As Canadians go through yet another election, politicians of all stripes are busy dusting off campaign slogans, attack ads and policy books. Each party puts forth its best ideas to fix what ails the country and what will propel it forward on a wave of prosperity.
The amazing part of this election campaign is that nobody seems to be addressing the 800 pound gorilla in the room. That gorilla is named “Canadian Real Estate”. The overvaluation of real estate (“bubble” is so overused it has lost its shock value) in many parts of Canada has been propelled by a Canadian addiction to debt and federal government policies that helped to create a runaway freight train in the form of real estate prices. Outside of the Canadian political campaigning trail the Conservatives have paid lip service to the issue through their recent series of mortgage lending restrictions, however, this tightening is only undoing the Conservative party’s mortgage lending loosening from a few years earlier. Again, both key facts are rarely mentioned by any of the political parties currently campaigning.
Some economists and even the Canadian Finance Minister have argued or proclaimed that a Canadian estate bubble does not exist. They point to the fact that Canadian mortgage lending standards are more rigorous than those that contributed to the US real estate meltdown. In part, this is true. However, the role of the Canadian Mortgage and Housing Corporation (CMHC) in helping to push real estate prices to their current levels seldom receives the attention it deserves.
The CMHC has been especially generous in ensuring that banks and other financial institutions were not hindered in making mortgage credit available to Canadian borrowers. Given its central role in the real estate markets and the potential impact on the Canadian economy, it should be an election issue that is front and center. If Canadian defaults on mortgages were to increase, the Federal government (i.e. Canadian taxpayers) would be on the hook for the bill. As Ross Perot once said about the US deficit, “it’s like the crazy aunt in the basement nobody wants to talk about”.
Given that Canadian consumer debt is at record levels and challenging the peak figures of US consumer debt before the recent recession, it does not take a generous amount of imagination to envision a scenario in which Canada may have a “Made in Canada Housing Crisis”. Canadian income growth has been dismal but record low interest rates have given many Canadians a “What Me Worry?” attitude.
Those who confront the issue are often faced with a response of, “can you prove that there is a bubble in Canada”? As with any bubble or even other unpleasant economic events such as recessions, only time will truly tell. However, in at least one Canadian market, Vancouver, the fundamentals and rate of price increases have gone far beyond what could be prudently considered sustainable.
As the chart demonstrates, Vancouver home prices have surged far beyond total British Columbia GDP growth and personal income growth. In fact, for housing prices to revert back to the GDP growth rates by the end of 2011 (assuming the BC economy grows at 4% in 2011), we would require at least a 12% and up to a 31% correction in home prices. This of course assumes that BC’s GDP isn’t linked to a housing bubble bursting. In truth, the dependence on real estate to spur economic growth has been very apparent, especially in Vancouver, and therefore a deeper correction would actually be required to find a sustainable equilibrium.
Canadians should be demanding some answers from their politicians about what they propose as a solution to this issue and to recognize that an issue does exist. If it unfolds even somewhat close to the worst case scenario, many Canadians may be left wondering “How could this happen?” The problem is that there is no easy fix to getting Canadians to ease off the debt spigot. However, we need simply look across the border to see what occurs when the problem is ignored.
This report is for information purposes only and is neither a solicitation for the purchase of securities nor an offer of securities. The information contained in this report has been compiled from sources we believe to be reliable, however, we make no guarantee, representation or warranty, expressed or implied, as to such information’s accuracy or completeness. All opinions and estimates contained in this report, whether or not our own, are based on assumptions we believe to be reasonable as of the date of the report and are subject to change without notice. Past performance is not indicative of future performance.Please note that, as at the date of this report, our firm may hold positions in some of the companies mentioned.
Copyright (C) 2011 Pacifica Partners Inc. All rights reserved.