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What's really driving house prices in Canada? The must-see graph of the day...

JUNE 23, 2011

We've spent a great deal of time analyzing the drivers of house price appreciation in Canada.  We know the usual suspects...the ones that drive house prices in normal times.  And we've examined them all and found them wholly unable to account for the unprecedented rise in house prices in Canada:  Rents (cities and provinces), Incomes (cities and provinces), GDP (part 1 and part 2), Inflation.  House prices have massively outpaced them all.

We've also examined the supposed drivers of real estate appreciation:  Population growth and immigration.  The reality is that these two have a negligible effect on real estate values except in situations where land use regulations are highly restrictive.  It's supply and demand, baby!  Population growth increases demand, but don't think for a second that our construction industry in Canada isn't just as motivated by profits as any other industry.  Demand will not go unmet....unless restrictive land use regulations are in play, in which case they contribute to boom-bust cycles (reference this gem by Leith Van Onselen for an excellent read).  Further to that point, check out the construction activity in Canada's larger cities.  It's been plenty to satiate demographic demand.

And just for fun, we examined how demographics gave real estate a 0.5% annual tailwind for the past 40 years.  That party is now over.  Demographics are now estimated to exert a 1% per year drag on house prices going forward.   Bummer.

My position has long been that the driver of house price appreciation in Canada over the past decade has been primarily the result of the unprecedented expansion in debt caused by the loosening of CMHC mortgage insurance requirements and the removal of the maximum insurable mortgage ceiling....facilitated by a falling interest rate environment, a new mass perception of the 'investment worthiness' of real estate as an asset class, and the emergence of housing as a form of conspicuous consumption.  But if we boiled them all down into one word, it would be this:  DEBT!  And the pace of debt accumulation is not sustainable... ergo, the pace of house price appreciation is not sustainable.  Nor are house prices at current levels relative to underlying fundamentals.

Not convinced?  Behold!....presented without further commentary...

house prices canada debt gdp

 

...well okay.  Maybe one last comment for Sams Mango the naysayers.  Good luck finding a more obvious relationship using any other variable.  

-Ben  

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Ben Rabidoux
By Ben Rabidoux

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65 Comments

  • Etienne said:
    • 2 years, 10 months

    I like the "further" commentary :)

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  • jesse said:
    • 2 years, 10 months

    Yeah well I'm sure I could find a high correlation between Asian GDP growth and... no wait that graph's for Canada not Vancouver and Toronto. Why bother, Ben? You've more than convinced the Bank of Canada, so why worry about some anonymous poster with an obvious confirmation bias ax to grind?

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  • Ben Rabidoux said:
    • 2 years, 10 months

    I think the graph is cool....and quite telling. The fact that I could take a pot shot at a troll is just a bonus :)

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  • MM said:
    • 2 years, 10 months

    Prices and debt follow each other, but the graph doesn't say which causes which.

    What you're saying is that people will borrow as much as they can, because it is human nature (at least in this area and duration of time), and with this money they bid up prices.

    But it's very easy to argue that prices go up because that's what they do (or because factore X increases demand), and when that happens people have to borrow more to buy.

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  • Ben Rabidoux said:
    • 2 years, 10 months

    Either way, if the two variables are as closely tied as the graph suggests, and one variable (debt) has a concrete upper boundary and is on an unsustainable trajectory, what are the implications for the other variable (house prices)?

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  • Al said:
    • 2 years, 9 months

    I think the relationship between price and availability of debt is to some extent reinforcing. Price is determined when supply and demand reach equilibrium. Demand is made up of two characteristics, willingness and ability to pay. Both must be met. In the case of housing, the ability to pay for most is based on their ability to borrow. If you can't get the loan, you can't become part of the demand equation, and thus the price won't be affected. This suggests that the availability of debt leads to price changes.

    However, when prices get pushed to their limits based upon the current availability of debt, both price appreciation and volume of transactions stall. The reaction by those who try to steer the economy is to make money more available by either lowering interest rates or loosening standards. This suggests that price leads to debt.

    Since both thoughts seem true on their own merit, it seems reasonable to conclude they are mutually reinforcing.

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  • MP said:
    • 2 years, 10 months

    Why the mini-cyclical nature (saw tooth) of the blue line? Seasonal variance within a year?

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  • Sams Mango said:
    • 2 years, 10 months

    r u serious???? You made a graph that shows that cheap debt equals higher house prices and that home and home construction are a large part of GDP - is that not very clear to anyone? You are really reaching here Ben to try to redeem yourself. You are still wrong on housing. If you waited in line at a condo pre sale with all the time you waste on these graphs and website, you would have been up more than 25% in Vancouver.

    You still don't get the fundamental math of real estate or use mtg purchasing power to normalize anything. Until you don't get these simple facts, you will not understand real estate.

    When asked if you think home prices will be higher or lower in 10 years, you gave some flake response as usual. Answer clear - If I buy a condo today for 300k, will the price will lower or higher in 10 years in your view? Calling me a troll?? You have had ZERO success in your housing call. And now you are planning a book to spread your failure. A book - LMOA I will buy one for my fireplace in my SFH that has doubled in the last five years.

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  • yogi said:
    • 2 years, 10 months

    They laughed at Roubini in the US as well, until it happened.

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  • the kid said:
    • 2 years, 10 months

    Make sure u sign that book for the troll Ben.

    Gad zooks you have really hit a nerve now.

    Congrats.

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  • Ben Rabidoux said:
    • 2 years, 9 months

    Let's be clear here: I told you that house prices stood a very good chance of being lower nominally in 10 years and were virtually assured of being lower in real terms.

    I have been writing on housing and the economy now for exactly 9 months...hardly long enough to determine just how accurate my macro calls are, particularly since we are seeing signs of the credit fatigue that I have been warning about. Time will tell. In the mean time, take out that home equity, buy another couple homes....preferably condos on spec. Enjoy your massive gains in a few years.

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  • Sams Mango said:
    • 2 years, 9 months

    LOL - BEN you just kill me.

    I HAVE BEEN ONLY WRONG FOR NINE MONTHS - just give me some more time to be right. In any company, firm, etc, you would have been fired long time ago. and now you are claiming to write a book? Are you serious. Shut down this blog and come back as a comedy blog - The Daily Laugh (i won't charge if you use it)

    I really just feel of my chair.

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  • Ben Rabidoux said:
    • 2 years, 9 months

    The challenge I posed was for anyone to find a variable that has a more obvious relationship to house price growth. You clearly can`t. Your incessant ad hominem attacks reveal just how insecure you are in your position.

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  • vangrl said:
    • 2 years, 9 months

    my money's on Ben. I live on the West side of Vancouver, and I can tell you that there already is a change happening with condos and townhouses, lots of listings that have been sitting for months and A LOT of $10,000-$20,000 price reductions on condos in the $350,000-$600,000 range.
    I have two for sale signs outside my building that have been up for a few months now, the open houses are dead. These condos are priced reasonably (in this crazy market anyway), so it's not like they aren't priced with comparables.
    My feeling is the locals aren't interested in buying much anymore, that only the houses are moving quickly and that it's definitely Chinese that are buying the houses in this area. Any sign that the market is slowing down or falling and they will probably stop buying as well, Chinese are gamblers, it's in their blood, they walk away from the table when things aren't going their way.
    That's my take on my neighbourhood, ground zero for craziness.

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  • BBC said:
    • 2 years, 9 months

    Vangri,
    You are absolutely right. I also live & OWN (@sams mango) and there is a major imbalance in the market. Westside real estate is a big topic in our neighbourhood and the local consensus is that the fundamentals do not support the outrageous increase in RE prices. You don't need to be in the 'real estate industry' or an 'economist' to see that things don't look right. The question on everyone's mind is 'WHEN' not 'if' there is a correction.

    Westside will most likey always have rich asians investing in our real estate..they have been here since the '80s. But we didn't see them supporting real estate when we had our recession in '08! The key is that they are 'investors' ....they care about making money with the extra bonus of living in a beautiful city. Don't be fooled, making money comes first!

    FYI....I am of chinese heritage, born in Canadian....I understand the mentality.

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  • Sams Mango said:
    • 2 years, 9 months

    If you feel that way, why don't you sell your home into "the outrageous increase in RE prices" ???? and rent

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  • Dave said:
    • 2 years, 10 months

    "Renting a cheaper option than homeownership"

    Macquarie interview on BNN today

    http://www.bnn.ca/News/2011/6/23/Renting-a-cheaper-option-than-homeowner...

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  • Chris said:
    • 2 years, 10 months

    I don't really understand what is the point in this graph. It seems possibly to illustrate Milton Friedman's point that inflation is a monetary phenomenon, which I don't think anyone doubts, not even the housing bulls.

    Why use mortgage debt as a percentage of GDP rather than nominal or real mortgage debt? I'm not sure what conclusions to draw with the GDP divisor, unless you're using GDP as a proxy for inflation? But then shouldn't you consider the average home price as a percentage of GDP as well? Seems like you're comparing apples and oranges.

    The real question is will the government continue to monetize housing. I used to strongly share your view that things would return to normal at some point, but I'm growing increasingly pessimistic that the government is willing to tolerate high inflation in an attempt to bail the system out. Your own prediction that interest rates won't rise this year seems to jive with this.

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  • the kid said:
    • 2 years, 10 months

    Looked up a definition of a troll in urbandictionary.com and found this:

    troll 1a. Noun One who posts a deliberately provocative message to a newsgroup or message board with the intention of causing maximum disruption and argument.

    I'd say you're a troll.

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  • Sams Mango said:
    • 2 years, 9 months

    A rich one. Keep renting and paying my mortgage

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  • the kid said:
    • 2 years, 9 months

    At least you have the balls to admit it. Good on ya!

    For some of us who do have some wealth, and don't need a considerable mortgage, if any.
    It is a known fact that RE prices do go down on high interest environment.
    If one has the dry powder, it'll be easy pickens.
    I'm sorry to hear a poor schlupp like you can only survive in these low interest environments.

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  • Bally said:
    • 2 years, 9 months

    Actually Mango I believe I'm only paying 50% of your mortgage. You are paying the rest. And the maintenance costs. And the tax.

    Meanwhile I'm investing all the extra money I have in tulip bulbs because I think they are a safer bet than housing right now...mark my words - get in early before the real growth starts :-)

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  • Ben Rabidoux said:
    • 2 years, 9 months

    I think that in the last 10 years, house prices have diverged from fundamentals solely because of the loosening of credit standards and a massive expansion in mortgage debt, captured in rising mortgage debt relative to GDP. I didn't use nominal mortgage debt because of the impact of rising population, inflation, etc which cause it to rise anyways. Mortgage debt as a percentage of GDP removes population growth and inflation (in theory) from the equation.

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  • Todd said:
    • 2 years, 10 months

    Sams argument boils down squarely to "its different here", and illustrates the herd mentality that prevails today. We have the resources so things here are different. I would love for Sam to share with us his thoughts on the US house market "correction" and the metrics that surrounded it against Canada's current metrics and help all of us pitiful souls.

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  • Sams Mango said:
    • 2 years, 9 months

    @Todd - even Ben who is always wrong on stocks and housing will tell you that it we don't have subprime lending in Canada. Big diff from US mtg market

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  • jwg said:
    • 2 years, 9 months

    Instead of descending into name-calling, why not take this over to long bets and make a friendly wager?

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  • Sams Mango said:
    • 2 years, 9 months

    anytime, Ben has perfect track record of being wrong in his graphs, analysis and whatever calls he makes from them. I will take the other side of that anyday!

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  • Joe Q. said:
    • 2 years, 9 months

    Ben has perfect track record of being wrong in his graphs, analysis and whatever calls he makes from them

    RE markets go through annual cycles, and Ben's been writing this blog since, what, October? Seems awfully early to call him "wrong".

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  • Andrew said:
    • 2 years, 9 months

    that's right Ben, Sams Mango don't need no graphs and charts and data and evidence or nuttin, you just wrong cause Sams Mango says so! Don't write a book cause Sams Mango says so!

    I think he's jealous that you have a blog that people read and that you're writing a book. Only the market will tell whether your book will be successful or not, and only the market will determine what the house prices will be. The best we can do is analyse the data we have and make the best choice we can make with the info we have. People are free to interpret the data as they wish. People who call other people stupid for interpreting it different than them are just insecure.

    Keep on writing!

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  • TS said:
    • 2 years, 9 months

    A decade of growth based on debt. I guess when we add the Federal and Provincial deficits plus institutions such as WSIB (16 billion) the next decade is not looking so good...

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  • Sams Mango said:
    • 2 years, 9 months

    HERE IS THE MUST SEE GRAPH OF DAY - 30Y of upward prices, yes it goes, up,down, goes stale, but it is going higher with time (probably older than Ben). A house is not a stock as Ben will make you believe, it is an asset that you buy and hold and live in with your wife and kids for a long time. The other graph is of interest rates. IF and when rates go up, you will be crying you missed a chance to buy your family a home at affordable borrowing. Keep renting, pissing money away and dreaming that you will get a chance to buy a home 10%, 20% or even 30% cheaper than today. AIn't going to happen.

    Go into a bank, fire up you MS Excel - ask yourself, i want to buy this home for 500K today, if rates go up 1%, that is going to cost you 5K*25 more (excl compounding) = 125k more for the home. So you need to wait to buy the house at 375K to be same today (less with comp) - these are the fundamentals of rates vs house prices that Ben doesn't get. of course, you will renting while you wait for that price drop and if doesn't come, you will have spent all that downpayment on rent.

    http://canadabubble.com/images/stories/chart/canadahousingprice30years.jpg

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  • MM said:
    • 2 years, 9 months

    Assume a 5 year fixed mortgage - if rates go up 1%, you pay 5K * 5 more for the first term = $25k = 5% of the purchase price. I suspect a larger drop if rates do go up 1%.

    How much will you pay for the remaining 20 years? Who knows, but it's unlikely to be the same as the rate is today or a year from now.

    "borrowers should remember that a fixed-rate mortgage will reprice a number of times over the life of the mortgage and, while asset prices can rise and fall, debt endures"

    These are the fundamentals of rates vs house prices.

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  • Loewen said:
    • 2 years, 9 months

    Obviously you have a long term view SM. Then why the hell are you trying to argue with people who have a shorter term view than you?
    You sound like a scared "long" in denial, but but but.....it's different here guys.

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  • Sams Mango said:
    • 2 years, 9 months

    the only denial here is Ben - he continues to use his same line - I HAVE ONLY BEEN WRONG NINE MONTHS and now he going to use his NINE MONTHS of being wrong to write a book. WAKE UP PEOPLE

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  • LS said:
    • 2 years, 9 months

    I haven't read the comments on this site in a while, just the articles, which are very well presented and even-keeled.
    The comments used to be pretty intelligent as well, with good additional insights. Now I see it has degenerated to the level of most other comment boards, lead by the goading of the resident troll. It would be in the interest of this board to ban him since he obviously is only here to provoke. Dissent is fine, but he's really just a waste of space and bringing the comments section down.
    Sam, Mango, whatever your nom de jour is: If Ben is so wrong why are you here? Go out and enjoy the fruits of your RE investments. We will continue to wallow in our wrongness and you can check back in a year to poke fun.

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  • TS said:
    • 2 years, 9 months

    30 years of upward prices?
    I see prices substantially down between 1980 and 1987.
    Also between 1989 to 2003.
    Why do you not see that this is about to happen again?
    It is no big deal like you say. A house is a home. Not a get rich scheme is it?
    Unless you are a speculator that is.

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  • vishy said:
    • 2 years, 9 months

    Do you see the irony in your statement? Interest rates are at historic low 1%, they should be between 3-4%, by your own calculation you should wait a couple of years because a lot of people would be stretched and real estate market would indeed be in distress in a couple of years. We in Canada don't have 30 year rates only 5 year and I bet you won't even pay down 20% of your house in 5 years. So you carry a substantial debt and riduculously high interest rates.

    Revisit your logic.

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  • Anti Sam Mango said:
    • 2 years, 9 months

    Sam Mango,

    It seems that you cannot properly interpret the graphs either! The graph you posted has an average slope of less than 3% from 1980 to 2002 (except the dip in 80s) and then there is a sharp rise in the prices. This is what's being discussed here, i.e., the effect of monetary policy, lending rates and CMHC insurance on the real estate prices.

    Ben can continue to be wrong for a few years to come, so don't waste your time with this none sense here. But he Will be right at some time in the future. There is a book by Robert J. Shiller (professor Shiller) called Irrational Exuberance you may want to educate yourself a bit, it won't hurt.

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  • Alexcanuck said:
    • 2 years, 9 months

    And here's that famous graph of 350 years of Amsterdam house prices. Easy to find 30 year periods of rising prices. Also steep plunges, grinding declines, sudden jumps, and flat periods.
    And you'd better believe that toward the end of any of the price rises you'd better believe there were lots of Sams with a host of truthy reasons why it's different this time.
    I prefer to believe history.

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  • Alexcanuck said:
    • 2 years, 9 months
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  • jesse said:
    • 2 years, 9 months

    When Ben Trolls. Too funny.

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  • KenT said:
    • 2 years, 9 months

    Sam's MO is to yell louder than Ben, that's how he tries to win a battle.

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  • Jim C  said:
    • 2 years, 9 months

    Ben,

    One thing to note here is that starting 2008, economy slowed down a lot and is still not where it was before. What that implies is that with no lending happening anywhere else (ask banks for their commercial side lending), even if mortgage debt increased at a smaller pace than before with respect to GDP, it would be amplified. If the economy starts to pick (which looks unlikely though in this current global economic environ which may very well be a short term view) and the debt begins to grow outside of the mortgage space, then this % figure would either come down or stay at the same level.

    An interesting thing to see would be how the current mortgage debt/GDP for Canada stacks against other countries, say UK, Japan which had similar immigration/land restrictive policies etc in place over the last two decades and had accompanying boom/bust periods in real estate.

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  • Reasonfirst said:
    • 2 years, 9 months

    If I were rich, I wouldn't be sitting in front of a computer commenting on blogs I disagree with. I'ld be out havin' fun...but that's just me.

    I think SM has some sort of disorder...

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  • triplenet said:
    • 2 years, 9 months

    On a national or individual basis:
    Any increase in real estate sales will equate to an increase in mortgage debt.
    Any increase in real estae sale price will equate to an increase in mortgage debt.
    Real Estate 101 - economics.
    We all knew that - didn't we?
    What's your point?

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  • Ben Rabidoux said:
    • 2 years, 9 months

    What you are looking at is mortgage debt as a percentage of GDP, not nominal mortgage debt. Huge difference.

    Real estate debt as a percentage of GDP was quite rangebound for the past 60 years before moving to new and unprecedented highs. What you missed in your Real Estate 101 class is that house prices rise over time, and so do mortgage debt, but they should march in line with income gains, rents, GDP, etc. When they don`t, you have a problem. In this case, the problem is that credit spigots have been held open through loosening of CMHC mortgage insurance criteria and the removal of maximum mortgage guarantees, coupled with a shift in mass perception.

    That's my point.

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  • jwg said:
    • 2 years, 9 months

    If I were rich, I'd still be interested in arguments. The fact that relatively "poor" people spend a lot of time on the (generally unremunerative) web is perhaps more noteworthy. Humans are inescapably interested in the truth that transcends our worldly squabbles, negotiations, and material interests.

    But what transcends us is still somehow tied to what we are doing. The transcendent is the horizon or focus of linguistic attention that allows us to defer present tensions to some future reckoning, if ever. As such a mediator, it has worldly consequences.

    The argument that "this time it's different" is anthropologically an interesting one. I see it belittled here by the same people who might invoke Roubini's black swans as a reality, one that implies the swan's emergence is a mark of something being different at times. Unless, that is, the Roubinesque argument is that there are always black swans at some point in any trend line. No trend goes on in linear fashion forever. And so, history is always the same in that it is sure to throw up discontinuities. Still, if they are truly unique or just rare swans, then they are unpredictable, i.e. it is different this time.

    I'd suggest that we have black swans because what works to hold a market's attention, to defer its inherent conflict to some future reckoning can't keep its transcendent hold forever. New hypotheses (fueled by various worldly realities) of what we should share as a common sacred belief about the market do emerge, sometimes catch on, and shift the truth about the market, causing crashes, surges, etc.

    It is the Western (essentially Jewish) idea of history that history is marked by fundamental discontinuities; it is the ancient pagan view that life is a big wheel cycling through the same old same old. Curious that in this argument, the believers in an impending discontinuity are the ones laughing at "it's different this time".

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  • Johnny In Ab said:
    • 2 years, 9 months

    My money is on Ben. My family and I moved to a new city in Alberta and have solicited the assistance of a realtor to help us find a house to buy. We signed up to some automated e-mail service that shows all the houses available in our price range, age and size (we have a large family). Needles to say I get 2-5 updates every day on new listings and price changes. The city I live in has 6.9 months worth of inventory on hand (May 2011)and number is trending up.

    Frankly I am scared to death to buy a house and find out in 2 years that it is worth 80% of what I paid for it. I would rather rent, save the $300.00 extra a month it would cost me to own, stock up on canned goods and watch the carnage that will happen to those who succomed to the pressure to "clime the property ladder".

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  • newbietrader said:
    • 2 years, 9 months

    Looks like a disaster waiting to happen. But how can you pick the top? Is the yeild curve inverted in Canada?
    http://www.debtdeflation.com/blogs/2011/05/09/land-of-the-tweedles/
    Take a look here. Even bigger carnage waiting. Looking at the Australian and US charts one can argue the canadian housing has room to go higher before the bust. What do you think?

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  • jpg101 said:
    • 2 years, 9 months

    This is a very big deal:
    http://www.zerohedge.com/article/guest-post-whats-really-driving-house-p...

    I am a long time reader and admire your work but don't post. Being on ZeroHedge is, in my opinion, a significant step for you and I think you really deserve it. Your clear and intelligent analysis is being rewarded.

    Jean Pierre

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  • Greg said:
    • 2 years, 9 months

    Congrats Ben.

    Maybe now that you read some feedback from thousands of analysts (and after deleting my posts) you will realize what is really going on. Read the politics not the skewed data.

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  • Heir said:
    • 2 years, 9 months

    You have to look at housing on a city-by-city basis. Vancouver, Toronto, and Calgary to a lesser extent are markets firmly in the grips of widespread offshore/foreign speculation. It's not currently the kind of speculation that is looking to flip a fast profit but rather the sort that is using Canadian real estate as hedge against global financial and political instability. The greatest source of capital appears to be from wealth generated in Mainland China. With a gun to my head I'd be forced to predict a 20% correction in Vancouver housing prices in the next several years and probably a similar correction in Toronto. The local populations cannot afford housing at current prices. The major variable is China.

    Note: I own my principal residence and $100MM+ in Canadian real estate with virtually no debt.

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  • Sams Mango said:
    • 2 years, 9 months

    20% - so for you that could mean 20MM$ ++ in loses - why are you not selling?

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  • Swift Kick said:
    • 2 years, 8 months

    Some properties, once sold, will never go back on the market. He probably owns top notch assets and not boom-time cardboard boxes.

    Paper gains are paper losses. He ain't losing nothing and obviously faces no margin calls on underwater properties. If anything the 20% drop would bring some much needed relief to insane property tax valuations.

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  • Heir said:
    • 2 years, 9 months

    Great question Sams. It's not quite so simple. I would need to go out and hire a broker, pay a commission and legal costs, capital gains tax as well as tax on recaptured depreciation of the assets. Then I would need to redeploy the after tax dollars in investments that yield probably 30% more than I was getting just to generate the same cash flow.

    Furthermore, because I know my real estate holdings quite well, I would expect them to weather any storm quite nicely. It's more the REITS who for the most part horse trade low quality properties that selling into a overpriced market makes good sense.

    In sum, the issues are tax liabilities and redeploying the capital in assets that I'm comfortable owning. A 20% or greater correction in Vancouver real estate for example would probably give me a great distressed buying opportunity.

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  • Mandelbrott said:
    • 2 years, 9 months

    Steve Keen's analysis of the "credit accelerator" seems to be proving useful as a predictor of housing price movements. Seems you are just a step away from generating "credit accelerator" computations for Canada. Would be very interesting indeed.

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  • terces said:
    • 2 years, 9 months

    Ben - I would appreciate if you would edit or delete comments from Sammango. I visit your blog to get your perspective and the constructive comments of your readers. As well I research public opinion and statistics with a number of other analysts who I respect. Banter is kind of fun on these sites, but the cutting comments from Sam are an anoyance. If he operates in the business world or out in public like this he would be crusified. I for one would appreciate if you could delete him. Any other support for this??

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  • Will said:
    • 2 years, 8 months

    I believe supply and demand is "out the window" in most of Canada. Prior to 2001, houses in small markets had a small market price. Now it seems the price is driven by what a 1800 sq ft house costs in a larger market. I guess someone finally put it together. "If a person in Toronro can afford a $300 000 house with an annual income of 60 000, why can't Bubba in Stirling afford the same mortgage with the same income...."

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  • armando said:
    • 2 years, 8 months

    I have seen this movie play out in all the major US cities before, and the ending is the same. And, yes, cheap money was the reason for the US housing market demise. So, anyone who argues differently, will soon be joining the unemployment ranks of quants and analysts from Goldman to Merrill to Citi, all exolting the virtues of leverage, and insisting "this time it's different". It's never different - a bubble is a bubble!! For the data driven , self deluding investors; you can talk yourself into anything, based on a number of assumptions inherent in any quantative investment modeling. Some use of common sense would have served a lot of CDOs investors well. But, alas, hubris is also repeated theme of many financial bubbles.

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  • Ram said:
    • 2 years, 8 months

    Demand and supply will eventually determine the price. Till there is variables supporting the demand which is higher than the supply, the price will keep on increasing. In emerging country like India, the real estate price has never come down even once in last 50 years. As such, though the percentage of mortgage debt is growing in relation to GDP, the price will increase. When the variables attached to demand such as income, employment, loan availablity, population and immigrant growth rate, investment from other countries and regions, etc are collectively positive, the real estate price will increase. It is not once factor but collection of various factors will determine the demand. Another important factor is perception of the market, once the market starts to fall then it keeps on falling eg.US. Once the market is in increasing trend then it keeps on increasing unless there is something big which will stop or turn back.

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  • Marc said:
    • 2 years, 8 months

    A nice post Ben. For those that are really doubting this it is quite simple. Savings are discouraged with low interest. Borrowing ensues as savings fail to keep pace with inflation and people chase risky returns (hmmmm.....such as house flipping which is like a giant ponzi of musical chairs which ends when there are no more chaors left or fools shall we say). Banks are only too happy to give loans as ......well this is what they do. Mortgages are assets don`t forget in inlfaitonary atmospheres on the banks books. Are they when deflation hits when consumers reach the end of their borrowing limits.
    Ask the US about that one. For all those that don`t understand what is happening and has happened since 2007 well go here http://www.debtdeflation.com/blogs/page/3/ In a non neo classical way Steven Keen backs you 100% Ben. So do I.

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  • JasonMS said:
    • 2 years, 6 months

    To buy in this market is to play with fire. With the stifling of rate increases the inevitable is only being prolonged and driving more and more Canadians to the brink, purchasing homes barely affordable at low rates. Without substantial salary increases this is not sustainable. Record levels of debt, retail already noting marked decrease, we are headed for disaster in my opinion, and you have the banks to thank for that. Wait, you have CMHC to thank for that actually. I mean, what do the Cdn banks have to loose in lending 500G+ to couples making < 100G/annually combined? CMHC insures these mtgs...in other words WE, THE TAXPAYERS ensure these mtgs. The longer they keep rates low, the louder the pop will be. Our economy is headed for quite possibly a worse hit then we are seeing globally. Sure, we have resources, but without buyers resources do what?? Supply/demand....drop in value. Look at the markets. Oh Canada, we are screwed.

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  • T Maresch said:
    • 2 years, 6 months

    Where is your "like" button (for facebook). So true, way back when I needed a mortgage I would have taken on more debt if the bank had let me especially with these low interest rates. More people need to read this!

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  • JimmY said:
    • 2 years, 6 months

    There is a like button at the top of the comment section. Give it a second to let it load.

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  • MK said:
    • 2 months, 3 weeks

    The graph you presented clearly shows the mortgage percentage is a result of the soaring/stagnating house prices, not a preceding motivation.

    You don't loan more money just because you predict the price rise, you only borrow because you cannot pay down enough.

    It is more than natural that higher offers will bring up the mortgage amount since the payrolls don't follow up the market boom.

    The issue of how much monthly panment you can afford within your income is a totally different one when you discuss the driving factors of house price.

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