Wednesday, December 29, 2010

Who says Canada has a housing bubble? Lots of people

Anyone who keeps an eye on economic indicators probably has an opinion as to the relative health of the Canadian housing market, and with good reason. Whether you're simply a home owner looking to build equity, a prospective buyer trying to decide if now is a good time to jump into the market, or employed in the building or selling of homes in this country....

There are a lot of people who's financial situation is very much tied to the health of our housing market.

We've all seen the ads with the couple in front of a bank employee, young and probably leveraged to the hilt with expenses at or near their income. What to do? The bank helps them free up the equity in their home, borrowing against it at dirt cheap rates of interest to free up their monthly cash flow.

You have more money than you think, is the message. With your house appreciating significantly in value you can pay off the line of credit and those high interest credit cards, and then go buy that new car and maybe hop on a plane for a nice warm destination this winter. Of course you'll own less of your home than you did before, but you're monthly debt servicing costs will be less, so what the hell.

In our hedonistic society all we need is an "expert" vindicating our decisions to indulge and we're good to go.

Then there's the real estate industry, selling new and resale homes to prospective buyers. Thousands of people's pay cheques rely on a steady stream of buyers entering the market, pushing prices ever higher. Within this same group I'd include the financial industry, always on the lookout for new ways to sell more paper...signed mortgage documents ensuring a steady cash flow and a tangible asset represented in the actual property.

With all these voices having a vested interest in seeing housing prices on a never ending up swing it should come as no surprise that talk of a housing bubble gets some people's backs up, but the voices are out there.

The last time oil was cresting $120 (USD) a barrel there were voices in the wind urging caution, but far louder were the shills spooking investors with fears of peak oil. Those who bought into oil at the height of that fear are still smarting, not as badly as when it crashed all the way to about $40. The smart ones of course waited until the bottom fell out before buying in.

But that's what smart money money waits for the herd to push prices to insane levels, and then scoops up the bargains when the bubble bursts and the bottom falls out.

Is that where real estate is heading? Are homes at or near a peak and due for a major correction? You won't hear any of the aforementioned vested interests promoting this idea. Cautious industry hacks are as rare now as bearish stock analysts were when Nortel was flying high, but there are voices in the wilderness...there always are, you just need to look.

Back at the end of the summer (Aug. 31/2010) David Macdonald of the Canadians Centre for Policy Alternatives wrote a paper entitled:

Canada's Housing Bubble An Accident Waiting to Happen (LINKED)

It got some play in the media, but not nearly as much as reports done by industry players and major advertisers such as Remax. Here's one which paints a far rosier picture:

Real estate picture improving: Re/Max (LINKED)

So who are the voice in the wilderness? Beyond the Canadian Centre for Policy Alternatives are there others cautioning about the potential for a significant devaluation in house prices?


Foremost would be Garth Turner with his blog GREATER FOOL (LINKED). This former 'loose cannon' politician and financial commentator pulls no punches and writes in a very engaging style that most I think will enjoy. His credentials also include many years working as a financial reporter/analyst for some of this country's major media outlets.

You can even find a full site dedicated to Canada's housing bubble at the aptly titled: Canada's Housing Bubble (LINKED)

A fellow blogger commented on an earlier post and mentioned that he has set up his own blog specific to the overheated Vancouver market: Vancouver Property News (LINKED)

When someone has a vested interest on one side or another of a debate, it can be hard to look past a firmly entrenched bias. For those still unconvinced of the storm clouds on the horizon, (clouds just waiting to be seeded by simple one or two point jump in mortgage rates) I invite you to read THIS ARTICLE: Housing bubble a danger - expert (LINKED) about Dean Baker, one of the first economists to predict the crashing of the US housing market.

Once mortgage rates start climbing I don't think it'll be long before signs like this become commonplace.

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