Posted by: CS | January 18, 2014

Canadian Real Estate: As Safe As Houses

For years, now, the Canadian real estate market has been a wonder of the financial world. Rising serenely into the sunlit, blue empyrean of the Arctic winter sky, with price to income ratios attaining multiples otherwise achieved only in the most manic of places such as  Hong Kong, Mumbai or Rio de Janeiro.

But has the crunch now come? The current issue of Time, available in every dental and medical waiting room across the land, features the article: Canada Has Its Own Housing Bubble—And It’s About to Burst.

“What has so many observers worried?”  asks Time.

A few things, apparently:

Canadian versus US household debt. Image source.

Canadian versus US household debt. Image source.

The chart (left) illustrates Canada’s debt problem.

“These huge debt loads,” Time quotes Matt Barnes of the research firm BCA, “could pose a serious threat if unemployment continues to rise due to a sharp pullback in the construction spending, or if interest rates begin to rise.”

Moreover, Time quotes Amna Asaf, an economist with the macro research firm Capital Economics, “Even a modest uptick in mortgage rates will translate into much higher homeownership costs, easily outpacing any expected increase in household incomes. This will price out some prospective home buyers, reinforcing the drop back in existing home sales that is already under way.”

This, notes Time, “is the same dynamic that eventually sunk the U.S. economy and triggered a global financial crisis. Canada’s saving grace, however, may end up being its strict housing regulations–which encourage high down payments and government-backed insurance.

And that’s pretty much the conclusion reached by the Financial Times (quoted here by Mike Shedlock ): Canada’s crazy high-priced housing is no threat to the banks.

Well, hey, that’s good news. No financial crisis and no huge bailout of bankers by the taxpayer. Instead, any cost of a housing crash to the financial sector will be borne by the, um, taxpayer, who’s already got the back of every crazy low-rate-mortgage-lending bank in the country by way of Canada’s government-owned CMHC, which has insured more than half a trillion in Canadian mortgage debt.

If there is a crash rather than a leisurely decade-long unwinding of the housing boom, it will be interesting to see whether the Tory government can stave it off until after the 2015 election, in which case the disaster will most likely become the property of an inexperienced head of a minority government named Justin Trudeau. Good luck with that, bud.

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