Thursday, September 24, 2009

The second biggest bubble in the world: Canadian housing

A mea culpa is in order. After a good 2008, my predictions on Canadian housing for 2009 are going to be a disaster. I admit it.

However, nothing I have seen to date tells me that the longer term direction of housing in Canada is going anywhere but down.

Due to government manipulation (see this excellent blog posting) which has surprisingly worked and record low interest rates, the Canadian housing bubble has reflated. Reflating bubbles are extremely rare, especially when combined with a stock market crash and a recession. Nonetheless, here we are.

Longer term, the housing market is going to go much, much lower. I believe that this echo bubble is completely nonsensical. Why? We are in a world of deflation, folks. Asset prices, incomes and wages are all either stagnating or dropping. Not just for months but years. Due to this echo bubble, the Canadian housing market has avoided the vicious circle of falling prices that create foreclosures (for now) which create lower prices (California).

However, the amount of debt in Canada is way too high. Despite what has happened to the rest of the world's housing, Canadians still believe that a 4% mortgage with 5% down for 35 years is completely sane. Based on the past decade, they have been correct. When this bubble truly deflates, a very similar experience will happen.

Forget all the explanations of subprime etc.... Those are revisionist explanations and symptoms of the problem. I look at time and price. When time is up on this boom, price will deflate. Canadian prices rose as much or more than US prices, and now for much longer.

Read this G&M article and tell me if it makes sense:

Why, after all the building of the past decade and the unlimited space that we have in this country, is there a perception of a shortage of housing?

The Canadian housing bubble is becoming as bad as the American one. A generational or lifetime high price in housing is happening as we speak and the bears have been capitulated. I plan on writing more on this as time permits.


Patrick said...

Thanks for this post, and the link. I am starting to get very worried about this bubble and what its impact will be on my friends/family who owe (and on me as a taxpayer).

I am shocked that so few people can see this trouble brewing -- from my barber right up to my Prime Minister.

rajasalil said...

Last year, I was expecting the bubble to burst around this time. The low interest rate have prevented it. I have stopped forecasting since future is not transparent until interest rates are correceted. I hope they (Boc) increase it but they might keep it until summer.

CD Rates said...

Canadian Housing bubble is really a worry for all of us. As many of our peers are living there. On the other side during this Bubble one ignored sector is flourishing i.e. - "Rental Accomodation". And hopefully this sector will continue to grow during this recession time.