‘Everything you need to know about Canada’s housing ‘bubble’’, by Mamta Badkar at the Financial Post [4 Oct 2012] is a noteworthy article, starting with the title. Not ‘Does Canada have a RE bubble?’; by now, the fact of the bubble is a given. All of the arguments in the article are familiar to readers of these and other ‘bear-blog’ pages. It is noteworthy to see them summarized in a national newspaper. Read the entire article. Here follows a point-form Vancouver-relevant summary, for the record:
1. Canadian home prices have been rising for some time other than a brief blip during the the recession.
2. Canada’s homes were more unaffordable in the second quarter than their historical average.
3. This was the second straight quarter in which the cost of owning a home, as a percent of income, increased.
4. Vancouver is the least affordable market in Canada, and Toronto’s affordability also worsened for a second straight quarter.
5. The home price index for Vancouver topped out in May but its still the least affordable city for homes.
6. While lower interest rates could explain some of the rise in home prices, the divergence between Vancouver prices and rents has been very stark.
7. Rising interest rates could send affordability to “dangerous levels”.
8. The sudden decline in home sales is extremely worrisome for the housing market.
“In Greater Vancouver residential property sales are 41.6% lower than the 10-year average.”
9. And it doesn’t help that Canada’s sub-prime market is “booming”.
Canada’s sub-prime mortgage industry is growing and there are $500-billion in high-risk mortgages in the Canadian housing market. That is nearly 50% of the market.
Moreover, the Canada Mortgage and Housing Corporation (CMHC) which insures all mortgages approved by banks, has a legal limit of $600-billion for mortgage insurance, and this limit has already been raised twice since the end of 2007.
“If these high risk mortgages run into problems, the Canadian taxpayers are the ones on the hook for the loss of investment on what could prove to be toxic assets. In addition to the CMHC, the government also insures 90% of the portfolios of Genworth MI Capital and Canada Guarantee. When taking these corporations into account, the Canadian people have over 1T in exposure to insured mortgages.”
10. The debt to disposable income ratio for Canadian households is at nearly 155%. Household debt in the U.S. was at 160% before its economic crisis.
11. The use of Home Equity Lines of Credit (HELOCs) has also been worrisome.
12. David Rosenberg thinks Canadian houses are carving out a top as U.S. homes are carving out a bottom.
13. Robert Shiller is worried “that what is happening in Canada is kind of a slow-motion version of what happened in the U.S.”.
14. Regulators have been changing policies to cool the housing market…
15. Some expect the housing correction will be mild…