Worthwhile Canadian Initiative

Montreal: An Island of Calm?

The latest release on the value of building permits for Canada's CMAs by Statistics Canada provides an interesting perspective on a slowing economy.  The numbers show that there has been a downward trend in the total value of permits since late 2012.

Worrying about the Canadian housing market, Part 3: Risks of default

Concerns about the housing market are not really about what happens to the market for houses per se; its role as a driving force for the recovery was done long ago. The real concern is the risk is a US-style financial crisis. I think it's a valid concern, but I don't think it's very likely.

UWO's Jim Magee has written a couple of very persuasive - that is, persuasive to me - commentary pieces on the topic:

• "Why didn't Canada's housing market go bust?" (Federal Reserve Bank of Cleveland, 2009)
• "Not here? Housing market policy and the risk of a housing bust" (CD Howe Institute e-brief, 2010)

Worrying about the Canadian housing market, Part 2: The effects of higher leverage

In a previous post on the housing market, I noted that we were unlikely to see the sorts of interest rate increases that would generate increases in mortgage payments of the size we saw in the early 1980s (up to 60%). And it's a good thing too, because most new homeowners are not as able to absorb those sorts of increases the way new homeowners were back then.

This difference is that the economics of mortgage debt in a low-inflation environment are quite different from those of the high-inflation world of the early 1980s.

Worrying about the Canadian housing market, Part 1: Higher interest rates

Like Nick, I've been thinking and worrying about the Canadian housing market, but not blogging about it. I've decided that it's worth putting some points out for discussion on the topic, if only because it's something we should be talking more about. I've broken it down to three separate posts: the second is here and the third is here.

The Bank of Canada has been warning homeowners that low mortgage interest rates are not here to stay, and homeowners' financial planning should be based on higher rates in the future. This concern is also the reason why the Department of Finance has been tightening conditions on mortgages. We don't want to see a wave of houses being dumped on the market because highly-leveraged home owners were unable to renew their mortgages. Or worse: a wave of defaults as people find they can no longer make their payments after renewing at a higher rate.

Below the fold, I'll try to sketch out how changing mortgage interest rates have affected mortgage payments in the past, as well as the sorts of changes people should be preparing for.

Things I think about and worry about but don't blog about

I mean macroeconomic things, not just cars and canoeing and stuff.

This is another "selection bias in blogging" post. Probably a more important selection bias than the one I talked about in my previous post.

If you thought that my blog posts are about all the things in macroeconomics I think are important, you would be wrong. Yes, my thinking something is important is one criterion, but it's not the only one. There is no point in me blogging about something I think is important if I also think I don't have anything useful to say about it. Because other people know more than me. Because other people are already saying anything I could say. Because I don't have any new thoughts I haven't already said. Because I can't make up my mind on the subject so don't know what to think. Etc.

The Lucasian map is not the Hayekian territory

In defence of Lucas '72.

Take any macroeconomic model of a market economy with inefficient aggregate fluctuations. In fact, take any economic model where something bad might happen.

Assume that model is literally true.

The people in that model are idiots.

The Wealth Curse -- why we are almost always less wealthy than we think we are

Wealth is an expectation about the future. Absent a complete set of futures markets, our expectations won't aggregate up, because our plans for the future are interdependent and almost always mutually inconsistent. Other people aren't planning to do what fulfilment of our own plans requires them to do. Our plans are going to be disappointed, even if nothing exogenous changes.

How do we get from here to Armageddon?

This is essentially a rerun of this earlier post, which produced no answers I found convincing. It's provoked by Livio's recent post, which produced comments raising questions similar to one that I've been asking for many months now. The question is: what are the mechanics behind "there's a housing bubble in Vancouver" (it's always Vancouver) to "therefore, Canada is doomed to a US-style balance-sheet recession"? There are any number of pundits who are willing to make this jump in logic, but the intermediate steps are almost never enumerated.

I don't have any problem imagining that housing prices in Vancouver and elsewhere will fall when the Bank of Canada starts its next cycle of interest rate hikes. What I'm having problems seeing is why that means we will follow the path the US took.

What Does a Canadian Housing Bust Look Like?

Housing prices in Canada and the possibility of a burst housing bubble were back in the news during this past week.  A report by Capital Economics said that housing prices in Canada could fall by as much as 25 percent over the next three years as a result of a loss in market fundamentals that include record levels of houshold debt and overvaluations relative to incomes.  Of course, we probably think that housing busts are the kind of things that only happen in other places but they have happened in Canada in the past - the early 1990s in Toronto and Calgary come to mind.  They have also happened in our more distant Canadian past on a scale that might surprise you. 

This is what a balance-sheet recession looks like, and it's not pretty

I had never heard the expression "balance-sheet recession" before this recent episode, and it's time I got around to a comparison of the household balance sheets of the US and Canada. Of all my "Canada is not the US" posts, this is the one that makes me most grateful.

Canadian mortgage debt

I feel bad about writing too many abstruse theory posts. How many angels can dance on the head of a monetary pin?

Here's something more practical. Think of it as a companion to Livio's post about Canadian house prices. Why would we worry if Canadian house prices are overvalued? One important reason (though not the only one) is that if house prices are overvalued that is one reason (again, not the only one) to expect they might fall. And if house prices fall, people with large mortgages might have negative equity, and this might lead to defaults, and problems in financial markets.

Are Canada's Housing Markets Overvalued?

Bank of Canada Governor Mark Carney is going to be in Vancouver on Wednesday June 15^th to deliver a speech on the country’s housing market.  There is a lot of interest as to whether or not the housing market is overvalued so I thought I would take a look at housing prices and markets using the most recent CMHC annual report (2010 Housing Observer) I was able to dig up, which has average housing prices by major urban centre as well as an assortment of other data for the period up to 2009.

Garth Turner bleg

There's a job needs doing, but I'm not the best person to do it. Because I was never that good at variances and covariances and CAPM and stuff. One of you finance guys would be much better.

The house price fairy

The house price fairy visited me last night. She offered me three choices: she would instantly double all house prices; she would instantly halve all house prices; or she would leave all house prices the same.

"You stupid fairy!" I replied. "Don't you know i already own this house, and I have no plans to sell it or to buy another? I need somewhere to live, and I've got it; I have already covered the short position in housing I was born with. I don't give a damn what you do with house prices; it won't make me richer or poorer or affect me in the slightest. That's why I own exactly one house, not two houses, and not zero houses, so I didn't have to care if house prices went up or down. Next time you wake me up, at least offer me something interesting to choose from!"

She looked at me reproachfully. "Nick, I expected better from you. Non-economists can only think of wealth (income) effects, and usually get them wrong too. You got the wealth effect right, but you ignored the substitution effect".

She was right. What should I have chosen? Or rather, which of the three choices should I not have chosen?

Liquidity and the housing market Phillips Curve

I think it is a stylised fact of the housing market that, on average, houses sell quickly when house prices are rising, and sell slowly when house prices are falling. (I am talking about house prices rising or falling relative to trend). There is a negative correlation between the rate of change of house prices (relative to trend) and the length of time houses stay on the market before selling. Why should this be so?

This stylised fact is very much like a housing market Phillips Curve. When prices are rising unemployment is low (houses sell quickly). When prices are falling unemployment is high (houses sell slowly). Thinking of this stylised fact as a Phillips Curve leads immediately to the following two theories:

Why can't Canadians get 30 year mortgages (but Americans can)?

The typical Canadian mortgage matures in 5 years or less. Why can't Canadians get (say) 30 year mortgages? I used to think that the answer was "inflation", or "inflation uncertainty". Now I don't. Now I think the answer is "Section 10 of the Canada Interest Act". Which we should abolish.

Why can Americans get 30 year mortgages? I used to think the answer was "some sort of implicit subsidy by Fanny and Freddy". Now I'm not so sure.

This post is mostly about Canada. But it has implications for Americans. On reading US comments and responses to my previous post, I get the impression that there's a general assumption that the US 30 year mortgage only exists because of government support. I'm not sure that's right. Or rather, it may depend on what sort of 30 year mortgage we are talking about.

US fixed rate mortgages aren't fixed rate mortgages; they are weird, stupid, and dangerous

Americans aren't really insular, like the English. But they live in a very big country, and that can have the same effect. If there's something peculiar about the US, Americans sometimes won't realise how peculiar it is. US mortgages are peculiar. "Weird" is a better term.

Patrick Lawler, as described by James Hagerty, has tried to explain to Americans that their 30-year fixed rate mortgages aren't 30-year fixed rate mortgages, and that they are weird, stupid, and dangerous. He failed, perhaps because he ran out of time.  Richard Green didn't get his point (H/T Mark Thoma). So I'm going to try.

A public finance vignette

Here's a short story, simple but true, that illustrates a lot of public finance: from public choice to Ricardian Equivalence.

I live on a cul de sac. Many of my neighbours wanted our gravel road paved, and were prepared to pay for it. The municipality held a neighbourhood referendum, and the motion passed by more than the required two thirds majority. They hired a contractor to pave the road, and split the cost equally among the 60 households. And today I got a letter asking whether I wanted to pay a lump sum of $6,050 or 15 annual payments of $583 added to my property taxes (which includes interest at 5%).

A question for Canadian housing bubble theorists

I suppose that this really should be entitled "A question for Vancouver housing bubble theorists", because pretty much every 'Canadian housing bubble' story I've seen uses anecdotes from Vancouver.

Here is the question: How do you get from a fall in Vancouver (or Canadian) house prices to a Canada-wide economic crisis?

And no, you cannot cut-and-paste old articles from Nouriel Roubini; Canada's financial markets are very different from those of the US. I want you to explain to me how a fall in (Vancouver) housing prices will generate a made-in-Canada recession.

A buying opportunity for snowbirds?

Casey Mulligan notes that "US houses during the boom did not look so expensive from a European perspective", although he's not sure to what extent it matters. I suspect that it matters a lot to many Canadians. Here's a graph of the Case-Shiller Phoenix house price index in USD and in CAD, along with the Teranet C-6 index:

Graphs for Miami and Tampa look the same.

Since 2002, Canadian housing prices have almost doubled, and US sunbelt prices have fallen by 20%-40% in CAD terms. I wonder how many Canadians are selling their homes and buying US retirement properties these days.