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Canadian House Prices -- The Puff piece edition

One of Canada’s premier magazine:  Macleans (nice folks that talk about nice things – think of it as the Canadian version of Time Magazine), wrote an exposé on the Canadian housing sector.  Actually, a non-exposé, since the one hard fact disclosed in the article is that Canadians have too much debt.  [Note I don't link the article  -- its too embarrassing, use Google its called the "Canada Bubble", march ]

Although there is some discussion about how the Canadian boom in natural resources is driving demand for housing (and foreign investors are poring money into Canada), at no time does this article talk hard facts.  It’s a bit like watching U.S. TV news: “After the break, how your cat is killing you!”.  The truth of the matter is that Canada’s housing is doing very very well indeed!  In some places (Vancouver and Victoria) house price (as a percentage of median income) are in nose bleed territory (900% and 700 respectively).  In fact, there is a simple rule of thumb, if house price exceed 4 times the median income, the risk of bubble market increase dramatically.  Toronto at 520% is at risk, Montreal at 460% is on the edge, and Halifax at 360% is in the green zone.

These are hard facts, not to be found anywhere in the Macleans article.  Nor does the article mention that the Bank of Canada, OSFI and CMHC recently tightened credit rules for the more aggressive mortgages (the starting point for housing). No more 30 year, 95% mortgages!  Now the maximum is 90% with a 25 year amortization, and an interest rate reset test with higher rates.  In Canada, liars loan and non-docs loans just don’t exist.  

The Macleans article is all about fear and nothing about substance.  It presents both sides of the argument with equal standing, Robert Schiller in one corner (the guy who first alerted the world to the U.S. housing bubble), and a bunch of famous unknown each talking their books (guy at Fidelity selling his Canadian funds, and a guy in a local shop selling his foreign wares).

The reality is that for the past two years, the Canadian real estate market has been in the danger zone.  On the bright side income is rising, but house prices are rising faster.  However, change is a foot (nowhere mentioned in the article).  CMHC (Canada’s equivalent to FannyMay) increased qualification thresholds for its mortgage guarantees sector will take some time to work through the system.  Some signs that the changes are impacting the market.  New builds and permits for have been tepid for the last 2 quarters now, an indication that things are slowing.  

The other side of the equation is that Canada’s wealth is built on its materials & energy bull market, which is already a decade old, and shows some fundamental differences from the older boom bust periods.  The demand/supply drivers are fundamentally different; whereas in 2002 emerging economies accounted for 20% of oil demand, today it is 50%.  OECD economies have seen stagnant demand for energy, whereas emerging markets have seen near double digit growth.  These economies continue to grow (at high paces), demand destruction in OECD economies is more than compensated for by the growth in emerging economies.

The hard facts that Maclean avoided are: 

  • Canadian house prices are ripe for a correction as prices are growing fast than income (and are already in nose-bleed territory)
  • A 10% to 15% correction is “baked in the cake”, but it could overshoot
  • Canadian regulatory agencies are well aware of the problem, and have taken action
  • Resource bull market is not about to end – although if oil goes to $200/bbl, all bets are off.

The Macleans story was unfortunately a lazy scare-mongering puff piece that makes you wonder about the future of Canadian journalism.  BTW, if they published that what did they turn down?

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