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Canada's economy looks OK, but there's a lot of bloggers on the internet that look at the debt problems of the US, Japan and several European countries (not just he PIGS), and predict an economic meltdown.

My gut instinct tells me this wont happen (maybe I'm a naive optimist), but what do you think?

Alex: I would venture to say that the US fiscal problem is largely self inflicted. They have options, they just refuse to exercise them. I'll refrain from speculating on why.

Hurrah! Economic good news!

Now the big economic debate of the next couple years can get going: is the recovery because of stimulus or in spite of it?

If one looks at the GDP figures, what actually has recovered is real estate and things related to real estate, and some areas where stimulus money was invested(construction, roads..) so yes we have more debt now than ever before. I think Canada will double dip into recession by the end of this year and i predict the canadian dollar going to 60 cents as the CHMC farce and the true state of the endebted canadian consumer/goverment is revealed.

Count me down as dubious as well, for similar reasons (high debt load, recovery dependent on unsustainable increases in residential mortgage debt), although I don't see the dollar dropping much, nor do I see huge problems for CMHC (they are formally backstopped by the Feds after all) and I'm not brave enough to predict a double dip recession this year, I just think it's going to hurt a lot when the housing market turns downwards (sometime in the next year or two most likely, depending on how extreme government measures to prop it up become).

I'd hope the government doesn't do much to prop up the housing industry. Affordability is a big problem in many cities, and it would be good for house prices to come down gracefully (or at least be inflated away).

house prices coming down or inflated away is inconsistent with a strong dollar. I think house prices will more likely crash which will put huge pressure on the CAD and we will have an sustainable export led recovery as we become again an investment destination of our south neighbours, it is just plein old fashioned economics.

dubious: What dynamic do you propose for a housing price crash? I just don't see it. CMHC loans are recourse (even in AB and SK), and employment is doing OK (at least compared to the US). I haven't checked lately, but do we have a big inventory buildup? Have delinquencies increases in Canada?

I think you have to tell a better story.

patrick: have a look at some analasys here. Do you see anything wrong with this story?
also, remember, canadian personal debt to disposal income is standing at 145%.Compare that with 132 down in the states.

While Canada's deficit seems small compared to other G20 countries; if one's includes the Provinces' budget deficit (Ontario and Quebec in particular) then debt ratio to GDP surpasses that of France and GB and approaches that of the US. It probably equals that of the US if one's include all of Canada's entitlement programs such as free healthcare, pension liabilities, and other social benefits.

"A report by the Quebec Ministry of Finance reveals some incredibly troubling findings.
The province, buoyed by billions of dollars in annual transfer payments from Ottawa, is deeply in debt. How deep? Try $285-billion . . . that’s a heck of a hole, especially when you realize that the rest of the country is funding its social and economical agenda.

To put this into perspective; Quebec’s total debt is graded at 94-percent of its Gross Domestic Product. Greece, the country that through its spend-crazy government has triggered a near state of panic in the European Union, has a lower percentage of debt-to-GDP. What does that say about the province? What does the rest of Canada have to say about this?

The findings are incredibly troubling and should serve as a wake-up call to everyone outside Quebec. This is surreal – and we are basically enabling Quebec politicians to take our money and subsidize their citizens’ lifestyle."

Patrick - House prices will come down because they are too high relative to the value of the asset (e.g. rents and incomes). No other story is needed. It's just like tech prices in 2000, all that was needed for them to come down was a change in mentality from speculative to cash-flow based. Delinquency levels and inventory levels are largely an effect of the mentality changing, not a cause, and recourse/non-recourse is irrelevant as huge price swings in the past in recourse jurisdictions have shown.

Actually, Quebec, which hasn't really had a housing bubble like much of the rest of the country is probably in OK shape, it is B.C. which is facing the most potential trouble in my opinion.

Andrew F - I agree with you but if the experience in places like the U.S. and Australia is anything to go by, it wont be long before the government is offering people a 10k bribe to buy a house along with a pile of other goodies. The B.C. government is already promising tax breaks and tax exemptions in the budget for homeowners/homebuyers, and that's with prices near record highs...

After house prices fall, then what happens?

dubious: You make a good point about including all public debt in these comparisons. With respect to Québec, on a per capita basis the subsidization of "lifestyle" is worse in the Atlantic provinces.

Hold ups of major resource projects in Newfoundland have likely cost hundreds of millions if not billions of foregone economic activity and government revenue (Voisey Bay, off-shore heavy oil). Input maximization continues to be the priority goal of the Newfoundland government. Newfoundlanders have stubbornly refused to reform the way fisheries are managed despite the massive and costly collapse of northern cod in the early 1990s. Fishing category unemployment and employment insurance (sic) transfers to commercial fishermen persist, thanks in part to political support in all the Atlantic provinces, Québec and the coast of British Columbia.

Incidentally, once upon a time, we--Canada--used to subsidize the "lifestyle" of Albertans.

Otherwise, I agree that Québec needs to get its own house in order. Returns to state-centric development moved into negative territory sometime ago. Agriculture, in particular, is a habitat- and wealth-destroying political monster. The well-educated francophone middle class was small pre-Silent Revolution. The glass ceiling persisted through the 1980s, but I would guess it has largely dissipated by now. These days, the well-educated francophone middle class runs the show. Québécois nationalism has enjoyed huge success. Time to move on.

dubious: Ok, so you quote a bunch of cherry picked debt figures. Big deal. WHO is going into to debt? If you tell me it's low income households or households experiencing unemployment, then I'll start to worry with you. If it's rich people taking advantage of historically low interest rates, then that's a good thing; it means monetary policy is working! And I don't buy into the public debt fear mongering. We're in the trough of the most serious recession since GD 1.0, of course we have deficits. God help us if we didn't. As the economy picks-up and tax revenue rebounds, the deficits will disappear.

You're just not telling a cogent story about how we go from where we are today to catastrophe. I'm not saying there isn't one to be told, but if there is yours ain't it.

Equalization has provided poorer provinces the opportunity to merely spend more, not equalize government services with the richer provinces. This is readily apparent in Quebec, with it's daycare, cheap tuition, and more generous welfare.

In trying to figure out whether we are in a housing bubble, keep in mind a few things, though:
1) Rent control exists in all provinces except alberta (even in ontario they limit the increases after your lease is up) which drags the rent indexes downward.
2) Canadian banks overall still had rather good lending policies. Most refused a mortgage over 4X yearly household income. It's causing people to stretch, but the only defaults are those whom are losing their jobs. Even when the conservatives relaxed downpayment minimums to 5% and increased amortization times(idiots, though they quietly reversed course) it was far better than the US.
3) Defaults will not go anywhere near as high as the states because people can't walk away from their homes for merely being underwater like they can in the states. You have to declare full bankruptcy here to do that and the bank can go after your job income, etc.
4) We don't have low income people about to get nailed with 3-4% income increases and doubling of payments. They were never allowed near a house.

I don't think we'll have a double dip, though house prices may fall and growth may be sluggish (I'm assuming that the world economy/United States won't go to hell again. i hope they get their financial house in order). I'd be surprised if it's a significant crash; time will tell who's right. Moreover, it'll depend how the BoC sets interest rates in the near future. They're playing with fire at keeping interest rates this low, both in terms of inflationary risk and cheap money.

dubious, that link to americanada's graphs show loans doubling every 10-12 years. This is in line with inflation and population growth, which combined equal ~6%/year (which compounding would double every dozen years; incidentally the stock market doubles roughly this often too).

Stephen, in my opinion if house prices fall we'll do the same thing that happened in the late 80s. People already owning a home will curse to themselves and may be stuck in them for awhile if they're underwater, and new buyers will have more affordable housing and will spend the rest of the money on something else.

We don't have low income people about to get nailed with 3-4% income increases and doubling of payments.

Oops, i means 3-4% INTEREST increases.

Christopher said :
dubious, that link to americanada's graphs show loans doubling every 10-12 years. This is in line with inflation and population growth, which combined equal ~6%/year (which compounding would double every dozen years; incidentally the stock market doubles roughly this often too)"

Look, from 2001 to 2009 the canadian personal debt more than doubled.

Now are you saying that canadian population doubled in the last decade? CBC has a 2% inflation target, i dont know how that makes for 100 or even 50% increase.
Have a look at the canadian inflation rates and let me know how you made the calaculation

Also, are you saying that the stock market doubles every 12 years? Havea look at the japanese stock market for the last 25 years, it has declined!!!

It amazes me why when prices of evth else go up is bad news, however when RE goes up, all media in this country pump it up as good news.

more interesting link

dubious, you're not answering Patrick's question. Scattershot factoids isn't an analysis.

Take us through the steps from here to Armageddon.

I am not predicting armageddon, what I think will happen in sequence is:
1) chinese commodity led bubble will pop
2) housing in canada will crash to levels of 2003-2004 back to where they are supported by fundementals at the same time as Alt-A in the US goes off causing un double dip recession
3) CHMC will loose a lot of money, CAD will be back to 60 - 70 cents range, there will be a lot of pain for people that took 3/35 morgages the last 3 years.
4) economy will start slowly to recover as we become competitive again with the low CAD, and it will be a private sector led recovery.

This is no catastrophe, it is a saine cycle that we will have to go through.

I will not start arguing with Patrick or anyone who still beleievs that there is no housing bubble in Canada when it takes 9 time household income to buy the median avearage house in vancouver and it costs twice as much to own than rent even with the lowest interest rates in history! It is unbeleivable how much people are still in denial in this country.

Why does 3) happen?

why does 3) happen:
because CHMC insures 100% of all morgages in canada and if prices correct to 30 to 40% lower as they should to align with fundementals, CHMC has to come up with the money and they dont have any! Look at their books. Fannie and freddy had limits as to the size and type of loans they could insure whereas CHMC has none. Go and ask your bank for a morgage, they dont care if you can pay it back or not as long as you qualify for CHMC insurance. Du you think this is prudent lending?

There will be close to 1 trillion CAD CHMC insured morgages in this country by year end. Think about it.
CHMC obligation should be counted as goverment debt to bring fiscal responsibility back here. Politicians are using CHMC as SIV to keep off balance sheet a huge number of liabilities which will eventually come to haunt the taxpayer in the near future.
The major unkownn is how much eauity withdrwal has been going on by the homeowners in canada. Too bad those statistics are not published. Even CHMC does not publish detailed statistics as to the type of garbage they are insuring. why? shouldnt this information be public? In the end not only we are not much different from the states, but we could be worse, time will tell.

Why would CMHC have to pay anything?

Stephen: Because CMHC insures the mortgages. If/when the bubble bursts, the banks in Canada should do fine--CMHC (and through CMHC all Canadian taxpayers) are on the hook. It might be fun when/if the taxpayers of all Canada get to bail out CMHC so that banks who made silly loans in Vancouver can be made whole. I don't think there is a more pure example of 'privatize the profit and socialize the loss' out there than the mortgage finance market in Canada, as currently arranged.

"After house prices fall, then what happens?"

Well, you could just look at Japan (two decades of stagnation), Ireland (steeply falling wages, high unemployment), Spain (unemployment at 19%), the U.S. (worst unemployment situation since the great depression) etc. but since you asked, a few things happen:

1) Residential investment will fall and stay low for quite a while
2) Personal consumption will fall due to less profit taking from sales, less home equity borrowing and less wealth effect spending. Personal savings rates increase.
3) All the money currently being 'printed' by residential mortgage debt expansion will no longer be generated, and this process will go into reverse as defaults rise (defaults are higher in a falling price environment since almost nobody defaults when they can sell their house and take profits from a gain instead)
4) Major financial institutions tighten their lending rules, marginal players, subprime lenders, etc. leave the market or scale back significantly.
5) Economic problems lead to reductions in household formation rates, lower incomes and lower rents, aggravating the fall in housing prices and the lack of residential investment.

What the overall impact is depends on how governments react. Around the world, governments have relied on 3 approaches with varying levels of success:

1) Restarting private borrowing with incentives (cash for clunkers, homeowner grants, tax breaks, etc.)
2) Substituting government borrowing (big deficits) for private borrowing
3) Printing money directly

In my opinion, 3) is the right approach and the countries that adopt it most aggressively will come out best from the global debt overhang, but I guess we'll see how it goes.

But how do we know that people will be defaulting on those mortgages? If that were going to happen, wouldn't it have happened when people were losing their jobs? Why would people default when house prices fall?

Even if that *does* happen, how does that affect the real economy? Banks and financial markets would carry on as before.

Cross-posted with Declan.

1) Residential investment will fall and stay low for quite a while

Why? There's no inventory overhang.

defaults are higher in a falling price environment

How much higher? Enough to matter? And why would the defaults happen now and not when the economy was shrinking?

The inventory overhang only shows up when the speculators dump their properties on the market and they only dump their properties when prices head down for a long enough period of time to convince/force them to bail. Maybe there's no overhang but given that housing starts have exceeded household formation for years and years, and how little increase in real rents there has been, I'd find that surprising. Vancouver was developing a massive inventory backlog in 2008 before interest rates were cut to 0 and the market rebounded. The cut in housing starts caused by the temporary 08/09 plunge in the market will help, but not enough in my opinion.

How much higher will defaults be? - That's a tough one, but it's been high enough to matter in a lot of countries - and given that consumer debt levels in Canada are among the world's highest, I wouldn't be too optimistic.

I already explained why nobody defaults when the housing market is strong, people sell their house and take the profits instead of defaulting. It just makes no sense to give up your home equity to the bank except in unusual circumstances. But when you don't have any equity...

Keep in mind that all CMHC insured loans - even in AB - are recourse loans. Default, and they'll sue to be made whole - which usually forces the borrower into BK. How do get a massive wave of defaults given these incentives?

With these incentives, I think speculators, who get caught with their pants down will become landlords rather than risk certain ruin.

when you have 65% of canadians one pay stub away from disaster, I doubt that the non recourse clause will do any help, it is even worse than in the states where you at least can punish the bank for having made a bad lending decision and walk away free from the morgage. Here, it seems all our system is designed to service the banks, we buy their crap through CHMC, insure their risk free morgages so they can make a risk free profit and advertise them as the soundest in the whole world and there is no relief for the poor taxpayer because of the non recourse clause. Why just not nationalize them, at least the taxpayer can get a share of the profits as well.


what we often ignore is that what you call speculators (they arent rich speculators) but mainly hard working canadians convinced by real estate propganda the home prices go always higher. I personally know people with 3 and 4 houses working at walmart. I doubt they will be "proud owners" or landlords for too long nonwithstanding the non recourse clause.

If Canada is going to experience a severe housing downturn then Australia is going to experience the equivalent of being nuked back to the Stone Age.

Now are you saying that canadian population doubled in the last decade? CBC has a 2% inflation target, i dont know how that makes for 100 or even 50% increase.

Dubious, you completely skimmed my post (and everybody else's by the look of it). If you can't add or calculate the compounding increases yourself, you need to re-analyze your assumptions.

~2% inflation (in the very graph you shown), with ~1% population growth, added to ~3% productivity increases. I wasn't saying 2% compounded would double every 10-12 years, but adding all those together would at least in terms of total real debt issued in all of Canada. It's not a bubble (yet). I worry about our low interest rates, though.

Also, as I also said, Canadians won't/can't just walk away from their houses if they plummet in value. If they can still make the payments with their current job, they CANNOT declare bankruptcy. In the states, you can do just that and the bank is up shit creek (this is bad economic policy, but the american obsession with homeownership as part of the american dream has put them in the doghouse). You don't even need a court. You've ignored all my points and haven't really answered Stephen's questions. Specifically:
How much higher? Enough to matter? And why would the defaults happen now and not when the economy was shrinking?

And I don't believe you when you say "I personally know people with 3 and 4 houses working at walmart". No bank in Canada would give out enough loans in Canada to pull that off. In fact, CMHC explicitly forbids loaning much more than 5X yearly household income. Those walmart employees have some pretty big dumps if they've pulled that off.

Stephen's right. If what you were saying was true, the market would have already crashed. While I can see housing prices staying flat like the early to mid 90s (or even them going down by 10-20%), it's not going to affect the banks.

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