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The Canadian Housing Bubble Has Begun To Burst
The Canadian Housing Bubble Has Begun To Burst
Don’t look now but slumping crude prices are hitting the Canadian housing market like a freight train. Energy accounts for 10% of Canadian GDP and around 25% of exports and the swift fall in oil prices is having a profound effect in the nation’s oil producing regions. Take Calgary for instance, where single-family home sales fell 34% last month. As the following chart shows, Alberta derives some 30% of its provincial revenues from energy royalties and as one TD analyst quoted by the Calgary Herald recently noted, “the effects of significantly lower oil prices had already turned up in resale activity, with sales in Calgary and Edmonton down more than 40 per cent and 30 per cent respectively, from October to January [and] as resale activity slows, prices usually follow.”
Depressed crude prices will create a $7 billion annual revenue shortfall for the province while GDP growth, which had been running at around 4%, is expected be just under half that this year, withsome analysts predicting the economy will contract. Here’s CIBC’s outlook for instance:
The Alberta government’s own assessment of the economic situation is deteriorating rapidly.
From the Alberta fiscal update:
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Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk
Canada Mauled by Oil Bust, Job Losses Pile Up – Housing Bubble, Banks at Risk
Ratings agency Fitch had already warned about Canada’s magnificent housing bubble that is even more magnificent than the housing bubble in the US that blew up so spectacularly. “High household debt relative to disposable income” – at the time hovering near a record 164% – “has made the market more susceptible to market stresses like unemployment or interest rate increases,” it wrote back in July.
On September 30, the Bank of Canada warned about the housing bubble and what an implosion would do to the banks: It’s so enormous and encumbered with so much debt that a “sharp correction in house prices” would pose a risk to the “stability of the financial system” [Is Canada Next? Housing Bubble Threatens “Financial Stability”].
Then in early January, oil-and-gas data provider CanOils found that “less than 20%” of the leading 50 Canadian oil and gas companies would be able to sustain their operations long-term with oil at US$50 per barrel (WTI last traded at $47.85). “A significant number of companies with high-debt ratios were particularly vulnerable right now,” it said. “The inevitable write-downs of assets that will accompany the falling oil price could harm companies’ ability to borrow,” and “low share prices” may prevent them from raising more money by issuing equity.
In other words, these companies, if the price of oil stays low for a while, are going to lose a lot of money, and the capital markets are going to turn off the spigot just when these companies need that new money the most. Fewer than 20% of them would make it through the bust.
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Norway Regulator Fears Housing Bubble “Isn’t Sustainable”
Norway Regulator Fears Housing Bubble “Isn’t Sustainable”
Amid the collapse in crude oil prices, the Norwegian central bank cut rates in December (after 1000 days on hold) and is likely to cut again as economic growth stalls. However, the country’s financial regulator iswarning falling interest rates risk pushing the Norwegian housing market beyond its breaking point into a “self-augmenting spiral.” With prices up 8.1% YoY, and up 85% nationwide in the last decade, even Robert Shiller warned of Norway’s housing bubble in 2012 – and since then household debt (and home prices) have surged. As Bloomberg reports, Morten Baltzersen, head of Norway’s Financial Supervisory Authority stressed “continued rapid growth in debt and house prices isn’t sustainable.” Unintended consequences?
As Bloomberg reports, a combination of plunging oil prices and falling interest rates risks pushing Norway’s housing market beyond its breaking point, the financial regulator said.
Norway’s housing market, which Nobel laureate Robert Shiller all the way back in 2012 said was in a bubble, has been inflated amid an oil boom that has driven wealth creation and kept unemployment below 4 percent.
Norwegians have more debt than ever before, owing their creditors about twice their disposable incomes, a level that Olsen and FSA’s Baltzersen have said is unsustainable.
And it’s about to get worse…
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The Scale Of The Chinese Real Estate Crash Is Terrifying
The Scale Of The Chinese Real Estate Crash Is Terrifying
We hear a great deal about the credit binge in advanced economies that helped lay the foundation for the 2008 financial crisis and is also widely blamed for holding back the pace of the recovery. Well, while the West has been unwinding some of this excess borrowing in recent years, emerging markets have been seeing their own credit boom.
And it’s a huge risk — particularly in China, where growth has normally pushed along the economies of several other countries.
Growth is slowing in China and its debt overhang is growing as a result. That’s a problem because countries ought to be able to grow their way out of debt. But that era may be coming to an end. And now China has a developing real estate crash of its own.
Here are the figures as provided by J.P. Morgan. (Note Hong Kong in particular):
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‘Canada Is In Serious Trouble’ As Debt, House Prices Climb, Deutsche Bank Declares
‘Canada Is In Serious Trouble’ As Debt, House Prices Climb, Deutsche Bank Declares
It was little more than a year ago that Deutsche Bank declared Canada’s housing market to be the most overvalued in the world, and on Thursday the German-based bank doubled down on its bearish assessment of Canada.
Residential real estate in Canada is overvalued by 63 per cent, according to research from Deutsche Bank chief international economist Torsten Slok.
Broken down, Slok sees the market as being 35-per-cent overvalued when compared to incomes, and 91-per-cent overvalued when compared to rents. That’s a more bearish assessment than most. The Bank of Canada estimates the market isovervalued by between 10 per cent and 30 per cent.
But those are similar numbers to those at the Economist magazine, which for years has been calling Canada’s housing market overvalued. It pegs the overvaluation at 32 per cent, when compared to incomes, and 75 per cent, when compared to rents.
“Canada is in serious trouble,” reads the title of a chart from Slok’s report, showing Canada’s household debt, as a percentage of income, climb to 50 per cent above current levels in the U.S.
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Prepare for Property Prices to Fall in U.S. and Globally
Prepare for Property Prices to Fall in U.S. and Globally
At the start of the New Year, there are increasing signs that the recovery seen in property prices in many cities in western countries — namely New York and other U.S. cities, and Dublin, London and other UK cities — is beginning to peter out.
Many cities have seen speculative frenzies return in recent months which led to price surges which would appear to be unsustainable – especially given the uncertain and poor geopolitical and economic backdrop.
This has been the case in the UK and Ireland, the U.S. and indeed in Canada, Australia, New Zealand and a few other markets.
The question at the start of 2015, is whether we are likely to see continued price gains or falls. There are all the hallmarks of an echo bubble akin to the one that burst so painfully in the ‘noughties’.
In the UK, the respected Centre for Economic and Business Research (CEBR) has predicted a decline in British property prices this year. Prices rose 8.8%, on average, in 2014 with prices in London ballooning another whopping 20%.
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The Canadian housing bubble makes California real estate look sensible: Crash in energy prices will put pressure on home values up north as Canadians go into maximum leverage. » 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 the7,000,000 foreclosures in the US came 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:
The Fracturing Energy Bubble Is the New Housing Crash | David Stockman’s Contra Corner
The Fracturing Energy Bubble Is the New Housing Crash | David Stockman’s Contra Corner.
Let’s see. Between July 2007 and January 2009, the median US residential housing price plunged from $230k to $165k or by 30%. That must have been some kind of super “tax cut”.
In fact, that brutal housing price plunge amounted to a $400 billion per year “savings” at the $1.5 trillion per year run-rate of residential housing turnover. So with all that extra money in their pockets consumers were positioned to spend-up a storm on shoes, shirts and dinners at the Red Lobster.
Except they didn’t. And, no, it wasn’t because housing is a purported “capital good” or that transactions are largely “financed” at upwards of 85% leverage ratios. None of those truisms changed consumer incomes or spending power per se.
Burst Chinese Housing Bubble Leads To First Annual Price Decline Since 2012; Prices Drop In Record 69 Cities | Zero Hedge
It has been over six months since the Chinese housing bubble has popped. What’s worse, as overnight housing numbers out of China confirmed, the government has so far failed to contain the fallout, and according to the National Bureau of Statistics, which is anything but, after a fifth straight monthly decline, Chinese home prices have now wiped out all price gains in the past year. This was immediately spun as bullish by media outlets and sellside experts as “raising expectations the government will have to implement more economic support measures to cushion the blow.” I.e., buy stocks because central banks will push risk prices artificially higher yet again. In other words, bad is still good and failure continues to be success.
According to the NBS, average home prices in 70 major Chinese cities were down 1.3% in September from a year earlier, the first such drop since November 2012.
Why Chinese Growth Forecasts Just Crashed To A Paltry 3.9% – And Are Going Even Lower – In One | ZeroHedge
Up until a few years ago, conventional wisdom was that China would grow at nearly double digits as long as the eye could see. Then, however, something happened, and China’s 9% growth became 8%, then 7% and even lower, as suddenly the Politburo made it quite clear China would not chase growth at any cost, especially when the cost is trillions in bad debt and other NPLs, as we have explained time and again. The collapse in Chinese growth expectations is shown best on the following formerly hockeysticking chart of IMF’s revised Chinese growth projections which has completely collapsed in the past few years.
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