Thursday 21 November 2013

Poloz - Probability of Hard Landing 20-40%

Would you really expect a politician or a banker to admit the truth? Imagine what would happen if Flaherty and Poloz openly admitted that there is a housing bubble in Canada! The chances for soft landing would diminish and other politicians would immediately start looking for who is responsible for creating this bubble in the first place. Of course we all know who to blame for this mess - Flaherty and the Bank of Canada. So why would they ruin their reputation? Simply put - they won't.

Recently Poloz was asked to put odds on his soft landing scenario. The governor replied that he would place it in the 60-80% probability range. In other words, Poloz estimates that chances for hard landing are 20-40%. I think those chances are much higher!

Furthermore Poloz said that most of the fundamentals surrounding the housing market appear headed in the right direction. I call BS on that and here's why:

Two quarters ago Canadian real estate was overvalued by 64% versus rents and 30% versus incomes. Fast forward to today (3rd Quarter 2013), and housing is overvalued by 68% versus rents and 32% vs incomes according to the OECD data. To me it seems that the fundamentals are worsening and not improving.

But hey, maybe Poloz wants the market to crash? In that case for him the fundamentals are indeed moving in the right direction.

When Poloz was asked with regards to how big the fallout would be, here's what he said:

"How big of a fallout would it be? It depends a great deal on where it is, if it's concentrated or generalized, or not."

Agreed. I think Vancouver would be the epicenter of what's to come. The Toronto condo bubble would be the runner up.

With regards to how generalized the landing would be? I think it would be pretty widespread. OECD seems to agree.
In the recent Economic Outlook (pdf), OECD had this to say:

"Real prices are also still rising in Belgium, Canada, New Zealand, Norway and Sweden, even though prices are high relative to rents, pointing to a risk of future correction, especially with borrowing costs now rising."

"There are indications that some OECD countries (Australia, Canada, New Zealand, Norway and Sweden) which have suffered relatively little from the global financial and euro area crises are exposed to vulnerabilities stemming from the non-financial sector (most or all from household debt, house prices and relative unit labour costs)"

I've put together a table based on the OECD data to visualize how overvalued the Canadian housing market is compared to other countries. You can switch between nominal and real prices, price-to-rent and price-to-income ratios. Enjoy. Also, feel free to share this but all I ask is to link back to this blog.



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