I really don't understand this. At all.
many Canadian households are more financially overextended than their
counterparts in the United States or Britain.
They said it's only a matter of time before the "tipping point" is reached and the housing and credit markets crack in Canada.
Once again, a financial institution makes headlines based on a news release based on a report that no-one can read (at least, I can't find it). Why on earth do journalists think that this sort of thing is newsworthy?
Especially when no-one else can make head nor tail of it. I've not seen any evidence that the Canadian housing market is as wildly over-priced as it was in the US; if anything, it could be argued that house prices have been too low.
But hey, it got Merrill Lynch Canada some publicity. And that's all that matters, isn't it? Well done, you brave stenographers of the financial press!
Worthwhile Canadian Initiative 
Try convincing someone from Vancouver that house prices are too low! Forbes ranked it the 6th most overpriced city in the world a little while back, Shiller called it the bubbliest city in the world and the price/rent and price/income ratios are as bad or worse than the hardest hit U.S. markets before they collapsed. But Vancouver is just a small part of Canada.
More generally, I get tired of studies and comments referring to ‘the Canadian Housing Market’ when it seems clear that, for whatever reason, no such thing exists. Different provinces are in very different places with respect to the housing cycle.
I also agree that it is irritating to see journalists reporting on some report without making the report itself available to the reader to review. Would be nice to see the full case for stating that Canadian households are more financially overextended than those in the U.S. and Britain, for instance.
Found the Merrill Lynch report – all 3 pages of it – at link, courtesy of Bloomberg’s article at link
Thanks! I edited the links so that people can click through.
We can’t have the same kind of disaster here because the whole industry is structured differently. The players holding these mortgages are much, much less highly leveraged than the investment banks in the US.
On the other hand, I find the savings rate disconcerting.
Yeah. It’s fair enough to point out that things are slowing down, and that there may be problems in the near future. But the use of the word ‘meltdown’ got on my nerves.
I would guess that Canadian national savings are in much better shape many other rich OECD countries.
That said, I would expect a signficant correction housing and real estate prices, particularly in western Canada.
But yeah, the things a fella has to do for a headline these days….
Depends on what impact you’re looking at.
If the question is “will housing pose the same systemic risk as in the US”, the answer is no, given CMHC insurance, better capitalisation requirements etc.
If the question is “is continued negative saving positive for housing prices and continued consumer spending?”, the answer is obviously no.
The crisis in the US was caused by overstretched consumers overcommitting themselves to debt, on the premise that their main asset, housing, would continually appreciate. Supply ramped up to meet this demand. Once that cycle of appreciation reversed, debt became unmanageable, leading to distress sales, foreclosures, and more falling prices.
This turned into the financial contagion, as financial firms ended up with crap on their books, and worse, couldn’t identify where the crap was or what a proper vallue of their assets is.
There is a sizable prospect that first situation will occur in many markets in Canada. The second situation, the sytemic financial meltdown, I am less convinced is on the horizon.
Like Declan, I am in Vancouver. There is little question in my mind that this city, as well as a number of other western cities, is going through this process now. Over the past few years, the only way to particiapte the market was through either relying on past equity appreciation (far beyond what anyone could actually save), or to take on colossal debt, or usually some combination of the two. My spidey sense tells me there are lotsa folks out there tapping HELOCs for basic housing related expenses (mortgage, maintenance) and maintaining lofty debt balances simply to live. Fine, if your house is worth 100k more this year than last. Not so great if you’re going in the hole to pay for something worth 50k less than it was last year. Potential buyers see this stress, and see falling prices, and hang on to their wallets.
In the summer, home prices in Saskatoon were more expensive than in Chicago, Miami, Phoenix, Dallas, Atlanta, Charlotte, Philadelphia, Tampa, Las Vegas, Houston, Minneapolis, and were equal with Boston. Home prices in Saskatoon doubled in two years. Did incomes double in two years? Nope.
550 sq ft bachelor condos in Vancouver were being listed for $400k, and this isn’t overvalued?
I also heard lots of economists say the US housing market was not overvalued in 2006, including our esteemed Fed chairman, who replaced a man who said that bubbles in housing couldn’t happen. BTW, home prices in California fell 41% last month.
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aSU7cx2EXfPQ
Canada will face the same problems as the US.
I’d suggest Canadians read Garth Turners book, “Greater Fool.” He lays out the case why the Canadian housing market is over-valued.
If I were in a mood to be uncharitable, I’d be wondering why anyone should have to fork out $30 to read his anaysis. It’s not as though he’s Robert Shiller.
I’ve looked at his website; it opens with data from San Diego. San Diego is well-known for being a city in a country that isn’t Canada. I lost interest after that.
I’ve looked at his website; it opens with data from San Diego. San Diego is well-known for being a city in a country that isn’t Canada. I lost interest after that.
You really are something else. Any popularization of some economic issue gets dismissed by you out of hand and anything you suggest is credible is mystifying to the rest of us.
No wonder the financial economy is cratering. Admit it…you don’t have any more of a clue what you’re talking than anyone else does.
Would it work if I were to ask you for advice and then did the exact opposite of what you recommended? Because, that’s worked for me in the past when it comes to…ptui…economists.
“I lost interest after that.”
Ah. The contempt of the open minded economist that knows everything already, then gets to be quoted as an economist that is “surprised” by events that to the rest of us seemed self evident.
No evidence that house prices are too high? How about things like affordability ratios, price to rent multiples, cap rates, ownership rates? All of these indicators point to house prices being too high, as does personal indebtedness and savings rate which is what the ML study chose to focus on.
Turner’s use of the San Diego example is an introduction to the issue — ie let’s look at a market that was completely bubbly and then extrapolate on what made it so bubbly compare it to what we see in Canada. It’s a fairly standard technique. Or did you avoid reading “Collapse” because Easter Island is notable for not being in Canada?
Merrill Lynch should make proper predictions for itself first, then it can be taken seriously. Yes, I think prices jumped pretty high last year, on the other hand, what you call “overpriced”? All prices are subjective, based on agreement between buyer and seller, some objective “off-market” price belongs to Marx’s economy. We can expect bigger offer, more active listings, slow growing or frozen prices in next few months, but that’s all…
Regards,
Julie
re: San Diego
Stephen
This is one of my favourite blogs.
However, I’ll give you an exact quote a successful investment professional in Vancouver said to me a few years ago when I asked him about soaring housing prices in Vancouver.
“Its still cheaper to buy a house in Vancouver than it is in San Diego. When you compare it to San Diego, Vancouver isn’t overvalued.”
T.