Spectator Sports

It ain’t exactly the Super Bowl, but waiting for Canadian real estate to crash is now a US spectator sport. I mean, listen to this: “It is clear that the Canadian housing market has undergone a debt-fueled asset price inflation.” Such a statement is worthy of this pathetic blog (where it can be safely ignored, like John Baird), but it takes on a new import coming from a global investment site which (horrors) horny Asians might read.

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In fact, the Canuckistan housing melt is big news. Last week Bloomberg was the first to pounce on documents released by the bank regulator in Ottawa throwing up alarm over Canadian subprimes, condo dangers and the exposure of lenders to meltdown. Then The Economist magazine estimated prices here could be too high by a riveting seventy per cent. Now the Wall Street Journal has jumped on the exposure Canada’s federal government has to excessive mortgage lending, in the wake of CMHC nearing its lending limit and the inevitability of a correction

“For years, Canadian bankers have argued that government backing of the country’s riskiest mortgages makes a U.S.-style housing and banking crisis unlikely,” the paper reported. “But as Canadian personal and mortgage borrowing continues to climb, international watchdogs have called on the government to better assess the risk that the high debt load now poses–not to the country’s banking system–but to government coffers.”

Hmmm. Lenders at risk. Government at risk. What else could possibly go wrong?

Well, according to Seeking Alpha, just about everything. In a two-parter cheerfully entitled, “Canadian Housing Market Collapse, the investment site compares and contrasts the American market and ours in terms of asset overvaluation. How this happened is irrelevant. The important thing to remember is that all assets eventually return to the mean which, for real estate, is usually determined by inflation.

US house prices, for example, tracked inflation fairly tightly until about 2000, when cheap rates and a distrust of stocks sent real estate ballistic. When the inevitable correction happened (deflation – returning prices to the mean) this asset class lost about a quarter of its total decline in the first year, three-quarters by the end of the second year and about 90% after three years. After five years now, it’s nearing the bottom. And in Canada we haven’t yet started.

Here house prices also grew along with the inflation rate until about the time Nortel crashed, and mortgage rates plopped. Then the surge began, lifting values close to 80%. Now a detached home in Toronto commands $750,000 and one in Vancouver is $1.1 million. The average Canadian house, for the first time, costs twice what Americans pay. Our personal debt surpasses theirs (another record) and Toronto has 300% more condo towers under construction than does New York.

So what happens next?

Says Alpha: “On average, housing prices will correct by about 25-30% across Canada, with some of the extremely overvalued markets (i.e.: Vancouver) declining more like 40% or more. If the Canadian housing market crash behaves like the USA one, expect most of the losses to occur in the first two years, and then slow down after that. Canadian banks will suffer, and may need a bailout. They are over-leveraged and over-exposed to housing market debt. I will not be surprised to see a Canadian banking crisis emerge in the next few years, and government bailouts to go with them.”

A Van house costing $800,000 today, we’re told, will eventually sell for $502,743, while the average $475,000 Toronto home will end up being $371,462. And this whole process will last as long as the American melt – something like five years.

Credible analysis? Actually it’s not far off the conclusions this oversexed blog reached in the sordid past, although a housing crash would end up being more F’s problem than that of the big banks, thanks to CHMC. But the big news here is that Canadian real estate is famous! In all the wrong ways! We’re screwed!

Imagine you’re in Guangdong, overseeing your industrial empire brimming with peasant labourers, feeling all horny about the west side of Vancouver, sipping tea and reading your Wall Street Journal and suddenly happen upon a story warning of Canadian collapse. This is how hot Asian money gets a cold.

Meanwhile, of course, mortgage rates are going up.

BMO killed off its 2.99 Special, now the Royal has raised rates on its four-year fixed by almost half a point, and bumped the fiver to 4.04%. The other banks will follow – just weeks ahead of the next federal budget expected to move again to deflate the gasbag before it ignites. Neither the feds nor Brother Carney at the BoC were happy with the mortgage war, the media slobbering it engendered nor the deluge of new borrowing.

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I hope you’re ready. The second half could be a killer.