Canada’s Housing Bubble Springs A Leak
By: Mike Whitney
Sagging prices and droopy home sales in Vancouver have set off alarms across Canada. These are the first signs that the country’s overheated real estate market has begun to cool. Homes sales have plunged 33 percent year-over-year, while prices have tagged close behind dropping 11 percent from their peak in April 2011. At the same time, listings are up a hefty 14 percent finishing off the grim trifecta of bulging supply, anemic demand, and tumbling prices. The news has sparked fear that Canada’s housing bubble has finally burst leaving millions of homeowners exposed to the same equity-decimating nightmare as victims in the US, Ireland, Spain and Japan. As sales continue to shrivel, prices are certain to dip further, leading to higher unemployment, record foreclosures, and a more generalized deceleration across all sectors of the economy. There’s a good chance that Canada will be slip back into recession sometime in 2013.
Here’s the story from the Wall Street Journal:
“After a blistering, multiyear run that saw ramshackle bungalows fetch seven-figure sums, one of the hottest real-estate markets in North America seems to be cooling, damped in part by government changes meant to deflate what many policy makers saw as the start of a bubble…
…prices and sales are falling, while properties are staying unsold for longer. Prices in the high-end market, long fueled by overseas buyers, particularly in recent years by well-heeled Chinese, are dropping off sharply…..suggesting more price drops may be on the way. Home sales in Vancouver and the surrounding metropolitan area dropped 33% this September from a year ago, according to the Vancouver real-estate board, while the total number of listings rose 14%.” (“In Vancouver, Home Sales Hit the Brakes”, Wall Street Journal)
The WSJ is wrong in saying that the government tried to stem the bubble, in fact, the (Stephen) Harper administration deserves much of the blame for their “light touch” regulatory posture that will wind up costing credulous homebuyers a great deal of money on vastly overpriced real estate. The combination of low rates, lax lending standards and laissez faire regulations are largely responsible for the unprecedented and reckless credit expansion that’s pushed the market to the cliff-edge. Here’s more from an article in Macleans:
“Though proportionally fewer Canadians are carrying a mortgage, according to the Bank Of Canada (BOC), the most vulnerable borrowers, those who are channeling 40 per cent or more of their income toward interest charges, are carrying a disproportionate share of the debt. While these borrowers amount to just over six per cent of Canadian households, they account for over 11 per cent of household debt……” (“Canada’s housing market: is it a cooling? Is it a crash?”, Macleans)
In other words, any change in economic conditions– like weaker growth, higher interest rates or rising unemployment– will lead to mass defaults by over-stretched homeowners who won’t be able to make their monthly mortgage payments. This is the same scenario that unfolded in the US in 2006 when tens of thousands of subprime borrowers defaulted en masse on their mortgages. The deflationary fallout from that implosion, crashed the market and sent the economy into a steep nosedive. Here’s more from Macleans:
“According to the latest estimate by Statistics Canada, which just revised its methodology for calculating the ratio of debt to disposable income to adjust to standards set by the IMF and the UN, Canadians are even deeper in the red than previously thought, owing $1.63 in debt for every dollar they make.
The BOC called household debt “the biggest domestic risk” to the economy and recently suggested the state of Canadian families’ balance sheets will play a role in its interest-rate setting decisions…..
Canadian regulators have also become concerned with loosening standards among Canadian lenders. Subprime-like mortgages, typically offered to the self-employment and recent immigrants, have become “an emerging risk” to the banking system, according to the Office of the Superintendent of Financial Institutions.” (Macleans)
Do you really need more proof that the government is responsible for this fiasco? Governors at the Bank of Canada and higher-ups in the Harper administration certainly knew what was going on and could have intervened to prevent a market meltdown, but they chose to do nothing. Instead, they promoted homeownership as a way of attaining the “Canadian dream” just as George W Bush praised the “ownership society” in order to inflate an even bigger bubble so he could transfer more wealth to his crooked banker friends on Wall Street. The same dynamic is at-work here.
Earlier in the week, Moody’s ratings agency announced that it was putting a number of Canadian banks on review for a possible one-notch downgrade. According to NASDAQ:
“The potential rating revision comes in the wake of a flagging economy, record-high consumer debt, soaring housing prices as well as sizable exposure of banks to capital markets….Canadian banks face a bunch of risks from substantial increases in the nation’s consumer debt over the last few years. The household debt-to-income ratio came in at 163% in the second quarter of 2012, up from 137% in the second quarter of 2007. This reflects the rising disparity between the growth in debt and hike in personal incomes. (NASDAQ)
And Moody’s is not the only one to sound the alarm either. Economists Robert Schiller and David Rosenburg have issued warnings as well. And according to Euro Pacific Capital, “Canadian home prices are up nearly 100% since 2000″ which suggests that the market is due for a severe correction. Then there’s this from Financial Post in an article aptly-titled “Everything you need to know about Canada’s housing ‘bubble’”:
“Canada’s sub-prime mortgage industry is growing and there are $500-billion in high-risk mortgages in the Canadian housing market. That is nearly 50% of the market.
Moreover, the Canada Mortgage and Housing Corporation (CMHC) which insures all mortgages approved by banks, has a legal limit of $600-billion for mortgage insurance, and this limit has already been raised twice since the end of 2007.
“If these high risk mortgages run into problems, the Canadian taxpayers are the ones on the hook for the loss of investment on what could prove to be toxic assets. In addition to the CMHC, the government also insures 90% of the portfolios of Genworth MI Capital and Canada Guarantee. When taking these corporations into account, the Canadian people have over 1T in exposure to insured mortgages.” (“Everything you need to know about Canada’s housing ‘bubble’”, Financial Post)
So while Canadian banks may not have dabbled in mortgage-backed securities (MBS) like banks in the US, they’re still in some deep sh**. The low rates, easy lending and failed regulation have increased the probability of a hard landing by many orders of magnitude.
Canadian banks have also been extending credit to borrowers who have next to nothing in their homes. Take a look:
“The use of Home Equity Lines of Credit (HELOCs) has been extremely controversial..(and)..have also contributed massively to household debt… Banks have been issuing HELOCs with a loan-to-value ratio as low as 80% i.e. issuing loans to someone who would need to borrow $80,000 for a home worth $100,000.” (Financial Post)
The banks have been ramping up credit to all comers knowing that the losses will get passed along to the government just as they did in the good old USA.
Finally, there’s the overall condition of the Canadian economy which is already showing a few cracks and fissures. Check out this report from Reuters that appeared on Thursday:
“The Canadian economy shrank in August for the first time in six months, an unexpected contraction that pointed to a sharp slowdown in third-quarter growth and reinforced the Bank of Canada’s message that interest rate hikes are less imminent.
The 0.1 percent contraction from July reflected broad weakness across most industries as well as temporary shutdowns at some oil and mining sites, Statistics Canada said on Wednesday.
“There are too many negatives in this report to dismiss the headline weakness as being attributable to just temporary disruptions in some sectors,” said Derek Holt and Dov Zigler of Scotia Capital.
Doug Porter, deputy chief economist at BMO Capital Markets, agreed. “We can’t brush this off as driven by special factors,” he said.” (“Canada economy shrinks in August, clouds outlook”, Reuters)
The global slowdown is going to hurt export-dependent Canada by curtailing the demand for natural resources. If the economy continues to contract, the defaults will rise accordingly, and housing prices will tank. No matter how you cut it, the government is going be on the hook for tens of billions of dollars in losses from funky mortgages.
THE BUBBLE COUNTERREVOLUTION
If it seems like there’s a pattern to this bubble madness; it’s because there’s is. In every country where housing bubbles have emerged, homeowners have been hammered while banks have been bailed out. The bailouts, in turn, have generated ungodly budget deficits that have been used to justify savage cuts to social programs; education, health care, welfare, and retirement spending. All of this is by design. Far-right elites and their political lackeys in Congress have never had the power to implement their belt-tightening measures via the ballot box or through the legislative process, so they’ve embarked on a different strategy altogether; bubblemaking. And while the plan is just another permutation of “strangle the beast”, (that is, shrinking the size of government by cutting off revenues) bubblemaking is far subtler, mainly because the its perpetrators conceal their real motives behind the mask of “financial crisis”. In this way, housing bubbles and financial crises resemble 9-11 which has been used for every regressive government policy from endless detention to perpetual war. The same is true here.
The real purpose of asset-price bubbles is to create the rationale for restructuring the economy (away from working people) and rolling back the progressive gains of the last century. It’s a social counterrevolution launched by big finance to ensure that the bulk of the nation’s wealth continues to flow upwards while the rapidly-diminishing middle class faces greater hardship, uncertainty and destitution.
Mike Whitney writes on politics and finances and lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion, forthcoming from AK Press. He can be reached at firstname.lastname@example.org