Canada is one of the few Western economies to have rebounded strongly from the Great Recession.
Indeed, in some ways it’s as if it never happened. Annual output has surged above the previous peak in 2008. The trade surplus in December rose to a three-year high. And all the jobs that were lost during the downturn have been recovered.
What’s more, Canada has managed to pull this off without spending money like mad. This year’s government budget deficit (the shortfall of tax revenues against state spending) will only be about 2.5% of GDP.
And in fact, the final figure looks set to be even better than official forecasts. Compared with the near-double-digit deficits that seem the norm these days, that’s quite remarkable.
There’s just one problem. The country has been inflating its own massive housing bubble. This could undo all the good work done elsewhere – and present smart investors with some profit opportunities…
Canada’s House Price Bubble is Set to Burst
House price mania has been a major feature of the global economy over the last ten to 15 years. Canadians joined the party several years later than their counterparts in other Western countries. The early-1990s recession was still taking its toll on the country’s dole queues, and also on its domestic property market, right through to the middle of the decade.
But as interest rates tumbled, Canada caught the bug just like everywhere else. And how. The ‘real’, i.e. inflation-adjusted, price of the country’s homes has increased by an average of 85% since 1998.
Sure, house values stagnated at the height of the financial crisis in 2008. But by 2009, property prices were back on a roll, rising by almost 20%. Canada’s current housing boom has now become one of the longest lasting in the world, says the Bank of Nova Scotia.
Indeed, Vancouver is the second-least affordable city anywhere on the planet, according to the annual report from the Demographia International Housing Affordability Survey 2012.
Like every other housing bubble, it’s been inflated by loose credit. Canadian household debt hit a new high last year. The average borrowing burden of Canadian families now stands at 153% of disposable incomes, according to Statistics Canada. To put that in context, that’s almost as much debt as US households had taken on at the peak of their own housing bubble.
In other words, the warning signs are everywhere. Canada’s housing market is plagued by “overvaluation, speculation and over supply”, says Merrill Lynch. The Economist conducts a survey that compares house prices with the rents that property owners can charge. On this basis, Canadian residential property is overvalued by more than 70%. Even the central bank admits there’s a problem.
In short, the country’s property prices won’t be able to defy gravity for much longer. Canadian lenders, including Toronto-Dominion Bank last week, are already lifting home loan rates to try to cool off the housing market. That’s seen prices start to drop in some areas – and there’ll be plenty more of that to come.
Why? Because despite its great recent export performance – boosted by a nascent recovery in the US – Canadian economic growth is slowing down. Unemployment is on the rise again.
That means that even if the Bank of Canada can keep interest rates at their current low levels, Canadian households have no scope to take on any more debt. If the dole queues get any longer, many homeowners may struggle to keep up with their existing payments.
What’s more, as we’ve written about several times, the omens for commodity markets this year aren’t good. If China really does slow down as much as we expect, raw material prices could be set for a lengthy period in the doldrums.
As we explain here, the Baltic Dry index of shipping rates is also pointing to a drop in demand for raw materials. Again, this would be bad news for Canada’s export-driven economy. In turn, that would hit the country’s housing market even harder.
Sounds familiar? If you’re a regular reader, it will be. Because we said something similar about Australia’s housing bubble recently. And with the housing bubbles set to burst in both countries, our advice is along the same lines.
A country’s – or region’s – currency is a useful barometer of investor confidence: just look at the eurozone. The Canadian dollar (CAD) is also known as the loonie (after the picture of the common loon bird on the reverse).
As markets begin to ‘price in’ what slower Chinese growth really means for commodity prices, the loonie is likely to come under pressure. A housing market crash would drive it down much more.
David Stevenson
Associate Editor, MoneyWeek (UK)
Publisher’s Note: This article first appeared in MoneyWeek (UK)
From the Archives…
Picking the Big Investment Story for 2012
2012-02-10 – Kris Sayce
Attention: If You Have Australian Bank Stocks – Sell Them Now
2012-02-09 – Kris Sayce
Why This Bearish Indicator Means it’s Time to BUY Stocks
2012-02-08 – Kris Sayce
Why The RBA Uses The Terms of Trade Indicator… And Why You Should Too
2012-02-07 – Greg Canavan
Why the US Unemployment Rate is a Slippery Statistic
2012-02-06 – Dr. Alex Cowie
February 15th, 2012 at 3:19 pm
Well that’s where you guys and every other “expert” from overseas just keeps getting it wrong. Countries like Canada, Australia, Brazil, South Africa, and other mining centres have housing prices overvalued by around 10% because of the mining boom, and that will correct over time in a manner quite unlike the other failing economies in Europe etc, or it will over correct if the boom halts suddenly.
Canada is NOT in the midst of a crash – just a correction.
http://online.wsj.com/article/BT-CO-20120213-711999.html
You didn’t learn your lesson in 2008, you didn’t learn in 2009, again you were wrong in 2010, and yet again in 2011.
At the end of 2013 you will have a double hat trick of wrong calls, and drood will owe me more mars bars than his credit card can handle.
Buy shares in Mars Confection – they will go through the roof in 2013.
February 16th, 2012 at 12:17 am
Clearly, the only way to get a job at MM (whether it’s UK, Aus, US) is to be able to write a story about a housing bubble somewhere in the world. At a rough guess, 30% of their stories in the last 3 years have been about this and judging by the lack of comments, most people have got tired of this repition and gone elsewhere.
How about some suggestions going forward.
We have an acute shortage of rental accomodation – particularly in the cheaper end of the market. What’s the solution? NRAS hasn’t worked and Government housing has waiting lists of 5-8 years. Meanwhile landlords around the country who bought pre 2004 are reaping great returns on their property investments (me included).
For the time being, investors have stopped buying properties and the rental squeeze will get worse in the coming months and years.
Perhaps the Labor Government should consider is to encourage investors to get into property so that – 1) the upward pressure on rental values is eased and 2) public housing is reserved for the genuinely needy.
This can be done quite easily with stamp duty and land tax relief.
However, I can hear the naysayers now – “those greedy bastards will just pocket the tax and keep the rents up”. But it is a supply and demand issue – more supply = more competition = lower rents.
February 16th, 2012 at 8:08 am
DM to get a job at MM you need to be a clone of Bill Bonner and the bible is the Empire Of Debt.
Bill Bonner never stops talking about gold and silver how hyperinflation is going to wipe out savers.
MM Australian is always screaming buy gold but a Australian investor has done poorly if you take into consideration loss of interest yeild and strong aussie dollar over 10 years.
American investor has done very well in gold zero interest rate yeild and US dollar has crash.
As for property you need to go by postcode if you brought in the Gold Coast you have massive losses also coastal tourist towns property is falling.
However if you brought near a major city with employment your returns would be very good.
My next call is Australian will suffer high unemployment and the underbelly of no major manufacturing base will surprise most Australains.
This will be a cause of a property crash high unemployment not rising interest rates?
February 16th, 2012 at 8:44 am
TRB
What about the Ranga (er KRudd) and her magic wand.
0% interest rates
Concessional tax depreciation allowance on assets
Cash splash
Stamp duty relief
Fhog
Subsidies to industry
Stimulus on shovel ready work
Less foreign workers (eg 457)
AUD debasement
Increased government employee no.
I could dream up more.
Any way what would you say constitutes high unemployment?
7%?
House crash? Further 20%?
It would be good to see a graph of the 1987 market crash
Till 1997 along with unemployment and AUD/USD and. House price index and even baltic dry etc (and what ever might be relevant like deficits) and compare that to say 2007 till now.
What would also be good, is to mark spots on the graph regarding govt interference.
February 16th, 2012 at 10:04 am
MM world has changed since 1987 we have massive competition from Asia with cheap labour and no whingers.
In Australian labour costs are too high, time you pay superannuation of 9%, work cover insurance and penalty rates our labour costs are through the roof!
Job losses are happening because you can get it cheaper in Asia without the spoil Australian whingers wanting more money for nothing.
As for a crash I’m not extreme saying 40% fall everywhere some areas will hold up well depends on the postcode and employment dynamics.
Example a tourist town or mining town with high unemployment could see 3o% drops .
MM no amount of taxpayer money will stop the cheap dynamic labour from Asia sending Aussies on the dole line.
As for government intervention the liberal party will have a field day, already this wasteful and useless government is spent enough of taxpayers money on overvalued properties.
Government can sell it’s school halls the size of a garage for $200,000 each that will keep the ranga budget in balance.
February 16th, 2012 at 10:16 am
Fair enough TRB.
If this down turn is unstoppable like late 80′s early 90′s (i still remember seeing all the shops with signs saying “To Let” (not to be read as Toilet)), then I guess I’m saying the Ranga will do all that she can and take us further down the tube.
I’m sure caucus has been discussing the situation at every opportunity.
February 16th, 2012 at 1:30 pm
“Countries like Canada, Australia, Brazil, South Africa, and other mining centres have housing prices overvalued by around 10% because of the mining boom…”
Only 10%, now that is a very imaginative take on the housing bubbles in those countries.
Try adding another zero and you may be closer to the truth.
February 16th, 2012 at 4:40 pm
pf,dm, what caused the property bubble in sydney in or around
2002,wasnt that correction 30-40%.oh thats right australia is
different,cant happen here lol.
February 17th, 2012 at 6:43 am
David – Australia is in a different cycle to the USA, Ireland etc and our economy has totally different drivers.
If you can’t see that then you are driving with your eyes closed, and YOU will crash.
February 17th, 2012 at 7:09 am
What are the drivers PF?
High wages ?
High debt levels?
High commodities?
High real estate in China?
High employment in resources and healthcare?
High levels of retail buying on the internet?
February 17th, 2012 at 7:32 am
Peter
What do you think about new entrants into the market. Specifically youth.
Youth unemployment is very High. Under 25′s must be in the 20% range. Someone can correct me.
How can they support high prices. Particularly on the wages they’ll receive once employed.
That’s been my concern all along. Mostly from a moral stand point. Govt policy which makes property seductive has in fact priced youth and low income earners out of the market.
Failing 0% rates and more interference, a kid doesn’t have a chance.
I work with lots of young people. They don’t have two 20 cent pieces to rub together. I’m talking about 25,28 year olds specifically.
If we look for govt to help out again, then well have a group of voters that might turn against the major parties.
February 17th, 2012 at 10:10 am
The only difference between here and abroad is that most other countries have realised that they must lower the value of their currencies in order to do business.
It doesn’t matter how much resources you have if you cant sell them.
Australia crows about the strength of the dollar and how that demonstrates a strong economy but when the rest of the world recovers we will be in deep doodie.
February 17th, 2012 at 10:16 am
As for high house prices , negative gearing was the big mistake and that will only be rectified when the young rebel.
If we keep screwing them do you think they will look after us in our old age?
February 17th, 2012 at 10:34 am
I tend to agree with Drood.
Our wages are high and uncompetitive because of the exchange rate.
Previuosly our wages got (nominally) high, due in part to easy money creating many transactions (sales) with many fees (think finance) attached to them and or each transaction had a healthy margin (think retail and export) to the point where high wages claims could be made, but we were able to balance that with a week dollar (vice versa).
Now the dollar is high and so we are seen as an expensive place.
February 17th, 2012 at 11:34 am
We either allow prices for assets and prices for wages to adjust or we meddle.
I reckon we’ll meddle. RBA so far trying not to meddle.
February 17th, 2012 at 11:44 am
M&M @ 11 – yes prices are high. It’s never been easy for the youth to buy a home – no one has a god given right to own a home.
Some generations have been born into famines, depressions, world wars, nuclear holocausts in Japan, extreme poverty and debt inheritance in India, high interest rates.
Some generations have an easier road, and some harder – no one can do anything about the times they are born into, good or bad.
Would you be better off in Syria where I assume house prices are not high?
Gen X look at the Boomers and envy their lot, but some guy in Bangladesh will look at our Gen X and envy them.
Boomers expected the world to end in a nuclear war, so they partied hard – but the world didn’t end and they had to change direction to make up for lost time. What do you think the unkempt hair, disregard for authority, and music was about?
“Eve of Destruction” and “Whoopee we’re gonna die/fixin to die rag” – they will be on YouTube.
I’m looking at a deal for a 27 year old right now – ordinary job – mining spin off, but not mining – he earns $120,000 plus – single no kids – how hard do you think life is for him?
Ask me about the meaning of life – it’s an easier question.
February 17th, 2012 at 12:09 pm
Peter – I’ll just focus on the 27 year old….
I know some girl’s that might be interested in meeting him.
Hooking up, is the meaning of life!
February 17th, 2012 at 12:28 pm
HA Ha Ha – well yes, procreation probably is.
He seems to be well looked after in that department.
February 17th, 2012 at 4:37 pm
PF… good job most people don’t think like you. Nothing would ever change.
As for most people not having a right to a home, they did once. Land was everyones , water was free ( and clean) and food was yours for the finding. Now you can,t even walk down a riverbank as someone thinks it’s their god given right to stop you.
All it takes is for people to realise what true freedom is. Australians had it only 300 years ago.
February 18th, 2012 at 10:54 pm
PF: Re: “It’s never been easy for the youth to buy a home – no one has a god given right to own a home.”
Are you really the kind of guy that believes, “Well I had it tough so everyone else also has to have it tough”? Haven’t our youth got more important problems to solve than how to put a roof over their heads?
There is absolutely zero excuse for home ownership to be so difficult in Australia. There is zero reason for our youth to need two incomes to pay for something that was once paid for with one income. We have supposedly had “boom times”. We’ve had bugger knows how many years of relative “peace” time. We have had a good education system and a mammoth amount of local resources. We have technology way beyond what our parent’s had. Hard workers are a dime a dozen – I’ve seen factories full of them. So if none of that is enough to make homes affordable, then what is? If this is how we cope in times of boom and peace, how the hell will we cope when a downturn comes?
“No-one has a god-given right to own a home”??? What kind of statement is that? You may as well say that no-one has a right to live either. You can live under that belief system if you wish, and if so then you deserve the consequences.
Sure no-one has a “god – given right to own a home”. But if a week’s pay is not enough to keep you alive for one week, why work? If an honest cop can only survive by being homeless, what’s he going to do?
Do you really have so few brain cells? Or is it just more profitable to keep some of them turned off?
February 20th, 2012 at 3:02 pm
Has anyone ever looked at the spending habits of the youth and their priorities? With gadgets, coffee, night-outs and drinking sprees— it is not about how much the young generation is earning, but how they are taught to manage their money wisely.
February 20th, 2012 at 9:37 pm
No Trading Coach. I did none of that stuff when I was younger. I worked my guts out, stuck to a budget, paid all my bills on time, and wondered what the hell I was doing wrong and how the other half survived.
I often contemplated taking up drinking and smoking, just so “I could quit and save all that money”.
Maybe there are young people out there living like there is no tomorrow but I don’t give a damn about them. When those who do the right thing have something to show for it, the slackers will see what they’re missing out on and fall into line with zero extra effort. As it is, there are plenty of good people working their guts out for nothing, and the slackers laugh at their foolishness.
February 22nd, 2012 at 7:24 am
I want another cash housing bubbles. Plz give me details give me reply.