Misleading averages: Where the economic pain of a housing bust would be felt

I’ve gotten my hands on the Capital Economics report and will be making another post about it later today.  Also, it’s that the time of the month when we disect the most recent board stats.  I’m hoping to get that out later today as well.  In a fitting segue, John in Ottawa made another great comment, this time about the misleading characteristics of averages (like what happens when less than 3% of the housing transactions account for 25% of the total dollar volume….hello Vancouver!).  We’ll get to the misleading new heights of the ‘average’ Vancouver detached home later today.  In the meantime, enjoy!

I commented back in early December that a neighbor of mine received a call from his bank.  They had “just noticed” that he hadn’t paid his mortgage for six months.  Two weeks ago he declared bankruptcy and last weekend he moved out.  Now the bank owns the house.  The man is more than 50 years old.

He is now a data point in the national average for defaults and bankruptcy.

I don’t like averages.  Canada is too big and diverse for averages to be useful.  Even composites can be skewed significantly by large markets such as Vancouver Toronto.  Averages can be alarmist or lulling and always misleading.

However, averages come from real data and somewhere in Canada that data is hidden, festering.  House prices in Chibougamau, QC or Tuktoyaktuk, NT will probably not fall 2 or 3% and not all houses in Vancouver will fall 25-30%.

But that’s the problem with averages.  If the average house price in Vancouver falls 25-30% a whole bunch of houses are going to drop 50 or 60 or 70%.  That’s how we get averages and those houses that drop the most are going to be at the bottom of the price heap, not the top.  That means that a whole lot of people are going to get hurt and hurt bad.

Face it, wealthy people can take a hit.  Wealthy people don’t have high LTV mortgages.  Wealthy people aren’t about to waste the money on mortgage insurance.  That stuff’s expensive.

It’s the young, the stretched, the people who hope they can grow into their mortgage or hope that the value of the house will grow out of high LTV who are vulnerable and as can be deduced from this mad rush to get in on the last of the 5/35, there are a lot of them.

Is CMHC likely to take a $10 billion hit?  I would hesitate to call it unlikely.  Is that a disaster?  Hardly.  It isn’t anywhere near as extreme as the trillions the US has had to pour into its banking system to keep it afloat, with no end in sight.  Canada is a strong country with tons of natural resources to sell to the world.  Canada will survive.  Canada is, after all, just a symbol we assign to an another average.

All those little real data points that make up the average.  Ah, there is the rub.  All those little real data points are people, most of them young and pretty naive.  It reminds me of the military statistic that the “average life expectancy” of a second lieutenant in battle is 60 seconds.  Hey, after the battle, you are either alive or you are dead.  You are never average.

The average Canadian is going to be fine.  The banks are going to be fine.  CMHC will weather the hit.  When the housing market turns not every market will be a metaphorical battle ground, but where the market turns the hardest, a bunch of young people are going to end up financially “dead.”  And like my neighbor, they’ll be added to an average.


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22 Responses to Misleading averages: Where the economic pain of a housing bust would be felt

  1. Jordan says:

    I had a quick look at the TREB (Toronto) numbers. Sales down about 13% from last year, listings down about 10%. The number of sales in the second half of Jan was a little under double that of the first half of Jan, which seems to be the general trend looking at past years. So no mad rush to buy before the mortgage rules come in (at least yet).

    February should be interesting.

  2. Brett says:

    Great section from the article!

    [And they were all saying the same thing: ‘We’re going to have a soft landing.’ ”]

    [The statement struck him as absurd: real-estate bubbles never end with soft landings. A bubble is inflated by nothing firmer than expectations. The moment people cease to believe that house prices will rise forever, they will notice what a terrible long-term investment real estate has become and flee the market, and the market will crash. It was in the nature of real-estate booms to end with crashes—just as it was perhaps in Morgan Kelly’s nature to assume that, if his former students were cast on Irish TV as financial experts, something was amiss.]

  3. Brett says:

    Another one. Canada anyone?

    [The comparisons that sprung to Morgan Kelly’s mind were with the housing bubbles in the Netherlands in the 1970s and Finland in the 1980s, but it almost didn’t matter which examples he picked: the mere idea that Ireland was not sui generis was the panic-making thought. “There is an iron law of house prices,” he wrote. “The more house prices rise relative to income and rents, the more they subsequently fall.”]

  4. NDG says:

    And that
    [There’s no such thing as a non-recourse home mortgage in Ireland. The guy who pays too much for his house is not allowed to simply hand the keys to the bank and walk away. He’s on the hook, personally, for whatever he borrowed. Across Ireland, people are unable to extract themselves from their houses or their bank loans. Irish people will tell you that, because of their sad history of dispossession, owning a home is not just a way to avoid paying rent but a mark of freedom. In their rush to freedom, the Irish built their own prisons. And their leaders helped them to do it.]

    Don’t forget to read Q&E!

  5. Mango says:

    How many empty skyscrapers and building’s do you see empty around? The story of failure continues to be re-told. Why is no one focusing on the amazing job numbers in Canada today and the story of success!!!!

  6. Brett says:

    Because Mango that is all we hear over and over and over again is how great Canada is and how we are better than the whole world. The fact of the matter is we need to look at the mistakes of other countries and learn from them. If we don’t do that then we will be forced to repeat those mistakes.

  7. Mango says:

    I think when we start to see massive over build and empty places just collecting dust in Canada, you should start to panic. Right now people are saving, paying down mortgages and working hard to find jobs and live. At worst the market is stale, but people need to live and work.

    Let the “bubble”, credit expansion as you guys call it run it’s course before you ring alarm bells. First we looked at US “We are next” now Ireland ” We are next”..Lewis I must say is a fantastic writer, he can emotionally jerk off bears so well with his words..

    Can we now move on to looking for holes in the jobs, if you can find any – please.

    • ATP says:

      Mango, since you asked, here it is from Dave Rosenberg, a real economist at Gluskin Sheff. By the way, feel free to discount his opinion ad hominem because he is a bear:

      “Moreover, before becoming overly exuberant, let’s keep in mind that before the seasonal adjustment is applied by the statisticians, the raw data showed a 210.2k total job decline — January is a month that:
      (i) typically sees a hangover after a holiday shopping binge and,
      (ii) most of the country is in a deep freeze.

      So even adding a single construction worker in Moose Jaw can have an outsized impact on the seasonally-adjusted data. Indeed, only in Canada and in the month of January can a nationwide 67.2k slide in construction employment then be statistically massaged to show a 2.7k increase on a seasonally adjusted basis.”

      • Mango says:

        Rosenberg is the biggest loser – he once said “we are in a 8 year bear market rally” You are doomed if you listen to him

  8. mac says:


    Have you been to the Olympic Village lately?

    • Mango says:

      Yes, zero interest. Good concept, would rather wait for the parks and schools and issues to be sorted out before i step in.

  9. mac says:

    No Mango, you’re not catching my drift.

    You stated, ” I think when we start to see massive over build and empty places just collecting dust in Canada, you should start to panic.”

    Well, according to your criteria, it’s time to start panicking. There are over 20 buildings there, not collecting dust, but rainwater.

    I would love it if you can answer another question of yours… you asked another poster how long have you lived in Canada and what’s the highest unemployment you’ve seen? I’ve lived here all my life and the highest unemployment I’ve seen was in the 80s and I believe it was close to 9% on paper and rumoured to be 17% in reality. Almost exactly what it is in the US today. A US rate I’ve never seen before.

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