Every bubble bursts, but when the danger signs are telling you that you have a large housing bubble on your hands you don’t turn around and say
“don’t worry there is room to go even higher“.
That’s what CIBC is telling Canadians despite the fact that Canada’s debt to income ratio is now higher than the US experienced in 2006.
Then there is always the “soft landing” mantra that’s trotted out, much like Ireland heard from its bankers before the property crash made it the world’s largest debtor nation. The amazing fact about the Canadian banks is the amount of money in the banks vaults is only $4 billion yet they managed to loan out over $1.5 trillion. Everyone is else has been taken out by the bankers, its soon to be Canada’s turn.
According to this article, CIBC thinks the huge amount of household debt in Canada and the beginning cracks in the housing bubble are nothing to worry about. The main reason for this benign assessment seems to be that there have been a few other credit and real estate bubbles in the world that have grown even bigger than the US one before it burst. What a relief.
“The news out of Canada’s real estate market isn’t good, but the country will avoid a U.S.-style real estate meltdown, CIBC said Tuesday.
Economist Benjamin Tal said in a report that even recently released data about high levels of Canadian consumer debt isn’t proof that there will be a sudden, big drop in home prices.
“To be sure, house prices in Canada will probably fall in the coming year or two, but any comparison to the American market of 2006 reflects deep misunderstanding of the credit landscapes of the pre-crash environment in the U.S. and today’s Canadian market,” he wrote.
Tal noted that Canada’s debt-to-income ratio has just broken the U.S. record set in 2006, but said other countries have had even higher levels without a crash.
Tal said home prices in large cities like Vancouver and Toronto are overshooting their fundamentals and will likely slip as sales fall.
“But the Canada of today is very different than a pre-recession U.S., namely as far as borrower profiles are concerned,” he wrote.
“Therefore, when it comes to jitters regarding a U.S.-type meltdown here at home, the only thing we have to fear is fear itself.”
“This time its different!”
It is actually fairly typical to find this type of thinking near the top of a bubble. The people living inside it cannot believe that it could possibly crash. Of course Canada’s economic situation is in many respects ‘different’ from the US economic situation, but that is the case with every slice of economic history. Not one of them can possibly be exactly the same. Nevertheless, one can come to some general conclusions about credit expansion-induced bubbles. Economic laws will be operative whether or not the precise historical circumstances are similar. When Japan reached the height of its bubble in the late 1980’s, it was also widely argued that the overvaluation of stocks and real estate was no reason to worry because Japan was allegedly ‘different’.
The government has taken steps to curb prices but this will only hasten the fall.
Canada’s housing market has begun to cool markedly. As is usually the case, the first sign of trouble is a sharp drop-off in transaction volumes. Existing home sales in Canada were down by 15.1% in September year-on-year. This seems to be the result measures recently introduced by the government that are aimed at slowing down or reversing house price increases. Prices will no doubt eventually follow transaction volumes.
50% or $500 billion of the housing market is at high risk. It doesn’t help that the Government owned CMHC has insured most of the mortgages against default which leaves the taxpayer on the hook.
It is generally held that Canada’s banking system is in ruddy health and not in danger from the extended credit and real estate bubble, mainly because a government-owned organization, Canadian Mortgage Housing Corp. (CMHC) insures most of the mortgages with down payments of 20% or less. The company also helps fund mortgages by issuing debt and buying mortgage backed securities with the proceeds.
This kind of thinking has things exactly the wrong way around. It is precisely because such a state-owned guarantor of mortgages exists that the vaunted lending standards of Canada’s banks have increasingly gone out of the window as the bubble has grown. Today some $500 billion, or 50% of Canada’s outstanding mortgages are considered ‘high risk’ according to the Financial Post. Moreover, HELOCs (‘home equity lines of credit’, i.e., the use of homes as ATMs) have grown like wildfire, at loan-to-value rates of up to 80%.
Through CMHC and government guarantees for privately held mortgage insurers Genworth Capital and Canada Guarantee, Canadian tax payers are on the hook for more than C$1 trillion in mortgages.