Is a Canadian first time home buyer’s strike in the works?

RBC releases first time home buyer survey

As Australia wrestles with a housing bubble that dwarfs our own, home buyers in Australia have wisely clued in to the dangers of buying at such inflated prices and have been busy organizing a formal buyer strike campaign.  It now appears that first time buyers here in Canada may be adopting a similar, albeit less organized approach.

The 18th annual home ownership study conducted by RBC has revealed some interesting factoids:

“Over half of young Canadians (55 per cent) believe that it makes sense to delay a home purchase until next year, 10 points higher than the national average, and almost half (46 per cent) of younger homeowners admit that their mortgage is using up too much of their income.”

The RBC report doesn’t adequately explain what they mean by ‘too much of their income’.  Does that mean they have to sacrifice going on an annual cruise?  Does it mean they are finding saving for retirement difficult?  I’d be curious to know how they worded this question.

Regardless, these are not an insignificant findings.  The data continues to suggest that a significant portion of house price appreciation over the past decade has been due to the loosening of CMHC mortgage standards.  To reuse an example I showed in an earlier post, consider that up until just over a decade ago, a $20,000 down payment would get you an $80,000 mortgage, meaning you could buy a house priced at $100,000.  The loosening of mortgage standards down to the current 5% minimum (a misnomer given that banks offer up to 7% cash back mortgages meaning you can technically buy with nothing down) has had a huge effect on opening the credit spigots.

Today that same $20,000 would secure a mortgage worth $380,000.  Not hard to see how this has had an effect on house prices as credit growth has blasted higher, pulling house prices with it.  Note that mortgage credit growth (the red line) went parabolic in the early 2000s.

The major impact of these loosened mortgage lending requirements has been to allow more people into the housing market who would otherwise have to wait until they had saved up an adequate down payment (….I know…..the injustice!).

As a result, we see that mortgage loan approvals and spiked around the same time while the home ownership rate rose significantly.

This entire process was aided by a general downward trend in fixed and variable interest rates, particularly since the turn of the century:

Finally, housing starts have outpaced household formation for the better part of a decade, with household formation running at approximately 175K and housing starts running well over 200K.

This excess inventory has been absorbed primarily because of the expansion in ownership rates, itself owing to loosening mortgage standards and falling interest rates.  We’ll explore just what effect this building boom has had on GDP and employment in a later post, but for now, recognize that a significant chunk of economic and job growth has been reliant on this arguably artificial boom in housing demand.

And this brings us back to the original point of this post.  First time buyers, the driver of our housing boom, are getting nervous.  They recognize that the era ahead of us is fundamentally different from the past decade.  Rather than falling interest rates, we will see rising ones.  Rather than loosening credit conditions, it seems that the government is determined to rein them in.  It seems a given that demand is set to fall, and I believe it will fall hard.  What remains to be see is how supply will respond.  Certainly home builders have pared back their activity and a lack of resale inventory has kept MLS listings at well below average for most of the past 8 months…..but will it continue?

This is indeed the million dollar question.  The attitudes of the young ‘uns and the overall inventory levels are barometers worth watching.



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What are the implications?

I’m working on a neat series looking at the historical percentage of GDP derived from residential construction in different provinces and connecting that to the change in the percentage of the workforce employed in construction over time. It might give us some hints on how a potential housing correction might weigh on economic and job growth.  Stay tuned for that.

In the meantime, I’m going to throw out two charts I’ve created in the hopes that some of our astute readers might make some connections for me.  Tell me what these graphs say to you, and what are the potential implications…if any?  These are all derived from Stats Canada data.

Exhibit 1: Inflation adjusted investment in residential structures in Canada.

Exhibit 2:  Cumulative change in real house prices and CPI deflated mortgage debt

I’ll take a break doing the analysis for tonight and instead turn it over to my readers.  Have at ‘er.

Also note that the website on the graphs is…

This is my new website.  It is running and functional, but there are a few bugs to work out.  All content should be ported over within a couple weeks.  Check it out!  It is pretty snazzy if I do say so myself.



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Another look at mass psychology, asset bubbles, and the Canadian real estate market

Understanding the driver of asset bubbles

Perhaps the greatest distinction between those economists who have correctly identified asset bubbles in the past and those whose economic models failed to identify them is the ability of the former group to recognize the role that mass psychology plays in building asset bubbles.

My personal belief is that an asset bubble needs several key components in order to be birthed. It’s difficult to say which comes first, but I do believe that an asset bubble requires the following:

1) A new and widespread optimistic sentiment towards an asset. This is often a ‘new era’ story in which all potential restrictions on growth are explained away. Consider the tech bubble of the late 90s in which the mind blowing prospects of a new internet economy caused people to abandon all reasonable skepticism. One company that sold toys over the internet and was in fact losing money on each transaction had a higher market cap (number of shares outstanding multiplied by the price of each share) than the largest and most profitable toy retailer, Toys ‘R’ Us. Similarly a company that sold plane tickets online and had razor thin profit margins was considered more valuable than some of the largest US airlines (and consider that these airlines actually had tangible assets like airplanes).

In hindsight, the whole thing was ridiculous. But you couldn’t help being caught up in the emotion and awe at the time.  Lest you think this same dynamic is not at work at least to some degree in Canada, let me highlight just a few memes you’ll likely hear in any discussion of real estate in Canada:  “House prices never go down”….”Buy now or be priced out forever”….”Wealthy immigrants will keep house prices high”….”Best investment I ever made”…..

In fact, we could look to the most recent RBC opinion poll which found that well over 90% of Canadians view real estate as an excellent investment.  For why this is potentially problematic, check out this primer.

2) Abundant credit. Historically, the largest and most painful asset bubbles often involved significant leverage created by loose credit conditions. It’s the nature of leverage that makes the crash so painful. Consider real estate in the US. If a new home owner purchases a $200,000 home with a %20,000 down payment, they have a 10% equity position at first. But if real estate drops by 10%, they have now lost 100% of their equity.

It’s this leveraged element that generates fantastic profits on the way up, but cuts deep on the way back down. I think we’ve spent quite a bit of time examining how this dynamic of abundant credit is impacting our real estate market. Consider that a little over a decade ago, a $20,000 down payment would get you a CMHC insured mortgage of $80,000. Today that same $20,000 gets you a mortgage of $380,000.   Not hard to see how this will impact house prices.  This is where CMHC has played such a massive role in bloating house prices….despite their mandate to “help Canadians access…affordable homes”.  Of course it’s even worse than that since you can actually purchase a home with zero equity. If you’re interested, here’s a step-by-step guide on how to blow your brains out on mortgage debt:

Step 1- Borrow the 5% minimum down payment on a credit card or from a family member…….Step 2- Take advantage of the 5% cash-back mortgage offered by almost all of the big banks…….Step 3-  Buy the house you want.  Make sure it includes granite, stainless steel, and double the space you really need…….Step 4- Once the deal closes, pay back the down payment with the cash the bank gives you as their thanks for signing up for a lifetime of debt servitude.  Enjoy your new home (which is actually just a rental as we know that a home without equity is just a rental with debt).

3)  A persistent and significant deviation from underlying fundamentals.  For stocks, people often reference the price/earnings ratio.  In the case of real estate, we can reference price/income, price/GDP growth, price/rent, overall affordability, etc.  Once these start showing a significant and persistent deviation from their long-term norms, we should get suspicious…..and house prices are doing exactly this by the way.

4)  A feedback loop where rising prices become the justification for rising prices. Once the three previous elements are in place, you have all the necessary components for a virtuous feedback loop.  The power human emotions of fear, greed, and envy become the motivator for many to jump into the market, spurred on by the stories of easy riches made by co workers and friends and fearful of being left behind.  Eventually the rise in prices becomes the justification for rising house prices.

It’s here that we are wise to remember the teachings of the Wall Street legend, Bob Farrell, whose rules for investing offer timeless wisdom. Two in particular are worth remembering:

“Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways”

Indeed it is the seemingly limitless supply of ‘Greater Fools’ who keep irrationally priced markets buoyant for longer than would seem possible.  But alas there is a finite limit.  Reaching that limit seldom (if ever) results in a sideways market while the pool refills.

“The public buys the most at the top and the least at the bottom”

Sad, but true.  Remember this at times like these when sentiment towards real estate is exceptionally high and nearly everyone is convinced of a rosy future picture for housing.

As house prices have risen, no longer do people reference economic growth as the justification for high house prices since that correlation has long since been broken.   No longer do they reference rising wages, inflation, or any other fundamental, since none of them serve to explain the rise in price.  Instead they are left explaining that house prices rise simply because they rise.  They respond accordingly by piling in and driving house prices higher…..which encourages others to dive in….rinse, repeat.

That’s a quick fly-by of the dynamic that creates asset bubbles.  Now let’s take a minute and zoom in on the element of mass psychology.

Another look at mass psychology

Interestingly, Re/Max released a ‘report’ yesterday which nicely highlights the workings of mass psychology.  (As an aside, I am constantly amazed that this self-serving propaganda is lapped up by the mainstream media as reliable and newsworthy information).

“Driven by the threat of higher interest rates down the road, first-time buyers are contributing to strong upward momentum in residential housing markets across the country”

I actually don’t doubt that this is true, though I question what that implies about sales levels going forward.

“Despite homeownership rates approaching 70 per cent, there is clearly room for growth as entry-level buyers make their moves from coast-to-coast, undeterred by higher housing values and changes to lending criteria”

This statement is highly suspect.  We’ll take a closer look at home ownership rates in a moment.

“While some may feel discouraged by eroding affordability levels, the underlying confidence in the concept of homeownership is rising….“While market conditions are one thing that influences first-time buyers, few things trump the fundamental belief in homeownership”

Well that pretty much sums it up, doesn’t it?

My position has been that the overall impact of cratering interest rates by the Bank of Canada and loosening credit requirements via CMHC has been to pull demand forward.  The propensity of humans to find comfort in herd behaviour and the impact of positive reinforcement as people have seen house prices rise well beyond incomes, inflation, and other underlying fundamentals have created the very mentality succinctly described by Re/Max.  The big question is whether or not this is benign.

One way we can quantify this dynamic at work is by examining home ownership rates which we know are at historic highs and have increased across all demographics, firmly dismissing the notion that the rise in ownership is simply a result of an aging population.

Note that this data stops in 2006.  Given the rise in ownership since that time, any guesses as to what the latest census data will reveal?

Furthermore, if we look at the new CMHC mortgage loans as a percentage of total population, we see the following trend:

Note that this includes those who have renewed their mortgage as well as new mortgage originations.  This is CANSIM table 027-0017 if anyone wants to replicate the graph (you’ll also need to track down population data).  Note also the significant difference between the 2000-2009 period and the earlier period.  My belief is that our credit bubble began in the early 2000s and intensified since 2004 as CMHC lending requirements were eased and the element of mass psychology took root.

So just how high can the ownership rate go?  This data suggests that the buyer pool is already thin.  The danger from here is that those who have not yet bought are increasingly made up of people who either can’t afford to buy or those who see high house prices for what they really are.  Given our propensity to think as a collective, all it takes to induce a buyer strike is to break that “fundamental belief in homeownership”. Exactly what will trigger that remains to be seen, though I suspect that a modest fall in house prices will be enough.  Should this fundamental belief be shaken, the same dynamic of mass psychology that drove prices higher will act as a dead weight on house prices moving forward.



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Tour through the board stats: March 2011

It’s that time of the month again.  Time to turn our eyes to the month end sales data from the big real estate boards.  Frankly these numbers may well be meaningless until a clear trend can be established next month.  With new mortgage rule changes coming into effect mid month, there was a significant chance that sales were front loaded during the month as some people no doubt rushed to beat the new rules.

With that in mind, let’s turn to the numbers and see how things are shaping up.  Click on the city name to see the press release for that particular board.  Many realtor boards are still frustratingly slow at releasing their month-end data.  I’ve included the largest realtor boards that have released their data as of today.  It’s unfortunate that at the time of posting, the boards in Edmonton, Winnipeg, Ottawa, and Montreal had not yet posted their final month end numbers.


The fine folks at VREB did their best to spin the fact that sales declined 21% over last year, choosing instead to focus on month-over-month sales numbers which always rise at this time of the year anyways:

“Victoria Real Estate Board President, Dennis Fimrite, commented that the increase in sales last month, coupled with stable prices, shows continued consumer confidence in the market. “The latest figures offer further evidence of the return to balanced market conditions…”

Integrity at its finest.  And what of those stable prices?  You’ll note that the press releases chooses to instead use the 6 month average.  Why?  I have one idea.  Due to seasonality in house prices, the six month average can be highly misleading.  What we need is a year-over-year comparison.  Behold!

So much for ‘stable’.  I guess Mr. Fimrite (or is that ‘Fibrite’?) hasn’t read his own board’s Code of Ethics which states that its members are committed to, “Absolute honesty and integrity in business dealings”.  This is shameless manipulation of numbers and there’s no excuse for it.

New listings were also 11% higher than last year, a fact that Mr. Fimrite brushes off in the press release as a normal, expected rise in sales associated with the Spring buying season.

The sales to new listings ratio came in at roughly 0.4 or slightly into buyers market territory.  This ratio is calculated by comparing the number of new listings with the number of sales for any one month.  It is a measure of supply and demand.  Though there’s no broad consensus, a reading of roughly 0.5 is balanced, 0.4 or less is a buyer’s market, and 0.6 or more is a seller’s market.

Months of inventory came in at 6.6, lower than last month’s 7.6 month total and also slightly into buyer’s market territory.

Despite the best efforts of the fine folks at the Victoria Real Estate Board, there doesn’t appear to be a bottom under their market yet.  I suspect it has a ways to fall.


Crazy times continue in Vancouver, which registered a 30% jump in sales over last year.  Just how much strength can be attributed to the looming mortgage rule changes will be seen in next month’s numbers, though the recent activity seems to suggest a continued strong demand for Vancouver real estate.

The sales to new listings ratio was 0.60 or slightly into seller’s market territory.  Months of inventory also decreased to 3.2, well into seller’s market territory.

Prices for all housing types were up on a year over year basis by 5.4%.

It’s hard to know whether the March numbers are a signal of an extremely strong Spring buying season or the result of a rush to beat the new mortage rules.  Final April numbers will give more insight.


An interesting month in Calgary as sales dipped very slightly compared to last year, but active listings tanked by 20%.

Meanwhile, average single family home prices shed another 2% while the median value was down 5% over last year’s numbers.  The condo market fared worse, shedding 5% off the average and 7% off the median price in the past 12 months.

Sales to new listings ratio for the month came in at 0.56 (balanced….thanks to the drop in new listings), while months of inventory came in at 3, perhaps slightly into what might be considered a seller’s market.

If the low levels of inventory can persist, it should slow the bleeding.  April will be a telling month.


It appears that the rush to beat the new mortgage rules may have been seen most prominently in Toronto, where every district saw an unusually high bounce in their sales/new listings ratio.

Total sales were very strong at 9262, a modest 11% decrease from last year’s record numbers.  Sales to new listings registered at a healthy 0.6.

On the back of continued low inventory numbers, months of inventory was a paltry 1.8.  This is exceptionally low.  Inventory numbers are well below normal (usually 20-23K at this time of year, versus 16K currently) while sales are still very high.  Kudos to Guava for the graph.

This remains the great Toronto mystery.  As long as supply remains constrained, a strong floor will remain under Toronto house prices.  I have little doubt that demand will experience continued weakness, but it is now the supply side that is worth watching.  For now, no significant signs of stress in this market.


I debated even doing a tour through the board stats this month as I think the sales data will likely be largely skewed by the irrational rush to beat the new mortgage rules.  The true test will be April and through the rest of the summer.  Inventory remains largely suppressed by historic standards in many large centres.  This has been an 8 month theme now.  How this will play out going forward will indeed be the big question.  I am certain that sales levels will experience continued weakness through most large centres, though the inventory levels will be the determinant of how the weaker demand will impact prices.



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A regional look at Canada’s housing bubble: Part 2

Note to my readers:  Due to some technical problems, I was not able to make any posts this weekend.  My apologies.

In part 1 of this mini series, we examined house prices from BC east to Ontario.  Today we will examine provinces east of Quebec.  As mentioned before, Quebec resales data is not owned directly by CREA, so I’ve had to endeavor to obtain that data from the realtor association in Quebec.  I’m hoping to have that data later this week to complete the series.

New Brunswick

By and large, New Brunswick house prices look fairly valued on the basis of GDP per capita.

Not too much to be concerned about here.  Housing has largely paced the level of economic expansion, perhaps even lagging slightly from the late 90s onwards.

Nova Scotia

Once again, nothing to be particularly alarmed by here.  Housing may be marginally over extended, but certainly not meaningfully.

Prince Edward Island

PEI is an interesting case.  Once again we see that the particular starting point has a significant impact on the overall trend.  In this case, housing lost some 30% of its value in the three year period after 1981 (the start of the graph).  Using 1981 as a starting point yields a graph that indicates serious undervaluation in real estate on the island.

This is rather curious.  If we look at house prices divided by GDP per capita, we note that in 1981 at the start of the graph, housing on the island was 7 times GDP per capita, or roughly 75% above its long-term mean.  The subsequent correction brought house prices back in line with underlying GDP.

Once again at the risk of being accused of data mining, I advanced the start date.  If indeed PEI was correcting from a level of pre-existing overvaluation in 1981 as the above chart suggests, then it would make sense to advance the time line.  What a difference three years makes…

Based on the metric of GDP per capita, house prices in PEI reflect fair valuation and perhaps an degree of undervaluation.


On the basis of per capita GDP, house prices in Newfoundland are by far the most reasonable in Canada.  In fact, they appear to be significantly undervalued.

The fine folks in Newfoundland can sleep easy knowing that a nation wide housing bust will likely impact them marginally.


On the basis of per capita GDP, there seems to be a clear east/west divide between the ‘overvalued’ provinces and those that appear fairly valued by this metric.  What may surprise some of my readers is that this line seems to lie east of Ontario, as most provinces from Ontario to BC exhibit significant levels of housing overvaluation.

Using the data from this post and the previous post in this series, we can arguably divide the provinces into two groups:  The overvalued/bubble provinces and the undervalued/fairly valued provinces.  The provinces seem to break down as follows:


BC, Alberta (arguable based on starting point), Manitoba, Ontario

Combined contribution to Canadian GDP: 70%

Undervalued/Fairly Valued:

Saskatchewan, New Brunswick, Nova Scotia, PEI, Newfoundland

Combined contribution to Canadian GDP: 10%

Unknown/Not Calculated:

Quebec (I’m working on getting house price data for Quebec), Northwest Territory, Yukon, Nunavut.

Combined contribution to GDP: 20%, of which Quebec accounts for nearly 19%.

The point here is that the provinces that we should be concerned about represent a whopping 70% of our GDP, and possibly as high as 90% depending on how fairly valued Quebec real estate is.  This should concern us.  As so often discussed on this blog, falling house prices are a catalyst for retrenching consumers, falling employment, and weak economic growth.

It is highly unlikely that any political party will have the political will power to address this issue.  Indeed, if early election promises are any indication, all major parties will likely be all too willing to shovel more money at the house-owning electorate:

“Among the Liberals’ new proposals was a green renovation tax credit worth $2,025 for expenses of up to $13,500 on new windows, doors and roofing.”

Yet more fuel for Canada’s HGTV addiction.  The data continues to suggest that significant overvaluation exists on a nationwide basis.  Regionally, most areas of the province seem to have engaged in some levels of irrational exuberance.  I’m continuing to work with the data.  Up next, another look at the role of mass psychology by examining new mortgage originations as a percentage of total population.  Stay tuned!




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A regional look at Canada’s housing bubble: Part 1


I recently highlighted the fact that aggregate Canadian house prices appear to be significantly overvalued relative to GDP per capita (one of the key determinents of income….all things being equal, higher income levels should equate to higher house prices).

Here are the key charts from that post:

As several of my readers have noted, an examination of house prices in Canada at the national level may have implications for the broader economy, but it does little to reveal local variations in house prices.

This is certainly true.  I have long held that our national housing bubble is inflated primarily because of a handful of markets and specific market segments.  Nevertheless, I’ve been hesitant to predict that too many locales will escape unscathed given the widespread element of mass psychology.  It’s hard to find a part of the country where housing is looked upon as anything other than a fantastic investment and a great store of value.  Furthermore, the widespread credit excess caused by the loosening of CMHC mortgage insurance standards knows no Canadian boundaries.

So with that in mind I undertook the significant challenge of analyzing provincial house prices based on one primary determinant of fundamental value:  GDP per capita.  This was done by accessing provincial resale data from CREA, and population and GDP data from Stats Canada.  Today we will examine BC east to Ontario.  Tomorrow we will look at the rest of the eastern province with the exception of Quebec (apologies to my Quebec readers as their house price data is not recorded by CREA….I’ll see if I can get my hands on it, but it won’t be this weekend).

British Columbia

I’ll let the charts do the talking for BC:

I’m not sure that much else needs to be said about these findings.  Not too many people would be surprised to learn that house prices in BC are exceptionally out of touch with economic fundamentals.  Let’s move on to a finding that quite surprised me…


You may recall that Robert Shiller, arguably the world’s leading expert on real estate bubbles specifically pointed to Alberta as a bubble zone.  House prices have in fact risen substantially, but so too has GDP per capita.

Now what I want you to note is that in this case house prices have apparently lagged GDP growth for nearly 25 years, only to catch up in 2006.  Let me suggest that this is quite likely a reflection of the starting point.  Throughout long enough periods of time, we should expect gains in house prices to pace gains in GDP.  When it doesn’t, it is far more likely a reflection of a skewed starting point.  From 1981 to 1986, house prices lost 22% of their value as a pre-existing bubble popped.  If in fact the 1981-1986 housing bust was the result of a pre-existing bubble and simply resulted in house prices realigning with GDP growth, it could be argued (at the risk of being accused of data mining) that a different starting point would be a better indicator of current over or under-valuation.

With that in mind, I advanced the starting point by 5 years, aligning it with the bottom in the housing bubble and with the bottom in the drop in per capita GDP as seen on the chart.

You can see that from this point, GDP and house prices track each other much more closely…..until the mid 2000s that it.  I will leave it up to my readers to decide which chart tells the more compelling story.

Interestingly, when the average house price is plotted against average GDP per capita, it seems to confirm that there is a level of overvaluation based on historic norms, but perhaps not as significant as the second chart above.


Of all the Western provinces, Saskatchewan seems to be the most fairly valued, perhaps in part due to restrictions on foreign ownership of farmland until the regulations were loosened in the past few years.  Yet once again we seem to have the same problem of house prices apparently underperforming GDP for 20 years.  What is interesting is that Saskatchewan never experienced a significant boom and bust.  Could it be that houses and land in Saskatchewan have managed to avoid the sort of “easy riches” mentality that is the hallmark of an asset bubble?

Even if we advance the data to look for a line of better fit, we note that by all accounts, Saskatchewan seems much more fairly valued.  The best line of fit for the two data series begins in 1990 and then deviates markedly about the same time as other parts of the country, namely the mid 2000s.

Yet if we divide Saskatchewan house prices by GDP per capita, we note the following:

There may in fact be a small amount of froth in some parts of the Saskatchewan market, but by and large, it is much more fairly valued than other areas.


Manitoba is surprisingly bubbly….

Note that house prices significantly underperformed GDP for much of the 90s and yet there appears to be significant overvaluation at present.  Advancing the data set to find a cleaner fit would only make the housing overvaluation that much more acute.

When house prices are divided by per capita GDP, the variation from the mean is particularly noticable.


Once again, the bubbly level of house prices in Canada’s most populace province is hard to miss…

You’ll note the ‘bubble’ (centred over 1989) which led to a fairly painful housing correction in the early 90s followed by a decade of stagnant growth.  Note the relative variance of that blip over current price levels.

It is perhaps even easier to spot when house prices are divided by per capita GDP.

Indeed it appears that if there is an east/west divide that separates the ‘bubble’ provinces from those more closely in line with their fundamentals, that line appears to be somewhere east of Ontario.

We’ll look at those eastern provinces tomorrow to try to get more of an answer…

Cheers for now,


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So much for the ‘conservative’ Canadian consumer: Another look at Canada’s credit bubble

The ‘conservative’ Canadian consumer has been often cited as one of the primary reasons for Canada’s miraculous escape from the depths of the Great Recession.  In fact, earlier this week, the deputy governor of the Bank of Canada attributed our ability to largely side step the worst of the recession to our, “relatively strong household balance sheets“.

This has never quite sat well with me.  I’ve long believed that Canada is in the midst of a fairly significant credit bubble, fueled largely by a massive expansion in mortgage credit and HELOCs.  I’ve written about Canada’s credit bubble before, but now I’d like to revisit it.

Let’s start by noting that mortgage debt as a percentage of GDP is currently sitting at approximately 63%.

While well above its long-term average, it is certainly well below the peak the US experienced (~73% of GDP) and it is a country mile from the ridiculous levels of mortgage debt relative to GDP those crazy Aussies are carrying (nearly 90%).  Thanks to Steve Keen for this chart.

However, mortgage debt alone is but one part of the puzzle.  Indeed the total debt burden including other consumer debt is significant in this discussion.  First, let’s look at the US experience with total consumer debt as a percentage of GDP.  Thanks to Calculated Risk for this gem.

Notice that once other consumer debt is factored in, we see that the US consumer credit bubble peaked at  slightly less than 95% of GDP with mortgage debt comprising roughly 77% of total consumer debt burden.

Now let’s turn our eyes to Canada.  For those who want to replicate this data, look at CANSIM tables 176-0027 and 176-0069 and well as Stats Canada for historic GDP data.  Here it is:

Note that when other consumer debt is added to mortgage debt, we are currently sitting at ~93% GDP with only 68% of that debt total being mortgage debt (compared to 77% in the US).  This is why discussions of Canada’s mortgage debt alone are not sufficient to fully appreciate the full scope of our made-in-Canada debt bubble.  Note also that the CANSIM data does not include debt issued by car dealerships or department stores.  So much for the conservative Canadian consumer story!

If we look at cumulative growth in total consumer debt relative to GDP and inflation we find the following:

Indeed we know that the HELOC is the fastest growing form of debt, now accounting for 12% of all consumer debt outstanding.  Canadians have a love affair with home equity.  The wealth effect spending associated with our strong and bubblicious housing market is by far the most significant factor that has helped Canada side step (or is that ‘delay’) the most significant effects of the credit crisis that gripped much of the world.

For more on Canada’s consumer debt levels, check out these related posts:

Credit risk across the nation: Who’s most at risk from an interest rate shock?

Debt Crunch: A look at Canada’s record level of household debt



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CIBC on the housing and the Canadian Consumer; Bank of Canada speech; Other noteworthy news stories

CIBC on housing and the Canadian consumer

Just a week after Scotia Economics released a report suggesting that Canadian consumers are “tapped out”, CIBC economics has released an interesting report that contains some similar themes.

Some highlights:

This suggests that something more fundamental (than demographics -ed.) has impacted all Canadians uniformly, and is responsible for the drop in the savings rate. Such factors probably include lower inflation expectations, an extended period of low interest rates, the cohort effect (for example, the changing financial attitudes and behaviours of a 40-year old person today compared to a 40-year-old person 10-20 years ago), and innovation and deregulation in financial markets.

The recent surge in savings in the US suggests that changing macro economic conditions can dramatically impact the savings rate. In fact, at near 6%, the American savings rate is 1.6 percentage points higher than in Canada2—the largest gap on record.

These are indeed some of the frequent topics on this blog:  Canada’s low savings rate and the propensity for people to change perception en masse in response to economic conditions.  I’ve long maintained that the primary driver of the low savings rate is shifting consumer perceptions towards consumption and materialism, with falling interest rates as a close secondary factor.  One need only look at the arguable rise in housing as a form of conspicuous consumption to see this reality.

Note what caused the savings rate in the US to spike, even amid the lowest inflation and interest rate environment in half a century:  Falling house prices, collapsing net worth, and a retrenching consumer.

CIBC notes that Canadians have largely ignored savings due to the perceived wealth increase in their homes.

“The reality is that the (Canadian -ed.) real estate boom has rested on low interest
rates that are clearly behind us. And one should not underestimate the importance of the housing market in impacting the Canadian savings rate. After all, with the average house price in Canada more than doubling since 1997, many households have been saving indirectly or passively via the increase in their home equity, and thus felt less pressured to save from their current income.

That housing “wealth effect” stimulated consumption and reduced savings. Not only has real estate wealth risen much faster than wealth linked to financial assets during
the past decade (Chart 2), but also the housing wealth effect is significantly more powerful than the wealth effect associated with rising stock prices.

Here’s the thing:  You can’t eat your house.  It can’t sustain an expected lifestyle in retirement absent significant associated financial assets.  You can, however, use the interest and dividend payments from financial savings to sustain a lifestyle during retirement.  Therein lies a huge unanswered question for me:  All evidence seems to suggest that the wave of boomers set to retire over the next decade are exceptionally house rich, yet not nearly as financially healthy when financial assets are considered.

This is a topic I explored in an earlier primer on demographics.  It remains to be seen just how many people are planning on accessing home equity via downsizing to partially fund their retirement, though all evidence seems to suggest that it is not an insignificant number.  The next obvious question is how will this happen without exerting downwards price pressure compressing given that home ownership rates and debt levels are already at all-time highs.

Bank of Canada toots its own horn

Jean Boivin, Deputy Governor of the Bank of Canada, recently gave an interesting speech in Montreal:

The “Great” Recession in Canada: Perception vs. Reality

Boivin offers his insights into how Canada managed to experience such a strong rebound from the depths of the “Great Recession”.  It’s an interesting read, though I certainly don’t agree with all Boivin’s conclusions.

Some snippets:

“If the recovery was speedier, despite weaker contributions from investment and exports, support for the recovery must have come from household and government spending. This was indeed the case. Household spending declined by only 2 per cent between 2009 and 2010, compared with 6 per cent during the previous two recessions. The contribution of government spending to growth was more than one percentage point in each year.

The greater strength of household and government spending reflects Canada’s favourable position at the outset of the recession. Major adjustments had been made to the structure of the Canadian economy. Business and household balance sheets were relatively sound, and the banking system was robust, managed prudently, and sufficiently capitalized.”

Certainly it was household and government spending that served as the catalyst to the rapid rebound in economic growth, but I certainly don’t believe that this in any way reflected a “strong” consumer balance sheet.  Boivin notes that household balance sheets were “relatively strong”.  Compared to what?  If compared to our own Canadian history, this is categorically false as we had been making historic highs in debt/income ratios for some time before the onset of the recession.

If compared to the US, sure we may have looked okay then, but we’ve now passed the US consumer in terms of our relative indebtedness.   And may I suggest that perhaps it’s unwise to look at the greatest example of wealth destruction in human history currently ongoing in the US and suggest that since we didn’t experience their levels of excess, that somehow that makes us prudent.

Other noteworthy news stories:

1)  Rosenberg’s 180 on Canadian housing: Canadian housing is okay– Globe and Mail

I’ve got a lot of respect for David Rosenberg, but I believe he is flat out wrong on this one.  Rosenberg argues that there is no looming supply/demand imbalance as home builders have pared back new single unit construction.  This is a valid point, although it does not address the overall level of housing starts which continues to significantly outpace net household formation once condos and other multi family dwellings are taken into account.  Perhaps the more important question involves the ability and willingness of Canadians to continue to take on mounting debt loads to support house prices.  Interest rates have only one direction to rise while credit conditions are tightening and job growth remains tepid.

Rosenberg also argues that increased immigration may help to support house prices:

“Note that in 2009, net international immigration to Canada surged 13 per cent. So not only is the country acting as a magnet for international capital inflow, but Canada is also being increasingly viewed as a stable place to do business and a desirable area to live.”

This is highly suspect.  Read yesterday’s post for insight into how immigration affects real estate prices.  Rosenberg’s about-face on Canadian housing leaves me scratching my head as the underlying fundamentals which he so often referenced while discussing the Canadian bubble (or “giant sud” as he would say) have only deteriorated in recent months.

2)  Consumer confidence slides in March– Globe and Mail

The Conference of Canada released their March consumer confidence numbers which showed widespread declines across all key measures.

“Responses to the current and future finances questions were particularly pessimistic, the board said. Sentiment toward current finances were “worrisome,” the board said, and although it has improved since the recession, the balance has remained negative for 30 straight months.”

“The balance of opinion also worsened on future employment and responses to the question on major purchases trended negatively.”



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House prices: Examining inflation and supply/demand factors

I continue to work with some CREA data to find historic relationships between house prices and other factors.  I posted earlier on the historic correlation between house prices and per capita GDP, which shows significant overvaluation on a nation wide basis.  Today we’ll look quickly at inflation and then at some supply and demand factors.

As a reminder, this is dealing with aggregate Canadian data.  This is not to suggest that house prices everywhere are significantly overvalued.  Certainly there are a handful of particularly bubbly locales, but it is increasingly evident that even the more ‘reasonably’ priced areas are at the top of their long-term historic norms when measured against underlying fundamentals.

House prices and inflation

It was bubble guru and Yale economist Robert Shiller who famously calculated that house prices in the US have done little more than pace inflation over the past century.

In fact, the most extensive historic housing data set in the entire world verifies this finding.  Price data for the Herengracht Canal in Amsterdam extends all the way back to the early 1600s.  Remarkably, real (inflation-adjusted) house prices have moved around a long-term trend line over the past 350 years.  That is to say that houses essentially pace inflation over time. Source:  Piet Eichholtz as cited by Steve Keen

Note that periods of under performance relative to inflation were eventually corrected with rapid moves to the upside, while periods of over performance relative to inflation resulted in an eventual correction to the down side.  Note however that this can happen via a reduction in house prices or a stagnation in house prices while inflation catches up (the ‘soft landing’ thesis, if you will).

Here in Canada, inflation is often measured using the Consumer Price Index which tracks changes in a basket of consumer goods.  If house prices typically track broad measures of inflation over a long enough time horizon, how have we fared here in Canada?

Cumulative house price gains have far exceeded the cumulative growth in the CPI over the past 30 years.  Now it should be acknowledged that the starting point makes a great deal of difference in this case as it could be argued that we may have started from a period of significant house price undervaluation which would imply that the growth in housing relative to inflation is merely “catching up”.  This is a valid point, though the massive divergence between the two trends certainly argues against the notion that house prices are simply catching up.

Of note, many have criticized the CPI for understating inflation.  As John noted when we discussed the New House Price Index (NHPI), it is this index that is used as the input into the CPI measure, arguably understating true inflation.  I went ahead and plotted the same data series but this time I assumed that CPI had understated inflation by 50%.  There is no rationale for choosing 50% as an adjustment other than to simply illustrate how significantly government stats would have to be adjusted over each of the past 30 years in order to compensate for the massive divergence.  Here is the result:

It would essentially mean that house prices would have lagged inflation over much of the previous 30 years before rapidly rocketing past the inflation trend line in the past 5 years.

House prices and population growth

I want to now take a moment and discuss two often-cited arguments to support house prices at current levels:

1)  Immigration and population growth will continue to drive prices.

2)  Canada has not experienced the level of overbuilding experienced by the US.

Let’s start with the first statement.  While immigration and population growth can lead to higher property prices, they do so only under the relatively rare instances that the housing industry either cannot build houses fast enough to meet the demand or that current land restrictions prohibit building in highly desirable locations.  This second point is the primary focus of Demographia, the organization that releases the annual affordability rankings of international housing markets.

Aside from those two isolated instances, population growth in and of itself should have very little impact on aggregate house prices.  Nevertheless, let’s see data:

Here we see cumulative house price increase since 1980 plotted against increases in total population and growth in immigration.

If we broke down the annual change in house prices and plotted them against the annual change in total population and immigration as a percent of total population in each year, we see the following:

Note that in each case the correlational coefficient is negative, strangely enough, though both are insignificant.  In essence, these findings seem to mirror the findings of Steve Keen who found that immigration and population change had little impact on house prices in and of themselves.

No overbuilding?

One of the most commonly used arguments in support of the stability of our housing market relative to our southern neighbours is the supposed lack of overbuilding in Canada.  It is alleged that rampant speculation and overbuilding led to the supply glut that we currently see south of the border.

To validate this statement, I plotted the annual rate of housing starts per 10,000 people in both Canada and the US all the way back to 1980.  I found population data from Stats Canada and the World Bank, and housing starts data from CMHC and the National Association of Home Builders (NAHB).  Here are the results:

As you can see from the data, the US hasn’t built more homes than Canada on a per capita basis since 2001.  Over the entire 30 year period, housing starts per 10,000 averaged  61 in Canada and only 54 in the US.

It appears from this data that the “massive overbuilding” argument is highly suspect.

More to follow…



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David Madani on CBC’s “The Lang and O’Leary exchange”

You may recall that David Madani from Capital Economics released two reports earlier this year which were exactly in line with the preditions on this blog.  In the first report, he outlined his concerns about the Canadian real estate market, focusing on the same measures of fundamental value often discussed here. 

In the second report, he discussed the implications on a housing market correction to the broader Canadian economy, another topic of much discussion here.

Yesterday, Madani was on The Lang and O’Leary exchange to discuss these very topics.  Here’s the video.  The Madani clip starts at 52:00


Posted in Economy, Real Estate | Tagged , , , , , | 10 Comments