Wikinvest Wire

The new Canadian housing bubble?

Monday, February 08, 2010

China isn't the only place where they are talking about a housing bubble again these days and this morning's papers were sprinkled with reports on the subject. It would seem that, after the events of the last ten years or so, about the only way to be sure that there is a bubble is when you hear a high ranking government official deny its existence and that's exactly what happened north of the border according to this story in the Globe and Mail.

Ottawa says housing bubble not a concern
Finance Minister Jim Flaherty appears to have no immediate plans to tighten Canadian mortgage rules despite the advice of senior bankers concerned about surging home prices.

Mr. Flaherty said he sees no evidence of a housing bubble in Canada.

Easy access to risky mortgages was at the heart of the global financial collapse. Some are calling on Canada to err on the side of caution in ensuring the economy is protected from an American-style wave of mortgage defaults by homeowners.

The Globe and Mail reported Saturday that the heads of the country's six largest banks privately told Bank of Canada governor Mark Carney in November that they fear a potential collapse in house prices and the ensuing potential for economic damage.
Apparently, all they're asking for is a return to 10 percent down payments which, when you think about it, isn't asking all that much.

The Wall Street Journal filed this lengthy report on the subject and the anecdotal accounts of rising prices sound just like those heard in places like California, Las Vegas, Florida, and Arizona about five years ago. Sadly, policy makers in the U.S. would likely give their left arm to be hearing reports like these and warnings that a new housing bubble is forming.

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4 comments:

Anonymous said...

I liked this bit from the WSJ piece:
"Bryce Wilson, an elementary-school teacher in Toronto who bought two condominiums in December, says a 20% drop in the value of his mutual funds prompted him to shift money into real estate."
Not just one investment condo, but two.....

Anonymous said...

Beauty, eh?

me said...

Barry Ritholotz has some good reasons today why Canada housing in not in a bubble:
1) Lending Standards were increasingly non-existent in the US from 2001-07. On the other hand, Canada never had the non-bank lenders that abdicated these standards en masse. There was no “Lend-to-Securitize” business model in Canada.

2) Mortgage Insurance: Mortgage with less than 20% down payment are considered a high LTV ratio (This was 25% previously), and in these purchases, mortgage insurance is required. Over 80% of Canada’s homes have what was commonly known as PMI in the US.

3) Full Recourse Mortgages — you can walk away from the house, but not the mortgage debt. Makes quite a difference in the way borrowers behave.

4) Single Regulator, Lack of Regulatory Capture: The hodge-podge of Federal and State regulators encourages forum shopping; it also masks much of the massive lobbying effort by US banks and investment houses. Lobbying dollars don’t seem to be nearly as pernicious or corrupting North of the border.

By the way Tim, in the links today you put up about Prector and he scares me, A) gold tanking and B) the market rolling over. I am getting bad vibes since he lives about 50 miles from here. Since you are further away any thoughts?

Tim said...

I have a hard time with this one while a housing bubble is in its formative stages:

"Full Recourse Mortgages — you can walk away from the house, but not the mortgage debt. Makes quite a difference in the way borrowers behave."

I'd be shocked if more than 10 percent of homebuyers know or care if their loan is recourse or nonrecourse.

RE: Prechter - I stopped taking his advice on gold seriously about ten years ago when he said it would never go above $400 an ounce.

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