Canadians are becoming increasingly vulnerable to a housing correction, exposing them to a perfect storm of high debt and falling assets, the Bank of Canada warns…suggesting that many Canadians have constructed their finances on a house of cards, with ever rising home values the key and vulnerable support. [Sound familiar?] Words: 770
So says Julian Beltrame of The Canadian Press in edited excerpts from the original article* which Lorimer Wilson, editor of www.munKNEE.com (Your Key to Making Money!), has further edited below for length and clarity – see Editor’s Note at the bottom of the page. (This paragraph must be included in any article re-posting to avoid copyright infringement.)
Beltrame goes on to say, in part:
Correction in House Prices Will Cause Decline in Consumption
The bank economists point out that home prices have risen sharply in the past dozen or so years along with debt, as households needed both bigger mortgages to buy homes and…equity from higher home values to finance other purchases [saying that] “These facts are interrelated, since rising house prices can facilitate the accumulation of debt …and households, therefore, experience a significant shock if house prices were to reverse.”
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It adds that falling home prices could have a “relatively large impact on consumption” as equity disappears and the ability of householders to borrow is diminished calculating that a 10 per cent drop in home prices could generate a one per cent decline in consumption, which would slow economic growth. TD Bank chief economist Craig Alexander…says the bank’s example of a 10 per cent correction is not unrealistic given that it is the over-valuation figure the International Monetary Fund gives for Canadian housing stock. Alexander himself believes it could be as much as 15 per cent.
Correction in House Prices Will Cause Economic Contraction
He agrees that the central bank has every reason to be worried, because a correction could knock the stuffing out of Canada’s fragile recovery. “When it comes to the housing market and personal debt, I’m not worried that a housing market correction will lead to a problem in the Canadian financial system,” he said. “[Instead,] I worry more about the economy. I worry that if you have a drop in home prices and you wind up with consumers struggling to deleverage, it will lead to an economic contraction.”]
Correction in House Prices Will Not Be a U.S.-style Housing Collapse
The bank does not suggest a U.S.-style housing collapse for Canada is in the offing, nor does Alexander. A big part of the problem south of the border was due to easy credit conditions, something Canadian banks have avoided. [Nevertheless,] the bank’s economists are clearly concerned about the pitfalls from the steady increase in household debt, which has risen as a percentage of income from 110 per cent in 1999 to 153 per cent currently and debt to household equity has risen as well, even as home prices have soared. Part of that is well grounded on growing incomes, it says, but part is also due to super-low interest rates and unrealistic expectations that home values will keep rising.
Correction in House Prices Will Reduce Household Spending
Of particular concern to the central bank is that much of the increase in household debt was not mortgages, but loans secured by home equity which Canadians in turn spent on consumer items and renovating their homes. “These findings suggest that household indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to substantial negative economic consequences in the event of a correction in house prices,” one paper states.
Expectations of House Price Increases Have Moderated
The Bank of Canada papers were released hours after a new analysis by the TransUnion management firm found that non-mortgage borrowing had slowed sharply in the past year to a 1% increase, the lowest since 2004. While that represents only a small fraction of what Canadians owe, analysts have noted that overall debt accumulation has also been slowing of late and that expectations for home prices have moderated. That’s a good indicator that Canadians are starting to heed the message, said Alexander.
History Suggests House Prices Could Correct 20-30%
One paper issued by the central bank suggested that home prices have been influenced not only by low mortgage rates but also on expectations that values will keep rising. History shows that’s a bad bet, the paper states. “Over history, these other factors are associated with the medium-run tendency of house prices to rise faster than their long-run trend for a number of years and then subsequently adjust back to trend.” Those corrections could be as great as 20 to 30 per cent relative to the growth in the economy, it said.
Editor’s Note: The above article has been has edited ([ ]), abridged, and reformatted (including the title, some sub-titles and bold/italics emphases) for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article.
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The ownership premium in Canada’s largest cities is unprecedented, dangerous to new buyers, and unlikely to persist – and if analogies to the U.S. situation at its peak back in 2005 are at all valid, this is bad news. [Let me explain.] Words: 430
The following charts indicate relative performance of US home prices in Phoenix, Los Angeles, San Francisco, Chicago, Las Vegas, New York and Miami to Canadian home prices in Vancouver, Calgary, Toronto, and Montreal. US home prices are reflected in Canadian dollars for comparison purposes. Words: 240
Canada, France and Switzerland stood alone among nine markets measured in recording annual price gains, based on second-quarter data, with inflation-adjusted price increases of 5%, 5% and 4%, respectively, compared to declines of 6% in the U.S., the U.K. and Australia, 10% in Spain and 14% in Ireland. In fact, Canada’s home prices have escalated 44% since 2005 – with a high of 68% in Vancouver – and they are up 7.7% in the past 12 months! Words: 1244
The explosion of Australia’s mortgage debt is viewed by many economists and commentators as the key factor behind Australia’s unaffordable housing [and the primary] reason why Australia’s housing bubble is larger than that experienced in the United States in the mid-2000s. [Another factor is] the strangulation of fringe urban land supply via increasingly restrictive planning processes. [Let me substantiate that contention by comparing the two countries housing situation via a number of descriptive graphs. Words: 817
The rat-through-the-snake process of working down existing and prospective distressed properties is likely far from over, and how that process plays out will no doubt have an impact on how much housing prices will ultimately adjust. [Let’s take a look at some differing points of view in that regard.] Words: 497
There has been a deluge of articles recently about the upticks in the housing data…[yet, while] I do not dispute the improvement in the data regarding home starts, permits, pending sales, etc.,… [see graph below] these data points are still mired at very depressed levels so the assumption is that if home building is stabilizing then it is only a function of time until home prices began to rise as well. Right? Not so fast.. [Let me explain.] Words: 1100
According to both the Case Shiller and RadarLogic indices housing prices have been essentially flat for the past 2 years after having fallen by a third from their 2006/7 highs. [That being said, surely we can now rule out another collapse, can’t we? Words: 764
Yes, you read that right; get ready for the next housing boom. You’re probably thinking, “How could that be with all the mortgage delinquencies and foreclosures going on, and the record levels of housing inventory? Well, it’s not going to happen soon – [probably] not for several more years – but it’s coming. [Let me explain to you why it is inevitable.] Words: 589