Firstly, bubble mongering is happening for a reason. Home prices have risen faster than incomes for over a decade now. This is simply unsustainable. Secondly, the emergency low interest rates artificially boosted the affordability of Canadian housing which prolonged the lifespan of the bubble.
So just because the bubble hasn't deflated yet, doesn't mean that it isn't real. Also, when the real estate bubble finally does deflate, it will be because housing was out of whack with fundamentals and not because of a self fulfilling prophecy.
Now back to that article with my comments and added graphics.
From the Toronto Star:
Housing in
Canada is unaffordable. International experts are unequivocal in their concern,
and Canadian lawmakers are taking measures to deflate slowly rather than crash.
Ironically, only Canadian homebuyers seem to think the market is sustainable.
Sale prices are still rising. So when does it all start to unwind? Right about
now.
Since
the Great Recession, the Canadian economic model has basked in international
reverence for its conservative banks and rich commodity sector. So when Wall
Street rumblings about a Canadian housing bubble started becoming louder about
a year ago, as a card-carrying Canadian, I took notice.
Over the
last year, the “short Canada” thesis on Wall Street has evolved from a
contrarian sidebar into a growing chorus.
The
Economist recently wrote that Canadian housing looks “particularly vulnerable”
because of unsustainably high home prices compared to rents and incomes. The
OECD expressed the same concern. Steve Eisman, a private investor profiled in The
Big Short for shorting the U.S. housing market, recently presented several
ways to short Canada. Even Paul Krugman, a fan of
Canada’s economic and political backbone, recently published his concerns about
Canadian home prices and household debt.
Robert
Shiller, the economist who predicted the collapse of the U.S. housing market,
believes Canada could already be experiencing the correction that happened in
the United States, only “in slow motion.”
Canadian
lawmakers and institutional stakeholders have taken notice and are positioning themselves
defensively. The finance minister, the Bank of Canada and CMHC have tightened
and continue to tighten lending standards to “cool” the housing market. CIBC
shuttered its mortgage broker lending arm, FirstLine, and is considering
selling its mortgage broker franchisor, Mortgage Center Canada.
Those
closest to the industry are pulling back on the reins. Coincidence?
There are
two primary issues:
· Home prices are so
high relative to incomes that average households are very vulnerable to rate or
income movements.
· Housing is such a
big part of the Canadian economy that any small shift can be problematic.
In
Toronto, the median income is around $73,000, according to Demographia. The
median home price is $455,000. After coming up with a 20-per-cent down payment,
a “median” mortgagor would be on the hook for $22,200 annually, even at a
3.5-per-cent mortgage rate (which has to go up). If we include other housing
costs (real estate taxes, maintenance, insurance, etc.), costs climb to $30,000
every year. Throw in cable, cellphones, groceries and Internet, and the family
budget gets quite thin, quite fast. What happens when rates hit 5 per cent, or
8 per cent?
My gravest
concern is that Canada is fast approaching a 5:1 home-price-to-income ratio, a
benchmark achieved by the U.S. at the peak in 2006. Since the correction, the
U.S. ratio now hovers at approximately 3:1.
To
compound the problem, household debt in Canada has breached 150 per cent of
income and continues in the wrong direction; households are not cushioned
against a blow.
According to Demographia, the median
multiple in Toronto was 5.9 in 2012 which is considered severely unaffordable. Additionally, the debt-to-income ratio is currently 161.8% The future is indeed grim for the Canadian housing market.
Posts
