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First, maybe discuss what triggers the fall in the first place. (Assume a crisis..!)

That's not that hard - we're expecting interest rates to rise in the next few months, so we should expect housing prices to fall. What I don't see is how that leads to a US-style catastrophe.

don't you see man, its the CMHC, its a giant house of cards and its all coming down - time for foil hats and tins of baked beans.

Sorry - just wanted to be the first to conflate a boring mortgage insurer and an apocalyptic fever dream.

The Alberta housing market (CGY and EDM anyway) did suffer a pretty serious correction last year, with no real consquences for any other province. Vancouver is overdue - I live here, prices make no sense whatsoever (housing costs @60%+ of household income) - but I can't see how a localized correction would feedback into the rest of the economy in a similar way as happend in the US unless banks have taken massively levered bets on Vancouver real estate.

brendon: Hadn't visited your blog for a while ... glad to read your boy is doing well.

All Canada doomers I come across are of the underpants gnome variety:

Phase 1. CMHC
Phase 2. ???
Phase 3. Apocalypse

I'm not one who thinks that a housing correction will lead to a second, deep recession. I could see a large drop in house prices cooling construction, and generally reducing consumption due to wealth effects. I don't think commercial or multi-unit residential real estate are as vulnerable as they were in the late '80s.

However, say house prices fall by 40% in Vancouver. That would likely be enough for a decent number of people with high LTV/underwater mortgages to consider taking the hit from declaring bankruptcy. I wonder if CMHC has run the numbers on whether its reserves are sufficient to cover such an event without the government having to top it up. My concern about insuring against mortgage default is that claims are not independent. If a market loses a lot of value, there will likely be many claims in a short period of time. One wonders if CMHC should have different premium rates for each housing market based on affordability measures.

People buying houses at insane prices with insane leverage. Interest rates rise and they can't pay. Taxpayer on the hook for losses through CMHC. CMHC liabilities now ~1 trillion dollars, +250 billion per year, leverage is 70:1. Losses will be added directly to the deficit. A 5% default rate on 2007-2009 CMHC mortgages (by value) and a 20% decline in house prices will add 20 billion to the deficit. Double that if we track the US. If this raises interest rates, go to step 2.

Where does that 5% number come from?

Canada's already in a recession if you go to any former industrial heartland. Partly why Vancouver, Toronto and Ottawa are seen to be in a bubble is that their bubble isn't just in housing.

Once foreign bondholders are done with the PIIGS they will look at Canada's fiscal shape - both public debt, public sector obligations (ie pensions) and private debt and go 'uh-oh'. @Patrick - that could very well be phase 2 where you have question marks. Even if CMHC isn't 'Canada's Fannie and Freddie' if foreign investors think it is, then it doesn't matter - they'll sell anyway.

The real problem isn't now but five years from now when all those 'first time homebuyers' go to renew their 5/35 only to find in the meantime that either interest rates have spiked so that their payments go up substantially more than any raise they've had in the meantime and if the value of their house has fallen sharply in the meantime the bank might have some issues such as having the home-debtor come up with the difference in cash when it comes time to renew.

Oh, but we're a resource rich economy and there's lots of Rich Asians keeping Vancouver prices high? China's finances are looking shakier and shakier the more economists and investors examine them (Andy Xie, Jim Chanos etc.) and if China has a severe crisis those 'Rich Asians' aren't going to be so rich any more and there might be a lot less commodities buying (for those who believed that this actually was enough to make a difference to begin with - I don't).

What triggers? Simple - more sellers than buyers.

And what would trigger that? Vancouver's already unaffordable to the average person. At some point they'll run out of 'greater fools' like every other pyramid scheme.

Perhaps as some theorize, all these people buying multiple condos have done so with an eye to selling to the influx of foreigners attending the Olympics who visited for the first time and now just *have* to live there. What if those foreigners don't come, figuring that better bargains can be had further south?

Famous last words before any bubble pops: it's different this time.

No, it's not. It never is. If prices can plummet in Miami they can fall in Vancouver.

As for the Big 6 banks - a lot of them have an awful lot of crap on their balance sheets (so I hear from people who work high enough up in them) and a lot of phantom profits from derivatives trading. If the reliably volatile TSX sinks again (look at the crazy volume during the downdraft on Friday) they're not going to collapse but they aren't as healthy as many people seem to think they are.

Stephen, I couldn't agree with you more, and I'm saying this as I go out to buy more properties in Edmonton today.

Wouldn't a housing collapse be good for the economy? or should I say a controlled implosion? Wouldn't that clean out speculators, increase demand for those who really do need a home and not an vehicle by making home ownership more affordable. Perhaps the demand for high end luxury renovations might fall, but as a whole I wouldn't think it would kill your average home builder or renovation company. It might increase the demand for more modest renovations?

I don't know if a housing reallignment is such a bad thing.

I don't know if a *collapse* would be a good thing. But as long as other sectors start to pick up the slack (and they appear to be), I'm not too concerned by the prospect of a slowdown in housing market activity.

Vancouver hasn't had the massive expansion in housing stalk that Miami, Pheonix, etc have had. It was eventually the massive amount of new supply from overbuilding that caused the crash. Vancouver still has scarce supply. Also, loan requirements at Canadian banks still remain quite stringent by world standards. The average Canadian has quite a bit of equity to buffer against, whereas many Americans had none. If Canadians are using HELOCs all over the place, then there's worry. Also, the majority of Canadians still have mortgages from 2 or more years ago, before low interest rates came along. While some are 'lucky' with the low rates, the majority still don't.

I remain skeptical of a Canadian housing-induced recession. If 10% unemployment isn't causing defaults left, right, and centre then I'm skeptical we have much to worry about. Hopefully interest rates don't stay this low, though.

Erm, housing stock, not stalk.

If 10% unemployment isn't causing defaults left, right, and centre then I'm skeptical we have much to worry about.

This is sort of a corollary of my question: why didn't it happen *during* the recession?

It could be that the crisis actually prevented a steeper fall in prices since over-levered owners who were about to be reset at 5-6% were instead able to renew mortgages at historically low rates and therefore were not forced to sell. Without a glut of supply and with new demand induced by low rates, prices started to rise again, in spite of a serious recession.

A fall in Canadian house prices will be associated not with a Roubini'esque collapse, but with a need for more monetary stimulus.

Quite possibly. Not an insurmountable problem, though.

Data helps. Here's some interesting stuff on Vancouver.

Vancouver housing prices - detached, attached and condos peaked around May '08, bottomed out around Feb '09- May '09, and then began climbing again to where they are today - new historic highs.

Vancouver unemployment rate - hovering around 4% (S.A.) from beginning 2006 to mid 2008, then starts to climb to around 6% end of 2008 (end of graph scale)

Stats Can indicates unemployment rate continues to rise - up 2 points (unadjusted, 3 month moving avg) from 5.6% Feb 2009 to 7.6% Feb 2010

So, why the rebound in prices from mid 2008 while unemployment continues to rise? Must be Olympics effect, lowered interest rates, and speculation.

Tonight is the closing ceremonies for the Vancouver Paralympics. VANOC will be pretty much fully shut down by the end of March. Perhaps the start of the Vancouver real estate double-dip.

Does anyone buy a house because the Olympics are in town?

Well, if you were one of the 1500 hired by VANOC two years ago for a fixed consulting gig, would you rent and stick your family in a crowded apt, or invest?

VANCOUVER -- The windup of the Vancouver Organizing Committee began in earnest hours after the closing ceremony with the release of 300 of 1,500 full-time employees...

By the end of March, Vanoc will have shed another 1,200 or so employees, and by June will have just five working in the finance department, wrapping up.

Now start adding in support, sponsors...

Sponsors and other partners account for another 1,500 to 2,000 people who also need to look for jobs now.


Re: earlier question: why not during the recession? Lag time - severance, and how many months of mortgage default before a bank begins foreclosure? And if the market is still rising, bail or rent it out short term.

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

Here is the answer : By the end of next year if not earlier, you will know it, and will be theorising on this blog how we got there. I am sure you (and your fellow economists) will come with some theory to fit the facts on the ground afterwards.


A housing correction in Vancouver seems unlikely to spark a national recession. More likely we might see a housing correction either as a standalone event, or, coincident with other events such as the next recession in Canada/U.S., or rising inflation once the deflationary trend in the U.S. peters out.

As for when the correction in prices occurs, I am not in the camp of those believing the Olympics had anything at all to do with rising prices, not in any material sense. It seems more likely that recession put the lid on sellers coming to market, indeed Decembers rise was on constrained inventory if I recall correctly. Chances are that's going to spark something of a wave of sellers this spring, unless more than some believe that the rise is part of a longer term trend. If the latter occurs then maybe there'll be a parabolic spike I can dump our place into!

When I look around my neighbourhood I see that a great deal of the recent purchasers have been moving in with tenants. This is not a recent innovation here. I'm of the opinion that secondary (and tertiary) rental suites in single family dwellings are vastly under-counted in this city.

If you have 800 (small 1bdr) to 1200 (larger 2bdr) times one or two suites per family dwelling as a mortgage helper, suddenly the mortgage to rent ratio becomes a lot more palatable. Not making an excuse, we bought low and are paid off, I'm just putting a spin on one reason why prices are where they are. The market bears it because there is seemingly constant demand for secondary suites.

Olympics had very little to do with the rise in prices - if it was an olympic effect, why did other jurisdictions experience similar price increases? I think it has far more to do with very strong economic and employment growth and very low interest rates starting around 2002.

To the extent that the games impacted employment, there is likely some impact that can be pulled out, but it is a very small impact in percentage terms.

A fall in housing prices limited to Vancouver (which contains <10% of the population of the entire country), is unlikely to trigger any serious nationwide consequences, much in the same way that good economic times along with a solid housing market in Vancouver during the early 90's didn't prevent the national statistics from showing a nasty recession.

Economic 'problems' associated with a downturn in housing prices are as follows:
- Sharp reduction in construction activity (I don't know what % of Vancouver gdp is from residential construction, maybe 5-10%?)
- Sharp reduction in incomes for all associated with real estate industry (agents, brokers, lawyers, appraisers, inspectors, renovators, etc.)
- Mild reduction in consumer spending due to wealth effect (people feel poorer)
- Sharp reduction in consumer spending via borrowing against home equity
- Sharp reduction in local monetary expansion due to reduction in growth / shrinkage of total debt outstanding (as per MoneyDemandblog, above)
- Reduction in labour mobility due to people being underwater on their houses
- Reduction in small business borrowing /activity due to inability to put up real estate as collateral / unwillingness to take risk in the face of adverse net worth shock
- Reduction in government spending at municipal / provincial level due to lower tax revenues
- Reduction in bank lending generally due to adverse economic conditions / mortgage losses
- Federal losses due to insurance of CMHC and possible need to bail-out Genworth as well (unlikely to amount to all that much if a housing downturn is limited to Vancouver, but could reach meaningful, if not overwhelming dollar amounts in the event of a national crisis)
- Death/severe contraction of subprime lending business (not as big as in the U.S., but not inconsequential either)
- Very hard times for financial institutions that focus heavily on Vancouver real estate (e.g. some credit unions)

I've probably missed a few :)

Personally, I've never felt that the popping of the housing bubble should cause a serious crisis or a financial industry meltdown (after all, even the great depression failed to topple any significant Canadian banks), just grinding, recessionary economic pain for a few years until prices have mostly corrected, although I do note that the extreme measures taken by central banks/governments around the world when faced by the prospect of falling houses suggest they may not share my equanimity. I suspect the biggest impact is the monetary one. In a credit based monetary system, sharp contraction in the biggest source of credit is likely to be disruptive.

On a different note, any thoughts on Japan? Seems like they've been in economic stagnation for two decades since their property bubble burst, despite limited financial contagion from the decline in prices. What is it that puts us in better position than they were in (I'm not saying we're not in better position - I'd just like to see an economist make the case).

The contagion if there is one is via financial institutions.

Since Canadian banks are (we hope) well capitalized and well regulated, this should not be a problem. It will hit local lenders (Credit Unions?) and sub prime lenders.

The real concern is the balance sheet of the CMHC, where I do not think the full story and the full exposure are in the public domain. This reminds me (too much) of Fannie and Freddie, and to a lesser extent stories coming out about FHB (GNMA seems alrigh) which actually is closer to the CMHC in structure.

So it is hard to see a transmission mechanism across the country. What drives the Canadian housing market (besides demographics) is the local economies that are tied heavily to their American state regional trading partners (Ontario with Michigan etc.). And Canadian monetary policy (which is accomodative right now for the foreseeable future).

However it is easy to see a bad sting on the CMHC. Which could lead to tighter criteria in the future, and knock on effects. So a public-sector induced housing bubble reduction/ 'pop'. But the pricing effects, given that most other markets are not so obviously out of line nor so speculative, should be modest.

I agree with valuethinker: the biggest hit would be to the taxpayer via CMHC losses. But it's not easy to see what the solution is. CMHC insurance premiums are not trivial. In principle it would make sense to charge higher premiums in markets that are more likely to crash, just like car insurance ;-), but unlike car insurance where there's good micro-data on which drivers are more likely to crash, that would take a real judgment call for housing markets, and so would be a very "political" decision.

I am not in the camp of those believing the Olympics had anything at all to do with rising prices, not in any material sense.
Olympics had very little to do with the rise in prices - if it was an olympic effect, why did other jurisdictions experience similar price increases?

Well, I'd be more inclined to defer to people who live there and know the market better than I (or are involved in the real estate business, of which I am not).

But, here's what I'd look for if I wanted to look for any Olympic influence (and I'm not claiming it is the main reason, but a factor).

Rising prices in other jurisdictions: The rising tide lifts all ships. But in real estate- it's location, location, location. So, if I could use a slightly different analogy to a bubble - say a volcano. How do scientists know when it is about to erupt? The lava dome starts growing - and it eventually erupts when the weakest point (the centre) can't stand the pressure anymore. So, in Vancouver proper, if prices continue to rise, and new construction is constrained, what is happening? Either people are cashing out - and moving to cheaper locales (raising their prices), or the trading is thin (as in a stock) - so a few number of sales distorts the real market. Maybe look at sales volume, and relative prices.

Also, it seems to me when I looked at a few condo ads for the Vancouver market a couple of months ago, there was marketing hype about "getting in before the post Olympic bounce". Comparisons were undoubtedly made to the Vancouver real estate market post Expo '86 bounce, and the 1997 Hong Kong reversion from Britain to China exodus (which introduced the term "Monster House" to the Vancouver real estate vernacular). Since the price someone is willing to pay today for a house is based upon future expectations, the hype may not need to be true, only perceived by the purchaser to be true. I'm reminded of when I lived in Vancouver and a young Howe Street trader from Vancouver was purchasing in East Van (West Van where he grew up was now too expensive) because if he didn't get in then, he'd be priced out of the market. That was around 1994 (and pre Expo land and Coal harbour developments). I wonder if there wasn't some of that happening of late - "get in while you still can - and if interest rates rise, cash out with a profit".

There is no "bubble" per se but are residential and commercial real estate on the west coast being developed beyond what will be sustainable in the mid-term?

Barring increased surges of wealthy Asian immigrants or a return to higher prices for softwood timber and natural gas, it certainly looks like unsustainable to me.

There was no "bubble" in automobile production in the USA during the past decade. But emission regulations and low borrowing costs did contribute to a substantial increase in new vehicles on the road. Many American and Canadian workers are still unemployed because of this policy-driven overbuild.

Maybe you can use the ABCP crisis as a threshhold proxy. The USA tanked late 2008 and we barely tanked. What were their imports and exports reduced by? Probably can be translated into the equivalent Canadian housing price collapse. Maybe Vansterdam prices would have to triple or something before they could really tank Canada, and Flaherty recently signalled he's watching housing bubbles; is no one in the land to the right of him. The USA lost what, $8T? Maybe that is $100B of lost Cdn capital over last few years and it didn't really recession Canada. The tricky thing is there was a bubble beforehand that would've given profits to banks/insurance and it is hard to imagine them squandering everything so quickly. Fraser Valley housing actors are likely fat; insulated somewhat from lean times.

Beyond just a housing downturn, I think many people who see crisis coming, see it coming from too much debt in general leading to a debt-deflation / Minsky moment type meltdown, and a housing bubble popping would just be one deflationary element of that.

Debt-GDP ratios are high, but maybe they can be lowered without incident, or maybe they can go higher, or maybe they can just level off, I don't know, but for the last few decades it seems like economic expansion has been synonymous with increasing debt/gdp ratios and that doesn't seem sustainable over the long haul.

Wow. A very disappointing piece related to this from an otherwise good blogger:


The answer is "it depends."

It depends on the trigger mechanism for the housing price decline. It depends on how far home prices fall. It depends on the strength of the Canadian financial system. It depends on the strength of the US and global economy.

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