Wednesday , 13 December 2017


Housing Bubble Threatens Financial Stability of Canada – Here’s Why

While the hot air was let out of the housing bubble in the U.S. between 2007 and 2011,house-fiscal-cliff in Canada, after a minor ripple between 2008 and 2009, home prices continued soaring – to this very day. In August, they rose another 0.8%. Over the last 14 years, prices have increased by 150%, twice as fast as in the U.S…[and] far outpacing household incomes. Any increase in interest rates would prick the bubble, and its implosion would trigger all sorts of mayhem. Indeed, the Canadian government is very concerned that such an event would be a significant risk to the “stability of the financial system”.

The above introductory comments are edited excerpts from an article* by Wolf Richter (wolfstreet.com) entitled Is Canada Next? Housing Bubble Threatens ‘Financial Stability’.

Wolf goes on to say in further edited excerpts:

Home prices in Canada rose more moderately than in the U.S. during the crazy go-go years from 2000 until the financial crisis: in the U.S. they more than doubled in that period, according to the CaseShiller Index, while they rose “only” about 70% in Canada, based on the Teranet–National Bank National Composite House Price Index.

House Price Index UP Dramatically

While the hot air was let out of the housing bubble in the U.S. between 2007 and 2011, in Canada, after a minor ripple between 2008 and 2009, home prices continued soaring – to this very day [as can be seen in the chart below]. In August, they rose another 0.8%. Over the last 14 years, prices have increased by 150%, twice as fast as in the U.S..

Canada-house-price-index+US-CaseShiller

…In a speech to the Chamber of Commerce and Industry of Saguenay, Quebec, Bank of Canada Deputy Governor Agathe Côté has weighed in on the housing bubble discussing. among other things, the four key responsibilities of the BOC – monetary policy, the financial system, the currency, and funds management.

The housing bubble falls under the key responsibility of managing the financial system, or more precisely under the objective of promoting its “stability and efficiency.” As part of its Financial System Review, the BOC “assesses vulnerabilities and risks.” Among the four “important risks” in her presentation:

  • A sharp correction in house prices
  • A sharp increase in long-term rates

If those two occurred, all heck would break lose.

House Price-to-Income Ratio UP Dramatically

Home prices have skyrocketed, far outpacing household incomes. This chart from Côté’s presentation shows the very ugly growth of the house-price-to-disposable-income ratio. Since 2000, it has relentlessly soared, as home prices are placing an ever larger burden on household finances:

Canada-BOC-High-house-prices_1981_2014

Household Debt-to-Disposable Income Ratio UP Dramatically

Given the lagging incomes, households have made up the difference with debt, and they’ve gone on a phenomenal borrowing binge, and their indebtedness in relation to their income has skyrocketed and is now hovering at near a record 164%..

The chart below shows the debt-to-disposable-income ratio, which doesn’t leave households, and by extension lenders and the entire housing industry, any room to breathe once home values begin to descend back to earth – and there’s no trace of deleveraging in sight:

Canada-BOC-High-rates-of-household-debt

Home-price bubbles are treacherous. High household debt relative to disposable income has made the market more susceptible to market stresses like unemployment or interest rate increases. Low interest rates have been heating up the market yet any raising of them would prick the bubble, and its implosion would trigger all sorts of mayhem.

Impact of Higher Interest Rates on House Prices Would Be Dramatic

Now imagine what even just slightly higher interest rates would do to households barely able to shoulder this mountain of debt, and what they would do to home prices as demand would be systematically strangled.

The federal government…[has tried to] cool down the market…[by] shortening amortization periods to 25 years from 40 years and tightening the eligibility for government-backed mortgage insurance… [in an effort to] “engineer a soft landing” [but to no avail].

Conclusion

Bubbles don’t land softly, they implode, and it’s a brutal process. The longer bubbles are maintained, the more brutal their implosion and housing bubbles are particularly vicious: they’re accompanied by a construction boom, which contributes enormously to the economy in myriad direct and indirect ways – from well-paid construction jobs to pickup truck sales.

[Canada’s federal government has good reason to be very concerned about the negative impact any pricking of the housing bubble would have on the financial stability of the country!]

Editor’s Note: The author’s views and conclusions in the above article are unaltered and no personal comments have been included to maintain the integrity of the original post. Furthermore, the views, conclusions and any recommendations offered in this article are not to be construed as an endorsement of such by the editor.

*http://wolfstreet.com/2014/10/01/is-canadas-truly-magnificent-housing-bubble-next/(Copyright © 2014 Wolf Street Corp. All Rights Reserved)

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