Border – “There’s no question that Canada’s gigantic housing bubble is going to burst. It’s just a matter of when.”

  1. Ralph Cramdown

    To be fair, the OECD’s recommendation is idiocy given our unemployment rates, and the increases we’d see in them post-bubble. If real estate speculation is the problem in an otherwise moribund economy, do something about the problem with a scalpel, not a grenade.

    Lately, the best course of action for several troubled countries has been to listen to the OECD and do the opposite.

    • Please elaborate on the “scalpel”. I would love to know what you think it should be and how it would work.

      • Ralph Cramdown

        Here’s some ideas:
        – CMHC only to insure 90% of appraised values in bank losses
        – Higher DPs
        – No insurance for investment properties (and audits, so cap gains are actually paid on non owner occupied)
        – market by market insurable property value caps
        I’m sure you can think of more. If the problem is rampant property speculation due to moral hazard, fix that problem, rather than increasing borrowing costs for large and small enterprises in every other sector as well. I suspect the government has polled and discovered that policy directives regarding who should and shouldn’t be able to buy property with the government’s AAA credit rating aren’t popular, either with the general populace or with the interest groups who tend to write cheques, so we get this pussyfooting by OSFI, ostensibly to help the banks.

    • 4SlicesofCheese

      Open question,
      Do any countries have capital gains tax on primary housing?

      • Relaxed & Happy Islander

        The US. The threshold for paying is a gain of $250k+, but then again, they also get to write off their mortgage interest…

      • Ralph Cramdown

        I think the US does, but you can avoid it if you roll your profits into another residence within a certain timeframe(?)

  2. “Policymakers have far less control than people imagine. We believe the BoC and the politicians would dearly love to organize a soft landing”

    Agreed, and suggest national debt is the consideration setting interest rates. Competitive mortgage rates are like…an unintended consequence.

  3. Well it is not often I find myself disagreeing with an analysis of the problems posed by inflated housing prices but today is one of those times. There is a tendency in the blogospere for some writers to generalize a worry and take it out of context to the bigger picture.

    This is a case. Canada, (as a nation) is not in the midst of a housing bubble. The hot spots continue to be specific cities and in particular one city that is so bubbly it is nearly a world record holder. More specifically, the worst aspects of the excess in housing consumption in this country is confined to just a handful of postal codes. It is NOT national.

    A closer reading of the data tells us that nationally prices are just 35% ahead of long term historical norms. The price to income ratio averages 4.75 nationally whereas the long term average is 3.5 times income. Bad yes, but not an end of the world scenario. Indeed, most of the country is still on the lower end of the P/I ratio so I do not foresee any panic in the big picture. Given the diversity of our economy we are still well positioned to withstand many of the shocks that the rest of the world is currently dishing out.

    As long as employment numbers hold within a comfort range.

    We also need to keep in mind that as the cities of Vancouver and Toronto represent over a fifth of the national population (and that is also where some of the greatest excess is being seen) that national averages for the P/I have been skewed higher. Uncomfortably higher due to Vancouver’s influence.

    Two cities alone have fed numbers into the machine that might leave less wary readers with the impression that the whole country is in a massive bubble. It is not.

      • Many thanks Jesse. I found that confirming even if it is out of date. I am not turning into a bull by the way but I no longer harbour the deep concerns I once had where the national picture is concerned. I am also quite doubtful that this country will see the severe drops that typified the US housing collapse. We have trouble here in this country though. I will not minimize it for one minute but as I said in a thread last week, we are the beneficiaries of one of the best advertised bubbles in history. It seems everyone is getting on board to cool it off before the damage is actually dangerous though. From Government to the media to a wide range of analysts and the excellent work of bloggers all over the country…..we have seen tremendous success. That is perhaps the best reward for the effort of talking down the euphoria before it got out of hand everywhere else. So it is a job well done. Well, with the one exception that we lost the biggest patient of all along the way. Vancouver is gone terminal…

        Not much can be done there. Bombs away, I guess.

  4. But employment is unduly dependent on housing. The entire economy has and continues to be leveraged into RE. Since the 2008 it has been explicit government policy.

  5. Whether intentional or not, the consequence of this easy money policy of the past decade will be the impoverishment of the majority of Canadians. As in the 20’s, at the right time, the bankers will foreclose on possibly millions of Canadians. And those who believe that the government will not allow the banks to do this to Canadians, just need to look South of the border. Even after Obama’s repeated assurances to help distressed (and defrauded) home owners, all that has happened is that trillions have flown to banks. Even after the fraud of Robo-signing came to light, no banker was charged criminally and the banks got off with a few million dollars in fine while untold numbers of homeowners were defrauded out of their properties. Mass foreclosures did happen in Canada during the depression, and will happen again. And don’t expect Harper etal. to come to the rescue of Canadians. So is all this accidental that the Govt.s and Central Banks with the best Economists and models at their disposal were unable to foresee the consequences of their policies? I highly doubt it, and if it was accidental, then the politicians would act in good faith and initiate policies that would correct their mistakes. Then Obama would truly have helped the homeowners and not the banks who caused the problem. Then Harper etal. would not have brought in sub-prime mortgages and emergency rates knowing what had transpired in the US. So I have to conclude that this has all been done deliberately with a specific intent in mind, that being the impoverishment of the Canadian Middle Class. Bad times lies straight ahead and RE prices will the least of the concern of most Canadians in the coming years!

    • “…if it was accidental, then the politicians would act in good faith and initiate policies that would correct their mistakes. ”

      I’d disagree on that point. Politicians are more interested in staying in power (and being re-elected) than they are in inflicting short term pain for long term gain. So they avoid austerity at all cost.

    • Ralph Cramdown

      There’s two major problems with your analysis. First, bankers don’t want to foreclose, anywhere, ever. They aren’t good at it in good times, and even six years on in the US they’re still not good at it. Know what’s happening to all those sealed up, unoccupied houses in Florida with the AC turned off right now? And whose interests are served by destroying the middle class in a consumer driven society? Henry Ford didn’t say “I’m going to lower wages so the workers can’t afford my cars!”

      • Banks do staff people who concentrate specifically on foreclosures. Not knowing too much about it, I would think they would try to ensure these people are being optimally used. Reading through a mortgage contract it might come across that managing a foreclosure has entries on the left-hand side of the ledger.

      • Ralph Cramdown

        From everything I’ve read, it ain’t so. Remember, in some jurisdictions, banks aren’t allowed to profit from FC, they have to return any surplus to the owner. Real estate agents are always angry at how banks won’t put any money into FC listings, even to paint, replace carpet or broken fixtures, stuff that gets much more than its money back when really needed. And banks can take a long time to respond when there is an offer. It’s just a cost center in banks, and not a career-path one.

      • I worked for a major bank, in their head office, for a number of years. Banks typically do not have foreclosure specialists, they want the money owed to them and that is it. They are indeed loathe to spend anything to fix up a foreclosure, they just want it gone. The bank I worked for kept the foreclosure list extremely confidential (to avoid low ball offers) and parceled the listings out among many different agents. Any money made over and above what owed and what it costs to sell is returned to the ex-owner. It is not a money maker for the bank, usually just a depreciating asset.

      • The current situation is anything but typical. Looking at historical precedents do not provide much data that can accurately forecast the future. But looking at the magnitude of the DEBT bubble (which is the real bubble), and which is at historic highs in Canada, and the world, what is happening in Greece, Spain etc. will surely come here – very high unemployment and very few social safety nets! Under those conditions, the current bank guidelines for foreclosures etc. will be meaningless. This may not happen tomorrow but will happen sooner now rather than later.

  6. Why would the governments try not allow the banks to do trough the forclosure to Canadians (or to US, Ireland, Spain or any other countries speculators)? There is still the rest of the nations that behaved prudently instead of hoarding the homes in multiple numbers.They willingly participated in a Ponzy scheme, right?

  7. My tinfoil hat thinks the easing of mortgage rules (0 down 40 year) and growth in CMHC was to get Harper a majority. Now that he’s got it, he’s trying for the save. It’s not going to work.

    The quoted blogger is just jaded from watching tragedy in the U.S. turned to a massive power grab. If Harper can turn a housing crash into a political tool to get something else, that would be pretty impressive. He’s going to have his hands full saving his own skin.

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