Via Dr.Housing Bubble blog
,
As the year comes to a close, it is useful to put things into
perspective. Sure, California has a love affair with real
estate and we go through our traditional booms and busts.
$700,000 crap shacksnow litter the landscape
but there are fewer and fewer lemmings taking the plunge.
In Canada there was no correction. In fact,
households continue to go into deep debt to purchase real
estate. The argument goes that mortgage standards are
much tighter in Canada so therefore, they are much more enlightened
when it comes to financing homes. People forget that the bulk
of the
7,000,000 foreclosures in the UScame in the
form of
standard loans. Garbage loans imploded in more
dramatic fashion but people lost their homes because the economy
shifted. At that point, it merely meant covering the monthly
nut. We were housing dependent and that market contracted
aggressively.
Canada is housing and oil dependent. And oil just got
a big kick to the shins.
In Canadian debt we trust
There was an inflexion point for US markets when household debt
surpassed household income. People kept saying it was a
liquidity crisis initially but it was truly a solvency
crisis. People took on too much debt and were walking on a
financial tightrope. In the US, this peaked above 120
percent. Canada is well on its way above 160 percent:
Basically Canadians are deeper in debt relative to their
income. And a large part of this debt is housing
related. A large part of the economy is also tied to oil and
as you may know, oil just took a massive cut:
It was interesting to hear that we would never see oil drop
below $100 a barrel. Oil is now trading at $52.84 a
barrel. Similar arguments were made about US housing never
having one negative year-over-year price drop until we did.
Large part of Canada’s oil is costly to extract
A large portion of Canada’s oil is costly to extract. With
oil sands for example oil would need to be at $80 a barrel to make
a profit:
I doubt people want to run money losing operations for a long
period of time. So it is no surprise that oil rigs are
closing:
Fewer jobs and less money. And for a large part of the
Canadian economy, much of this money has been flowing into
housing. In Canada, there seems to be a cult belief that
housing simply will not correct. They are full on drinking
the good old tasting real estate Kool-Aid. In the US, we
already lived that correction and understand that yes, housing does
go through
booms and busts especially when debt is used to
supplement a lack of income growth. As the debt to income
chart shows, many US households were forced to deleverage via
foreclosures and bankruptcies.
Home prices out of sync
Home prices are fully out of sync with incomes. Take a
look at this rise in home values:
Canada has enjoyed many years of the global commodities
boom and now finds itself contending with a market full of debt and
inflated housing values. Short of oil rising back up to $80 a
barrel and higher Canada is likely going to face some short-term
pain. The housing market is due for a correction. Those
of us in California realize that booms and busts can occur all of a
sudden but the events leading up to this are largely
foreseeable.
I’m sure many in Canada assume that home values will simply
continue to go up and just because banks check incomes doesn’t mean
squat. As the above data shows, households are already deep
in the quicksand of massive debt. It is all dandy when
everything is going up including oil. When oil gets smashed
as it did, it came on quickly. Canada has their versions of
$700,000 crap shacksusually in the form of
condos. Hey, at least with a crap shack you don’t have to
share a common wall.
When you look at the Canadian housing market it makes the
US look like a frugal uncle.