Tuesday, 22 January 2013

In the news: Is Canada talking itself into a housing crisis?

From Globe and Mail
Little was heard of housing bubbles in Canada up to about a year ago. Now, predictions of crashes are on the front cover of Maclean’s and other publications. One might wonder if we are talking ourselves into a housing miasma, even though the fundamentals don’t point to one.
Consider affordability. The Bank of Canada’s housing affordability index shows that newly built standard houses are as affordable as 10 years ago. And the Royal Bank of Canada’s affordability indexes for existing housing only “exceed their long-term averages modestly, although the national figures are exaggerated by extremely poor affordability in Vancouver.”
It's funny how media manipulates information just to make a headline. Please consider an article from just a month ago by the Globe and Mail, titled Frozen Out: Behind Canada's Housing Affordability Crisis. The basic premise of the article is that low interest rate is just masking the risks of how unaffordable housing has became. Sounds like the Globe and Mail is suffering from indecisiveness. Furthermore the above article ignores all the other issues such as record high levels of debt in Canada, house prices outpacing incomes for over a decade, record rent to price ratios etc. Additionally, the article states:
Moreover, credible analysts don’t see a U.S.-style crash. Professor Robert Shiller told CBC News in September that Canada should be spared because its banks have low subprime exposure. And Gluskin Sheff economist David Rosenberg wrote in a November note “that the U.S. plunge five years ago followed years of credit-tightening moves… anyone think that [the Bank of Canada] is going to raise interest rates 450 basis points with inflation barely above 1 per cent?”
However, Mister Shiller also said that Canada is like a slow-motion version of the US and that Canadians suffer from same delusion that Americans did, that real estate prices always rise.
Mr. Shiller and co-authors argue the prominence of the bubble theme produced “a turning point in public thinking” that led to prices turning down, beginning in 2006. A similar point was made by Mr. Shiller in a 2006 paper, in which he wrote: “there are reasons to suspect that the price changes … are related to public swings in opinions rather than fundamentals.”
Could Canada similarly be talking itself into a housing crash (possibly followed by a financial crisis and years of stagnation)? Or will the fundamentals usher in the soft landing that the federal government is trying to achieve through tighter mortgage rules? Messrs. Shiller and Rosenberg believe the fundamentals will win because the Canadian setting is more supportive. Let’s hope so, if only so that Canadians are spared the trauma Americans have experienced.
We are not talking ourselves into a housing crash We are talking about a coming real estate crash because of the fundamentals. As one of the commentators of the article said: - This isn't a matter of changing public thought. Rather, it is a matter of changing the public's awareness of economic truths.


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