Housing bubble crisis? Maclean’s vs. The Bank of Canada

- February 24th, 2012

Two national institutions, the Bank of Canada and the newsmagazine Maclean’s, are out with new publications today with starkly different conclusions about the real estate market and household debt in this country. As it’s still relatively early, I have yet to read either but look forward to doing so. In the meantime,  we’ll let BMO Capital Markets deputy chief economist Douglas Porter officiate on the substantive issue at hand: Housing crisis or no? Here’s his thoughts from his morning comment (with his emphasis but my hyperlinks):

The Bank of Canada Warns on Household Debt, Chapter 1,187:

The latest quarterly Bank of Canada Review was chock-full of items on the rise in household debt — its causes, its risks — the rise in home prices, and consumer insolvencies. From a policy perspective, the Bank did not really take a new angle in the Review, as the main thrust of the reports was a note of caution on the debt/home price nexus and its impact on financial stability, but not alarm. There were some interesting observations scattered throughout the reports, and here are just some tidbits:

  • Demographic factors do not explain the trend increase in household debt over the past decade; in fact, they should have dampened it.
  • The share of consumption financed by home equity extraction has risen since 2000 to around 5% of total spending now. One estimate suggests that a 10% drop in home prices could cut consumption by 1% (a higher elasticity than we have assumed in the past).
  • The share of home equity extraction used to finance consumption and renovations has been stable at around 40% in the past ten years.
  • The Bank’s model suggests that while much of the 45% rise in real home prices in the past decade can be explained by fundamental factors (population and income growth, and interest rates), 13% can not be (so 13% overvalued?). I would submit that some may reflect a rebound from the incredibly subdued pace of home price increases in the prior decade. (See AM Charts for the graphic.)
  • On bankruptcies, the Bank suggests that “soft information” on customers is important, and that “hard information (e.g. credit scores) cannot fully replace the type of information gathered at local branches”.

If you have an appetite for alarming …. Check out the latest issue of Maclean’s. [There are no hyperlinks I can find at Macleans.ca to this though at 1000 today at its home page there are four -- count 'em -- four features arguing against the Office of Religious Freedom the Tories propose.  One is from Daniel C. Dennett, a very smart cookie and influential thinker for those, like me, interested in artificial or machine intelligence. His essay collection Brainchildren is a great introduction to his work but if you're really keen you'll want to read his seminal Content and Consciousness. But I've taken you too far away from Doug Porter and his thoughts about housing. Apologies - ed.] The front page screams “You Are About to Get Burned”, and suggests the Canadian housing market is exactly like its U.S. counterpart before the meltdown and is poised to repeat it. They calmly explain “Why it’s officially time to panic.” Suffice it to say, we do not agree. Of course, we also don’t have to sell magazines. Almost comically, the article asks “Why is everyone ignoring this unfolding disaster?”  Perhaps it’s being ignored in Latvia, but not here in Canada.

Categories: Economy, Main Page

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5 comments

  1. Ken says:

    Real estate is more of a local thing than Canadian market.

  2. noname says:

    I live in Vancouver and you’d have to have your head in the sand to NOT think this is a bubble.

    To own a single family home anywhere west of Main Street costs approximately 2 million dollars. In order to afford this, one must earn a minimum income of approximately 30-35K a MONTH. The average TWO income household in Vancouver earns 80K a year, or 6.6K a month. On the east side the average home price is 1M, about 550K higher than what the average two income household can afford.

    All of these affordability issues are trickling to other areas in metro vancouver and into, of course the condo market.

    Tell me, if this is not a bubble, what is it, because it is most certainly NOT sustainable. Companies are already having issues attracting talent because few people can afford to live here.

    Globe and Mail….
    “Canada’s housing boom is among the most long-lived in the Western world at 13 years, but the next few years could chip away at the gains that have seen the average house increase in value by 85 per cent since 1998.”
    – if you are on the West side of Vancouver, you have seen housing prices climb 88% over the last 5 years.

    There are many orgs writing about this (economist etc). I can’t imagine the BoC is going to announce there is a bubble. While MacCleans has magazines to sell the BoC has to keep fears in check so they too, jave ulterior motives.

    and FTR, people ARE ignoring it. Do you know how many people have told us “get in (to the real estate market) while you can now!” Everyone and there dog is rushing to get a million dollar mortgage with 5% down. Sadly, it is mostly young families who have no clue why that is a bad idea.

    We rent. No matter which way you slice it, renting is the way to go with this market now.

  3. noname says:

    BTW – I met with my banker just the other day. Sounds like lending standards are at US levels now too. Here are some profiles they lend to (from one of the big banks):

    New immigrant? NO income required for a mortgage! (one of their advertisements are: new to canada? no credit? no problem!)

    Self-employed? They will take your word on your income!

    Just have net worth and no income? No problem – they will lend to you too!

    Really? No bubble? Are you sure?

  4. Loon says:

    Ken says:
    February 24, 2012 at 10:56 am
    Real estate is more of a local thing than Canadian market.

    Just like low interest rates and CMHC backed 5% down mortgages are a local thing. The whole country is wrapped up in this, put down the kool aid.

  5. Thanks for the platitude says:

    “Real estate is more of a local thing than Canadian market.”

    Houses may be local but the bubble-stimulating policies are primarily federal.

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