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Source link: http://archive.mises.org/17317/will-vancouver-housing-market-go-the-way-of-the-canucks/

“Will Vancouver housing market go the way of the Canucks?”

June 16, 2011 by

In the wake of the US housing and financial crashes there were plenty of articles like this one extolling the virtues of the “sound” Canadian banking and mortgage business.

“In general, Canada’s banking system proved more prudent, more resilient, and much less prone to excesses,” wrote AEI’s Mark Perry early last year.  “Canada didn’t have nearly the real estate bubble and subsequent corrective crash in home prices as the United States:”

Bank2.A

Perry goes on to list the reasons Canadian banking is sound with no housing bubble: Full recourse mortgages, short-term fixed rates on mortgages,  mortgage insurance is more common, mortgage interest isn’t tax deductible, higher prepayment penalties, fewer banks that have more diversified loan portfolios, and fewer mortgages originated by brokers with,

Banks in Canada keep[ing] and servic[ing] 68 percent of the mortgages on their own balance sheets that they originate and underwrite, which encourages prudent lending since banks are putting much of their own capital at risk.

Now in the wake of the Canucks loss, the Financial Post is concerned for the Vancouver (and Toronto) housing markets.  Jacqueline Thorpe writes,

Mark Carney came as close as any central banker ever could on Wednesday to saying some parts of the Canadian housing market are in a bubble. He also basically said there’s not much the Bank of Canada can do to stop the frenzy.

Vancouver home prices are now 11 times higher than the average household income, considerably higher than the 5 times figure reached at the height of the US housing bubble. That may be the reason Vancouver real estate is vulnerable, or, it might be, as Robert Kavcic, an economist at BMO Capital Markets says, “By pure coincidence of course, the last time the Canucks suffered a heartbreak game 7 of the Stanley Cup final (1994) was just before red-hot Vancouver house prices tumbled more than 26%.”

If Vancouver (and other Canadian) housing prices crash, Canadian banks may not look so sound anymore.

{ 10 comments }

Joe June 16, 2011 at 12:58 pm

Great work bringing this to people’s attention.

In 2008, they expanded the role of the CMHC and slashed interest rates. They allowed liar loans.

No matter how prudent the banks are, they won’t prove the ABCT. For whatever reason, it’s “profitable” on paper to speculate in the housing mania, but the fundamentals just aren’t in place. ;)

Daniel June 16, 2011 at 10:14 pm

Won’t prove?

What’s missing?

CT June 16, 2011 at 1:13 pm

Canadian banking proved much more resilient because the Central Bank of Canada inflated the money supply less than its counterparts. This time it has gone inflation-mad and the housing boom is just one effect.

As an aside, what is really juicing the Vancouver market is rich Chinese buyers paying cash for houses. With the Chinese gov’t tightening monetary policy, this could quickly evaporate and prices in Vancouver could fall dramatically. Right now, I’d say both B.C. and Ontario are much too expensive if we price in more “normal” rates of interest, while the rest of the country is still only midly expensive.

Jake W. June 16, 2011 at 1:29 pm

The classy Canuck fan riots after game 7 (burning cars, looting, etc.) isn’t going to help the image of city and thus the desirability of living there. Although, this could be viewed as a one-time, fluke occurrence and have only a negligible effect.

mikey June 16, 2011 at 4:17 pm

Q: when is it more fun to riot- when your team wins the Stanley Cup or loses?

A: not a fair question, Vancouver fans have only had the second option.

RTB June 16, 2011 at 9:48 pm

We in Detroit only riot when we win, so that must be the answer.

24 June 16, 2011 at 4:49 pm

Anyone interested in following the Canadian real estate market, especially the bubbles that are Vancouver and the Greater Toronto Area should take a look at former Member of Parliament, Garth Turner’s humourous and insightful blog http://www.greaterfool.ca It has developed quite a following already of readers who have realized how out of proportion, and unaffordable these markets have become.

Vanmind June 16, 2011 at 8:59 pm

Riots. The perfect excuse for failed central planning. Just order government forces to allow the destruction to reach “viral news” status, and presto — you’re no longer to blame for bankrupting the city (e.g. Olympics).

Redmond June 16, 2011 at 10:42 pm

We have an article coming out on this in the next few days – CMHC is leveraged 100 to 1

Canada is in bad shape too – just 3 years behind.

Nalliah Thayabharan July 7, 2011 at 6:09 am

In the past several years we have seen the average price of a home triple and in some cases quadriple. Much of this has been caused by government programs to help the average consumer afford a home. When the government reduced the down payment required, the sellers simply raised the price so the actual cash required stayed the same. When the banks lowered interest rates, again the price of housing increased thereby costing the consumer the same.
Home ownership is a priviledge…not a right. In a free market society, we make our own economic decisions of where and what we live in. Quebecers have a preference to rent and house prices are a lot lower in Montreal than the other major cities in Canada.
The amount of interest paid on a given property will by far exceed the profit made by the home builder. A 25 year amortization will result in paying TWO & A HALF TIMES the Original Price of the Home. Banks essentially shuffle paper and contribute nothing to the economy. Banks essentially create currency out of thin air…..which leads to inflation & bubbles.
Our banks in Canada are not a healthy as one many think. 12 non-US banks, out of 20, received a share of the $600 billion bailout. RBC Capital Markets, LLC was one of them. All of the Canadian banks are up to their eyeballs in toxic assets & derivatives that they simply don’t understand.

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