Wolf
Richter www.testosteronepit.com www.amazon.com/author/wolfrichter
For years, home prices in Canada tracked those
in the US, including during the crazy bubble years. But as US home
prices peaked in 2006 and then skidded downhill unglamorously,
Canadian home prices, after a brief swoon during the financial
crisis, just continued to soar, unperturbed by reality and unhampered
by any sense of gravity.
Now
the average home price in Canada is $400,000, according to an
analysis by BMO, one of the largest Canadian banks. In the US, where
price bubbles are forming once again in a number of cities, the mean
home price is $250,000. OK, we’re comparing average and mean, which
aren’t the same thing, but the trends speak volumes (chart
by OtterWood
Capital Management):
The
gap between Canadian and US home prices is at an all-time record,
with the average price in Canada now 66% higher than the mean price
in the US. Even when the prices are adjusted for fluctuations in the
exchange rate, BMO points
out,
Canadian homes are still 50% more expensive than
the already expensive
US homes. What gives?
Ripples are already appearing. Housing starts
and building permits in Canada have been lousy. Bubbles have the
self-propagating effect of attracting ever more resources and jobs
and assuming an ever larger role in the economy. Until they implode.
Then it all reverses, often suddenly. During the housing bubble in
the US, that’s exactly what happened. And when it popped, millions
of people lost their jobs in the housing sector, investors lost
money, banks got bailed out…. You know the story.
Canada
has experienced the same shift of jobs and resources into the housing
sector. The more the housing bubble grew, the more it has attracted
jobs and resources which further inflated it. And so the bubble
ballooned even more insanely that in the US. In the process, the
economy has become much more dependent on housing-related activity
and jobs than in the past – and has become more vulnerable to a
correction in housing. A 20% downdraft in home prices, BMO’s senior
economist Sal Guatieri warned,
could throw the Canadian economy into a recession.
So
can we already hear the distinct popping sound from the housing
bubble in Canada? “Not just yet,” according to OtterWood
Capital Management.
But the housing market is “overpriced,” and a “bubble” it is.
Now all it takes to keep it going forever is a miracle, and a big one
at that, but miracles are rare in the housing sector, and if they do
occur, they don’t last long, and eventually, all bubbles do the
same thing: the hot air hisses out of them, and the bigger the
bubble, the worse the consequences.
In
the US, they’re not even trying to blame the weather this time.
“Housing affordability is really taking a bite out of the market,”
is how the chief economist for the California Association of Realtors
explained the March home sales fiasco. “We haven’t seen this
issue since 2007.” Read…. Housing
Bubble 2.0 Veers Elegantly Toward Housing Bust 2.0
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