Nobel laureate economist warns Canada at risk of housing bubble shocker

[Dion]

Nobel prize winning economist Paul Krugman has served notice that Canada may be experiencing a housing and debt bubble.

In a new post on his New York Times blog, Krugman said what’s going on in Canada could be a litmus test for what causes deep recessions and slow recoveries, the type that has plagued the U.S. economy for the past four years.

Krugman explains most economists initially considered the 2009 recession to be the simple byproduct of the financial crisis. Stabilize the banks, the thinking went, and it would all solve itself.

“Yet the economy remained depressed [even after banks were stabilized in the U.S.],” he writes. “As a result, many economists — myself included — turned to a view that stressed nonbanking issues, especially the broader effects of the collapsed housing and the overhang of private debt.”

That’s where Canada functions as a potential case study. Our household debt and home prices keep trending to unnervingly higher levels. At the same time, our banks are viewed as well regulated and conservative in their capital structures — they’re “boring,” as Krugman points out.

In the past, those boring banks would have led Krugman to rest easy about Canada’s household debt and housing. But the non-financial view undermines that.

“Canada ought to be quite vulnerable to a big deleveraging shock,” he writes.

http://www.vancouversun.com/business...490/story.html

[Dion]

Worthwhile Canadian Comparison

Enter Canada. Famously, Canada’s old-fashioned, boring banking system avoided getting caught up in the global financial crisis. And for a while Canadian housing prices lagged those south of the border. Since then, however:

Canadian household debt has kept rising even as the US level has declined:

So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

http://krugman.blogs.nytimes.com/201...an-comparison/

[SebC]

A bit weird to give this a "thumb up".

[Brannigans Law]

I keep thinking I should lock my mortgage in for 10 years not 5, at a higher rate.

[SeeBass]

^doing that this week

[Thor]

Take it from an Icelander, there is absolutely NOTHING to worry about, live the high life and take out more loans I say!

[oilyfan]

The alarming decline of housing affordability

http://www.theglobeandmail.com/globe...board/follows/

Affordability hardly seems a problem when you look at home sales. The Canadian Real Estate Association reported on Monday that sales were down 2.6 per cent in May on a year-over-year basis, but prices were up 3.7 per cent. The numbers were strong enough that the association increased its sales forecast for 2013.

And yet, there is clearly some stress on affordability, which is reported on in depth by Royal Bank of Canada’s economists every three months. As RBC points out in each report, lenders typically qualify borrowers by checking whether mortgage payments, property taxes and heating costs account for no more than 32 per cent of gross household income. In the first quarter of 2013, this package of housing costs consumed a low of 30.4 per cent of average household income in Edmonton for a detached bungalow and a high of 82.3 per cent in Vancouver. Nationally, housing costs ate up 42.5 per cent of the average household’s income.

RBC’s data show that to qualify to buy the average-priced two-storey home in Toronto and Vancouver in the first quarter, a couple would need gross annual household income of $132,100 and $156,200, respectively. Ottawa’s not far behind at $92,500, while the national number was $87,800.

Royal Bank of Canada's housing affordability measure takes a quarterly look at what percentage of median pre-tax household income is needed to pay the cost of a mortgage on an average-priced detached bungalow, plus property taxes and utilities. Lenders deem a house to be affordable if the associated costs account for no more than 32 per cent of the borrower’s gross income. Here are affordability numbers from the first quarter of 2013.

[Erick Estrada]

LOL at Vancouver. I know a few people down there that work multiple jobs to support their lifestyle and <1000 square foot condos. Is it really worth it?

[ranchlandsselling]

Originally Posted by oilyfan

The alarming decline of housing affordability

http://www.theglobeandmail.com/globe...board/follows/

Well - that should aleviate the Calgary fears.

[calgaryrocks]

wow, Montreal is cheap

[Thor]

Originally Posted by calgaryrocks

wow, Montreal is cheap

Like their WOMEN!

[mykalberta]

Are these guys ever held accountable if their "educated" opinions are ever wrong?

I wonder if anyone has ever asked him how his musings " Krugman advocated lower interest rates (to promote investment and spending on housing and other durable goods), and increased government spending on infrastructure, military, and unemployment benefits" affected the current economy.

The rise in home prices due to lower interest rates and government policy is what was the catalyst of the 2008 "crash". I am surprised such an educated economist wouldnt have theorized that possibility.

Take his "The Conscience of a Liberal" NYT blog with a grain of salt.

While the Cons havent done everything perfect, I think their mortgage lending changes have helped and hopefully they keep the spending prudent and only tax cuts if they have direct affect. I think Krugmen should worry about his own countries spend spend spend nature that he himself advocated for.

[SportsJunky]

I don't know why exactly but everytime I see Krugman's smug face on t.v. I want to reach through and give him a noogie.

[Erick Estrada]

Originally Posted by calgaryrocks

wow, Montreal is cheap

Montreal is like a lot of US cities in that there are very nice areas offset by some really shoddy areas. It's a place I love to visit but would never want to live.

[Cowboy89]

The problem with any 'affordability index' based on housing is that it's measured based on what the monthly mortgage payment is under current assumptions. It's completely short term thinking. Unreasonably high house prices in Canada are masked by interest rates that are as low as any of us will ever witness again. It's a good bet that a buyer of a house now could end up having huge mortgage payments in some years time when they go to renew their mortgage. It's questionable whether or not a lot of the marginal buyers today will be able to reasonably afford that increase when it happens.

[corporatejay]

Originally Posted by calgaryrocks

wow, Montreal is cheap

Well they pay about 50-60% in taxes plus sales taxes, I think your after tax income is much lower there.

Vancouver is absolutely ridiculous.

[Bertuzzied]

There is NO WAY anyone should be buying a house in Vancouver right now. Bad things are going to happen there and CTV Rob should be prepping now.

[mykalberta]

Does anyone have any home prices for San Fancisco? I would compare Vancouver to SFO for the most part (sans the tech industry). I am wondering if SFO is experiencing the same East Asian price influence that YVR is?

It would seem similar to YVR for home pricing according to the below website

http://www.trulia.com/real_estate/Sa...market-trends/

[undercoverbrother]

Originally Posted by mykalberta

Does anyone have any home prices for San Fancisco? I would compare Vancouver to SFO for the most part (sans the tech industry). I am wondering if SFO is experiencing the same East Asian price influence that YVR is?

Is San Fran and Van a good comparision? Just wondering why you picked San Fran?

[polak]

I don't know, my theory might be ridiculously off target but in an economy like Alberta's, wouldn't a real estate bubble burst only effect those that are using additional properties as investments? Since our economy is mostly reliant on external or recession proof demand (Oil, Agriculture, Low Cost-Big Box Retail hubs...etc) I can't imagine housing prices dropping and people losing money on investment properties would ravage our economy and lead to rampant unemployment i.e. the US crisis?

Those people who only have one, primary residence, should be okay outside of the fact that they may be over extended due to Canadian HELOC love, but if their jobs stay intact, they should still be able to make their payments and what not...?

I pulled all of this out of my a** as I was typing this so feel free to rip me a new one...