Home prices in Canada’s two largest metro areas have been red-hot for years. In May, the average selling price for all types of homes in the Greater Toronto Area jumped 11% from a year ago to C$649,600 on a 6% increase in sales. In Greater Vancouver, the composite benchmark price for all homes rose 9.4% to C$684,400 on a 23% increase in sales.
But these overall price changes paper over what’s happening with detached homes, whose prices soared 14% to C$1,104,900 in Vancouver and 18% to C$1,115,120 in Toronto.
Already last summer, Fitch fretted about overvaluation in housing and the high debt burden relative to disposable income of Canadian households. At about the same time, seven in ten mortgage lenders expressed concerns in a poll by FICO that home prices were in a “bubble” that could burst any time. Last October, the Bank of Canada thought that the housing bubble could threaten Canada’s financial stability.
This January, Deutsche Bank estimated that homes in Canada were 63% overvalued. In March, the IMF warned that high household debt levels and the “overheated housing market” are two risks it would “need to keep an eye on.” In April, the Economist determined that home prices in Canada were overvalued by 35% when compared to incomes, and 89% when compared to rents.
Now hedge funds are trying to engineer ways to short the Canadian housing market one way or the other, because surely this would be another “short of a lifetime.”
Maybe they’re right: beyond Toronto and Vancouver, the housing market is already drifting lower.
So it’s about time someone in the industry fights back and explains to those hedge funds that this market isn’t about to pop. But gosh, calling first-time homebuyers “plankton” in the “food chain” of the housing market that feeds “big wales and sharks?”
That’s what Stuart Levings, CEO of Canada’s largest mortgage insurer, Genworth MI Canada, told Bloomberg in an interview:
”We look at the housing market like a food chain. The first-time homebuyers are really the plankton. And if you don’t have plankton in the ocean, you’re going to eventually starve out even the big whales and the sharks. You need that first time homebuyer to buy that home so the next person can move out to buy their own home.”
And there was plenty of this plankton, namely millennials and about 250,000 immigrants per year who’re buying their first property, he said.
“There is strong demand in this country and there will always be,” Levings said. “Why? Simply because of our immigration policy. We bring in first-time buyer pipelines through our immigration policy. They are great future first-time homebuyers that become plankton.”
The federal government put in place some rules to tamp down on the housing bubble, including shorter amortizations and higher down payments, which has kept the subprime elements out of the market, he said, with average credit scores of Genworth customers being a high 737 points.
“We’ve squeezed the first-time homebuyers down into a small group who are qualified, good-quality borrowers,” he said. But the government should avoid tightening the rules further to avoid squeezing first-time buyers out entirely and poisoning the food chain.
And there won’t be a major correction in home prices, he said. That would require forced sales, the way it happened in the US during the housing bust, where owners, when they realized their homes were worth less than the mortgage, simply walked away.
That won’t happen in Canada. Mortgages are full-recourse, he said, and borrowers are personally liable. “We don’t see the herd mentality in Canada that we’ve seen in other markets,” he said. “Even in the 2008 crisis in Alberta, where prices dropped 25%, we did not see people walking away.”
That too may be a false reassurance. In the US, only about a dozen states are non-recourse. The rest of the states are like Canada. But trying to recover any significant amount of money from struggling borrowers who were upside-down in their mortgages turned out to be impossible. And investors owned their properties in LLCs so that the individual was protected by the corporate shield. Some of the hardest hit states, such as Nevada and Florida, were full-recourse. So if it can happen in the US, it can happen in Canada.
And besides, low interest rates keep the plankton alive, he said.
Housing is already in trouble in some cities, but it’s no big deal. In Calgary, the epicenter of the Canadian oil bust, the oil industry has cut thousands of jobs, home sales have dropped 28% in April from a year ago, and prices 1.5% since November, he said. But reality on the ground wasn’t that bad, he said. Many companies have opted to cut their employees’ pay rather than laying them off. So they continue to pay their mortgages.
The new rules have pushed subprime borrowers into the shadow banking sector of non-federally regulated lenders, which according to some estimates, provide about 10% of all mortgages. But Levings disagreed. That sector accounts for only 2% to 3%, he said. Subprime is “like the flea on the tail of the dog,” too minuscule to matter.
Levings, CEO of a mortgage insurer, is talking his book. He wants to persuade US hedge funds that the Canadian housing bubble will never blow up. There’s simply too much “plankton” in the water. It keeps the “food chain” healthy and offers ample nourishment for the “big wales and sharks.” And shorting the Canadian housing bubble is useless.
Denial works. But here’s the irony: even “second-time homebuyers” can’t afford to buy a home without a lot of help from mom and dad. Read…. Canada’s Magnificent Housing Bubble Goes Nuts, Cracks
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This insurer obviously thinks he’s a shark, but it’s possible he will become the chum once this one pops.
Texas is a recourse state, but this did not prevent thousands of foreclosures in the 1980s oil bust. If a person is young and highly leveraged without too many other assets, he/she can hand the property back to the bank and then file bankruptcy. Sure, it’s not as easy as mailing back the keys in a non-recourse state, but in the end, the outcome is the same. I knew several would-be real estate moguls who did this, and I rented a condominium from another who lost it to the bank halfway through my lease term.
I’m not familiar with Canadian bankruptcy law, though.
In Canada you can file for bankruptcy easily. Its what the vast majority of people will be doing once it goes bust. But.. the big question is when.
Another factor that is driving the housing bubble here is Immigration. Canada has a ” plan ” to increase its population to 60-80 Million assholes. Here in Ottawa where I live, there great ” plan ” is to increase the city to 5 Million assholes. Another ” plan ” that I have heard rumors about dating back to the era of Trudeau in the 70’s is there plan to merge Ottawa with Gatineau to create there mega city like Toronto. My thoughts are as long as that Immigration tap is running it won’t crash. It may stabilize out for awhile but I don’t see it crashing with that Immigration Tap running.
Immigration in Canada’s case is tied directly to capital flight from the rich in developing countries. As long as there’s too much liquidity sloshing around there it’s going to keep making its way to Vancouver and Toronto. It won’t last.
The US gets lot of immigrant ‘plankton’ too but most are too poor to buy homes and the ones that aren’t don’t shop at the bottom of the food chain. I think its somewhat the same in Vancouver from what I have heard. What kind of jobs are immigrants getting in Toronto that enable them to buy bubble priced plankton houses?
Vancouver is filled to the brim with the Chinese well to do who are buying second homes in Canada. Not necessarily immigrants.
So nice to see that we are not the “little people” anymore. Now we are considered “plankton”. (sarc.)
I used to think I was a sucker. Then they told me I wasn’t a sucker, I was a muppet. Then they told me it was self-defeating to think of myself as a muppet, I was a little person. Then they told me “little people” was overused, I was a plankton. I still don’t have a dime, but I have a great vocabulary.
Adapter from Jules Feiffer.
” “We don’t see the herd mentality in Canada that we’ve seen in other markets,””
Yep, it can’t happen here, this time is different, etc. For years the Canadians assumed that a housing bubble couldn’t happen, that it’s only an American/Club Med thing. So instead of a housing bust in 2007, their bubble just kept getting bigger. Soon enough they’ll find out that this time is not different.
Denial always seems prevalent in the later stages of a bubble, just because it’s gone on for so much longer than anyone was really expecting. I’ve become convinced that denialism is part of the process and a sign that we might well be nearing the end of this latest credit bubble.
Commenters are long on philosophy and short on facts. Typical for sheeple Canuks. The immigration thing is real fact. What will stop it? China clamping down? Capital controls? ISIS going away? Will the Loonie reverse upwards to choke off foreign demand? Will interest rates finally start rising in the face of all that printed money? Over to you. Tell us what will reverse the trend?
And remember, the value of houses has changed very little except for downtown areas. They are not increasing in value, it is the dollar that is losing value. It looks to me like unbacked fiat might finally be collapsing (as it always does) and recognizing this, people are dumping their dollars in favour of something real.
When the liquidity driving the bubbles in the emerging markets goes away, so too will a big chunk of the immigration. It’s hard for there to be capital flight if there’s no extra capital.
The dollar might be losing value but so is everything else, QE or some form of major interest rate repression is the policy of every major central around the world with no exception. You are partly right, but this isn’t just about searching for value. Speculative bubbles are always about too much credit looking for a return, which is why asset prices get bid up to such extremes (among other things).
Uh, a house is real? No, they’re buying a gigantic mortgage with the ‘illusion’ of owning a house.
Food chain, plankton, peasants, …
Yeah, pretty much sums things up. It’s good to be the King.
Bubble in Canada is limited to three major urban centers – Van, Cal, Tor; housing prices in small-medium centers are near or below replacement cost. Major urban centers are landlocked due to gov’t imposed greenbelts etc., so land prices escalate and condos prevail versus single family homes. Available land is also owned exclusively by major developers in the major urban corridors. Outside of the Alberta Tar Sands, economic growth is Canada is limited to financial services and pharmaceuticals, which again are centered in the major urban centers. The hidden story is that roughly 50% of new condo’s in Canada are purchased by foreign investors – i..e foreign speculators, not immigrants – who will walk away from the mortgage financing when the bubble bursts. Canadian banks otherwise enforce full payment on foreclosure or repossession, even if the proceeds from sale are less than the mortgage value.