Wednesday, May 19, 2010

Canada's Real Estate Market Bubbly

By Eric Jackson

05/19/10 - 06:00 AM EDT

Stock quotes in this article: RY , TD , CM , BMO

NEW YORK (TheStreet) -- It has been painful to watch the housing turmoil in the last few years play out in the U.S. I know friends who have been terribly affected by it. After seeing the devastating impacts on the entire economy from this housing downturn, many market observers have pointed to China as a frothy real estate bubble that will likely pop soon. However, you might be surprised to learn that -- up until very recently -- there were bidding wars going on for homes in Canada.

Canada might be America's neighbor to the north, but it has a bubbly real estate market, even as the U.S. market continues to limp along. Consider these eye-raising facts:
  • Canada's real estate prices have increased on average 40% in the last year while incomes have dropped.
  • Canadian residential real estate is now worth more today than it was pre-Lehman.
  • There are now more dwellings built in Canada (assuming, as the Canadian government does, that an average of 2.3 people live in each dwelling) than the population of Canada.
  • Canadian consumers have racked up enormous debts while interest rates have been low over the past 20 months.
  • Personal bankruptcies are at record levels now in Canada when interest rates are still at historical lows.
  • In Vancouver, people now spend 68% of their disposable income on housing. In Toronto, people spend 44% of their disposable income on housing. (Keep in mind that the China bears were complaining that it was unsustainable that some Chinese in Beijing and Shanghai were spending more than 30% of their disposable income on housing.)
  • Canadians have been proud that their banks have done well post-Lehman, unlike so many of their global peers. The banks have actively originated mortgages demanded by Canadians over the last year, but -- unlike U.S. banks during the housing boom -- for the most part, they've elected not to hold on to these mortgages. As quickly as they can, they pass along the mortgages to the Canada Housing and Mortgage Corporation. This is a crown corporation, meaning it's 100% owned by the federal Canadian government (i.e., the Canadian taxpayers).

    Over the last five years, the CHMC's liabilities -- meaning the mortgages they hold on their books -- have gone up five times from C$80 billion to C$400 billion. Any time you see a business increase its liabilities by that amount, it's intriguing. When you consider the last two years has been the worst economic downturn since the Great Depression, it's even more head-scratching.

    However, Canada's economy was going along okay pre-Lehman. Whenthe stock market dropped, Canadian housing and real estate activity stopped and prices did drop. But, with most consumers and the Canadian banks in okay shape, and with Canadian job losses not as bad (relatively) as in the U.S., Canadian consumers had quicker confidence to spend thanks to the lower interest rates.

    When famous bear David Rosenberg left Merrill Lynch to move back to Canada in 2008 and join Gluskin Sheff, he spoke in glowing terms about Canada's position in the global economy. Yet, even he has begun to acknowledge the housing bubble that exists in Canada.


    [This post is an excerpt of the full article, which is available on by clicking here. Free Site.]

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