Canadian Funding Corp points to here – what is hopefully one of the last of a once-robust breed – The Apocalyptic Canadian Housing Market Story:
Judging by the latest real estate data, the Canadian housing market could scarcely be better. Average home prices are up more than 16 per cent this year, and in May they hit an all-time monthly high, according to the Canadian Real Estate Association. By those numbers, Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed. And yet, there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.
Yadda yadda yadda.
We all know that the proximate cause of the US recession was the bursting of its housing market bubble: it blew up banks, laid waste to personal balance sheets, and left millions of people stuck in homes whose mortgages were more than their market value.
And then Canada went into recession. Unfortunately, this set up the following error of logic that was repeated in all-too-many Canadian newsrooms:
- The US is in recession because its housing market blew up.
- Canada is in recession.
- Therefore, Canada’s housing market must be blowing up as well.
And so it was the fate of any number of hapless Canadian journalists to be given assignments to bash out pieces that fit this narrative. But these exercises were all doomed to failure. The decline in house prices in Canada is a symptom of the recession, not its cause.
Let’s look at how house prices have behaved since 2003:
US house prices have fallen almost 40% (all changes are expressed in per cent log terms: 100 times the difference in the logs), while Canadian house prices are still within 10% of their peak. There are any number of lazy analysts who have swallowed the faulty syllogism enumerated above and have concluded that ‘Canada is following the US with a lag’. This only makes sense if you think that Canadian house prices rose for the same reasons that US prices rose, and that they have fallen for the same reasons that US prices have fallen. This is not the case. As has been documented at great length here and elsewhere, the Canadian economy has avoided the worst of the bubble and its consequences for the following reasons (among others):
- We never had restrictions on interstate banking, so Canadian banks spread their assets and liabilities across Canada. (So it doesn’t matter if a local housing market goes bust).
- We don’t have Glass-Steagal. The investment banks joined the retail banks some years ago.
- We don’t have mortgage interest deductibility from taxes. So paying down your mortgage is a tax-free investment. So most people want to pay down their mortgages.
- (Except in Alberta), mortgages are fully recourse. You can’t just walk away from a negative equity home and hand the keys to the bank; the bank will come after you for the difference.
Yes, house prices have fallen. But the linkages that make the US story so compelling don’t exist here. We don’t have banks that are blowing up. We don’t have massive waves of foreclosures (even the Globe and Mail has given up on its series of articles that culminated in this silliness). Nor do we have much in the way of evidence that lower house prices are causing undue inconvenience to Canadians: when Maclean’s decided to jump on the OMGWTFBBQ housing market bandwagon, the best it could could come up with in the way of a victim was some flipper of 7-figure Vancouver condos who got caught mid-flip. Boo-hoo-freaking-hoo.
Moreover, it’s becoming pretty clear that the decline in house prices is not so much a national story as it is one of falling house prices in Vancouver, Calgary and Toronto:
Vancouver is and always will be a special case whenever we talk about housing prices in Canada: its geography makes it extremely difficult for developers to respond to increases in demand. This is the sort of environment in which bubbles flourish so I’m not going to pretend that I can predict movements in Vancouver house prices. In Calgary, the incipient recovery in the oil sector will no doubt establish a floor on housing prices there fairly soon. And there’s even not-entirely-bad news out of Toronto these days. So I don’t see just how the national index is supposed to fall by another 30% or so.
It’s worth following the housing market numbers. But they are going to be at best a coincident indicator in this cycle.
http://worthwhile.typepad.com/worthwhile_canadian_initi/2009/06/the-housing-market-the-nonstory-of-the-canadian-recession-.html
reported by Moishe Alexander, CFC CEO