Canadian housing bubble

Commenting about the recent Wall Street Journal article “Housing rebound in Canada spurs talk of new bubble,” Rolfe Winkler of Reuters says

Last week Paul Krugman toasted the sobriety of Canadian banks. Among other things, he said that low rates aren’t enough to cause a bubble since Canadian rates are low and, well, they don’t have a bubble. If this article is to be believed, Krugman didn’t look closely enough. Banks may use less leverage in Canada, but low rates are encouraging households to borrow big — debt to disposable income is a bubbly 1.42x. Key quote in this piece is near the bottom, where a real estate agent notes that rising prices mean rents are only barely covering mortgage payments for real estate investments. The best definition of a bubble is when debt service payments finally eclipse rents. Then buyers/lenders are betting on continued appreciation, which can only be driven by still-easier credit. Canadian real estate appears to be headed in that direction.

Exactly right.  There are a few countries that have not seen their enormous property bubbles implode, among them South Africa, Canada, and Australia. All are leveraged to commodities to varying degrees. Coincidence? Hardly.

Remember that Japan’s banks were very well capitalized in 1989, as were American banks in 2007.  While the bubble in the U.S. was plain as day as the 2005 Economist graphic in my post Naysayers, the housing bubble was obvious points out, by that juncture Canada was looking relatively tame; Australia, not so much.

Given the recent irrational exuberance in Canada, let’s wait and see how the huge run up in Canadian house prices plays out over the long-term.