There is no Canadian Housing Bubble!

[neohguy]

Ilargi, The Automatic Earth, has a long series of articles today about the housing market in the US, Canada, and Europe. He feels that housing will fall 80% from its 2005 peak. Stoneleigh thinks 90%. That seems absurd until you realize that cash sales today are regularly being accomplished today at 50%. It would be much more if it wasn't for the FHA, Fannie, etc. He summarizes
theautomaticearth.blogspot.com/
That is to say, borrowing from ourselves to keep our illusion alive of a "normal" life must and will stop. That will lead both to major jumps in unemployment, and, as stated above, that in turn will lead to even worse housing markets.
So when do we see this come to fruition? Well, price discovery in a housing market, which is always prone to inertia, since people can stay put and fool themselves about the true value of their homes, can take a while to develop. But it will come. US banks will at some point need to offload foreclosed properties, They play a delicate game between the marked-to-whatever value they carry the homes for in their books, which makes them appear solvent, even as they get no income from the homes, and, on the other hand, getting that income. Banks are desperate for cash-flow, but for now, who cares if the Fed provides cash at 0.0078%?

The way we at The Automatic Earth see it play out is that the entire house of cards will fall within 2-5 years, and, within that time frame, sooner rather than later. While there can be any number of inside and outside factors that can speed it up, we see practically none left that could slow it down. Of course there can be people in a few years time who claim by hell and high water that their homes are still worth $500,000, but they will have neighbors who sold for $100,000, $50,000 or less. Price discovery can be in the eye of the beholder, until you must urgently sell.

This is inevitable. We must come off our credit "sugar" high, and we can't do that by applying more credit. That will mean scores of jobs created by that sugar high will disappear as well. The jobs that were not have all been moved elsewhere in the world. No healthy job market, no healthy housing market. Period.
There are people in many countries and regions who feel that their particular place is different, and they do so for a variety of reasons. But nine out of ten of them are wrong. Even in China and Brazil, which today look to be relatively healthy economies, the western credit collapse will cause unequalled mayhem. Russia may fare a little better, but only for the richest part of its population; then again, that will be true around the globe.

For the remaining 99% of the population, the combination of deleveraging and depression, a double barrel that guarantees a self-reinforcing positive feedback loop, will be gruesome and cruel.

People have complained about the fact that we have warned last year about what 2010 would bring, pointing at the stock markets, which appear just fine and normal. But, as we've always maintained, it's better to be a year early than a few minutes late, and moreover, if you look at the numbers of foreclosures and long-term unemployed, and the number of Americans who are on foodstamps today (1 in 7), maybe it's time to realize that what we think of as normal is something we left behind years ago. Even to ponder that from the very beginning of this now closing decade, with the huge run-up in real estate prices through out the western world, things have never really been normal.

It's perhaps just that when you can go out and buy homes and cars on credit, and iPod and iPads for Christmas, it is mighty tempting for the fickle human brain to see that as "normal". Meanwhile, your home values will return to what they were in, say, the 1970's, or even before that. It might be a better idea to see that as "normal". Then again, prospects for economic growth were much better back then. Maybe try 1950.

The human brain is lousy with diminishing returns and receding horizons. It excels at perpetual growth. Great at the impossible, bad at reality. So bad we'd rather invent our own reality than face the one we must face. Until we can't. In the end, what we'll be left with is a small group of rich people buying up real estate for pennies on the dollar. Which is of course no different from what happened in the 1930's.

Nothing new, nothing special there. What we fear will be new and special is the degree to which we will see our economies and societies crumble; there are precious few signs that it will be better, let alone different, this time. And that's why the only disagreement Stoneleigh and I have is between an 80+% and a 90% decline in home prices. Across the western world. On average.

[bimetalaupt]

The "boom" years post 1980 were a series of financial bubbles and an economy that was fueled by credit purchases by consumers who did not see real growth in their wages.
American workers cannot compete with workers who get paid cents on the dollar. The sheer cost of living in the U.S. prohibits that. So, keeping that in mind, where will the demand be for existing homes?
( note to any builders; there may be a market for homes that offer living spaces amenable to multi-generational families co-habitating, "boarding house" style homes, or townhome/condo "co-ops". The single family home may end up going the way of dinosaurs; too big/sucking up too many financial/other resources to survive)
We will continue to see a deflation in the price of housing because of continued job losses/ wage reduction.

Read more: notmsnmoney.proboards.com/index.cgi?board=moneytalk&action=display&thread=134#ixzz193zDjcCd
Kate,
The idea of a mega structure goes back a long way.. Look at Mesa Verde, The Ancestral Pueblo people lived in a complex with God, Grandmother , goats, chiefs and you...

From approximately A.D. 1 to 1300, the Ancestral Puebloans inhabited the Four Corners Area.

Their primary crops were corn, beans, and squash. They domesticated the turkey, and continued to gather wild plant foods and hunt game in order to supplement their diet.

The Ancestral Puebloans are known for their remarkable building techniques. From pit houses to multi-storied cliff dwellings, these structures remain as a tribute to their remarkable architectural abilities. The Ancestral Puebloans were also highly skilled potters, and beautiful decorated bowls, ladles, mugs, and other intricate ceramic items have been found in sites throughout the region.

There are many theories about why the Ancestral Pueblo people gradually abandoned the area by A.D. 1300. Their movements seem to be related to drought, climatic change, soil erosion, or overuse of the area's resources. We do know that the modern day Pueblo People are their descendants. A visit to Mesa Verde Country®, the archaeological center of America, is a must for anyone who desires a very special glimpse into the heritage of today's Pueblo people.

[Deleted]

Honestly I think housing has held up pretty well compared to a lot of "investments" IF you rule out troubled areas. Troubled areas would include FL (where insurance has gone crazy), Detroit (where car companies cut so many people), either coast (where they have had so many huge gains over the years), & places like that. My stepfather told me that he figured up his gain on his house (after selling it 40 years after he bought it) & it averaged 9% per year increase on what he paid for it.
Again one of the big problems with housing is that it is so location specific. A lot of people buy houses that will never really increase in value because of their location. They don't take one day selling that house into consideration when they are buying it. Just my thoughts.

[Aman A.K.A. Ahamburger]

Good story Bruce!! I like to think land re-development, recycling to make building materials, and building up.

neoh, the problem with the article you posted, and people who talk like the authors do. Is that there is a major bias against the west. Not to mention, that I think it's pretentious to say that everyone except the people who think like I do have their heads in the sand.

I say it's bias, because everywhere has mortgages, not just the west. Plus the authors are overlooking a very import part to the equation. It costs at least 130k just for material and labour to build a 1400 sq house. Builders don't work for free.
If people want to keep ignoring things like the Saudis pushing for a way to get houses to the lower and middle class because right now only the rich can afford them, that's fine by me. Just like at the start of 2010. Stoneleigh said by now that all of us Canadians that had our heads in the sand would be awake. While some of us were seeing a leveling in sales and in price because everywhere, but Van, had a correction. So that's another point against the super intelligent uninformed crowd.

The market and economy was supposed to crash in '09 and '10. I guess we march on in 2011!

[neohguy]

Ahamburger, I'm not in Canada. Canada and the US are similar in some ways and different in others. There are a couple of things that I think are the same everywhere:
1. A parabolic rise in asset prices that is only sustained by the notion that someone else will pay more is not sustainable.
2. Thinking your nation is "different" for reasons that are only nationalistic don't end well. You had better have hard reasons for claiming such because what our fathers and grandfathers did don't count anymore. What has your/mine done lately?
3. Any country that claims wealth that is achieved through ever increasing personal debt without an equal or more rise in personal income is delusional.
4. An emotional response defending parabolic rises in asset prices is a sign of insecurity. It displays the natural human tendency of denial. If you're secure, there would be no emotion.

I'm not picking on Canada. People that live in glass houses shouldn't throw stones. As I've said before, I didn't think that housing prices would crash in the US. I thought it would only slow down. I never thought I would be buying them today at a 50% discount. It makes sense though. Housing only thrives if it's affordable and by affordable I mean it's citizens being able to purchase with little or no government assisted/guaranteed programs.

[Aman A.K.A. Ahamburger]

neoh, while I love you passionate responses. They are just that emotional and personal. I understand the emotional side to human nature that you are describing. My thoughts are based off fundamentals.

A historical average of 40% is considered affordable. Here are the current top six cities in Canada.

Van at 68.8%, Tor at 47.2%, Montreal at 41.7%, Ottawa at 38.2%, Calgary at 37.1%, Edmonton at 32.7%

Our service economy remained strong because our job market remained strong in most of the country. A lot of which we produce, people will always need. There have been multi billion dollar contracts signed with countries that have populations totaling more than 3 billion people in 2010 in the area's of Canada that have the most affordable homes and the worst rental markets. I have been saying since Olympic speculation fueled prices in Van and pushed our national average to new heights, that there will be a WCC. The affability index points that out nicely.

The biggest thing, IMO, that people overlook is Volume. Canada is 1/10 the size of the US.

That's why, with the facts that I have posted above, and many more that I don't have time to post right now. We are reading stories like this..
-
Home sales rise 4.8 per cent in November
www.vancouversun.com/business/Home+sales+rise+cent+November/3980867/story.html#ixzz19FnUf07h

Although this is well short of record level activity for the month of November posted a year ago, seasonally adjusted sales now stand 19.5 per cent above levels recorded in July 2010, when it reached this year's low point," CREA said.

Not, "Canadian Housing market continues downward spiral in November", as some emotional based thinkers said would happen, and tried to convince others was an inevitability.

[neohguy]

The Automatic Earth is definitely not comfortable perma-bull reading so I'll post a little bit from Yahoo Canada that was posted last week:
ca.finance.yahoo.com/news/Could-U-S-style-collapse-yahoofinanceca-2480210207.html
Could a U.S.-style collapse happen here?
yahoofinance
Tom Fennell, On Monday December 20, 2010, 5:25 pm EST
Home ownership is at the centre of many Canadians' financial retirement plans. That's especially true for baby boomers who are sitting snugly atop a nice wave of real estate inflation.

In fact, the average price of a detached home in Canada has doubled since 2000, and in September was sitting at $331,000. Of course that number pales when compared to Vancouver, where the average price for the same period was $679,000 and in Toronto it was a still-high but a more modest $427,000.

So a lot of people nearing retirement age are hoping the housing market will stay buoyant until they cash out, allowing them to downsize, pay off their debts and still have plenty of money left over.

A lot of American homeowners used to think that way. But from their peak in 2005, U.S. house prices have fallen almost 30 per cent, and they are still trending lower. Things are still so bad in the U.S. that the real estate default rate hit a record high in 2010, with more than three million households receiving foreclosure notices. And it could get even worse in 2011.
...To say the least, our debt numbers do look unsettling. According to Statistics Canada, the Canadian household debt-to-income ratio hit a record high of 148.1 per cent in the third quarter. That is slightly above the 147.2 per cent debt ratio seen in the U.S., according to latest figures from the U.S. Federal Reserve....
Carney also noted that household debt has jumped by seven per cent since the recession bottomed out, compared to a fall of 3.5 per cent in the U.S. And most of the household debt in Canada can be attributed to mortgages, which have grown from $421 billion in 2000 to more than $1 trillion today, a 137 per cent increase in 10 years....
...according to the International Monetary Fund (IMF), Canadian housing prices are extremely overpriced when compared to U.S. housing prices at their peak in 2005. And by implication, whether it will be "fierce" or not, they are due to correct....
..., Canadian home prices relative to income are 15 per cent above the post-1970 average. This may not sound all that bad until you compare it to the U.S. and the fact that before prices there began to tumble, relative to income they were 11 per cent above the long-term average....
....In the case of housing, a regression to the mean would imply a return to long-established price trends based on historical levels of appreciation, and according to the IMF Canadian house prices are now selling 60 per cent above their historical average.

That sounds like a scary number, and it probably is when you consider that just before the U.S. housing bubble burst, prices there were tracking 30 per cent above their historical average and have almost fallen back to that level....
...After looking at all those numbers the IMF concluded that on a price-to-rent basis, Canada has some of the most expensive real estate in the world....
...Here's a final bit of analysis that should raise a few eyebrows. The Canada Mortgage and Housing Corporation has insured $773 billion in mortgages and loans, while holding only 1.2 per cent in equity.

But at its worst before it went technically bankrupt, Fannie Mae, the largest mortgage insurer in the U.S, had 1.5 per cent equity in its loan portfolio....
...So does this mean the Canadian real estate market is a bubble that is about to burst?

Only history will answer that question, but if you believe long-term trends matter when it comes to investing, odds are that housing prices will return to the mean. If you use past housing corrections as a guide, a correction could shave 30 per cent off their current values.

In the process, it also will also force a lot of baby boomers back to the drawing board to reschedule their retirements.....

[Aman A.K.A. Ahamburger]

I'm defiantly not a perma bull. Volume! Vancouver and Toronto, two of the most expensive place to live on earth; make up 50% of the very SMALL housing market here. Look to the facts above! Have a good day!

[neohguy]

Dec 26, 2010 16:18:54 GMT -5 Aman A.K.A. Ahamburger said:

I'm defiantly not a perma bull. Volume! Vancouver and Toronto, two of the most expensive place to live on earth; make up 50% of the very SMALL housing market here. Look to the facts above! Have a good day!

I'm not hoping that Canadian housing collapses Ahamburger. I do see some similarities that are common to all bubbles. These similarities do not mean that a bust is inevitable but I think they do deserve a very close look.

[Deleted]

I think that in a lot of areas (CA is one) housing is still overpriced in a lot of areas based off of what people earn. They could still go down some in those places. Also something else that could affect housing is the likelihood of increased taxes.

[comokate]

Dec 26, 2010 16:14:17 GMT -5 Aman A.K.A. Ahamburger said:

A historical average of 40% is considered affordable. Here are the current top five cities in Canada.

Van at 68.8%, Tor at 47.2%, Montreal at 41.7%, Ottawa at 38.2%, Calgary at 37.1%, Edmonton at 32.7%

Hmmm...what is the "40%" you are referring to? Historically, mortgages not exceeding 2.5 times an annual income were considered affordable. That old formula allowed for those pesky items such as taxes, insurance, savings, food, fuel, heating/cooling, health care, educational expenses, etc. to be purchased/paid for without using additional credit.
My first job as a teen was cleaning my mother's real estate office on the weekends. I listened ( captive audience...haha) to the agents discussing the binds some people got themselves into by being "house poor".
In my area, I noticed a big problem developing around 2000-2002 when "starter homes" here were exceeding one quarter of a million dollars, while the average family income was slightly over 40,000. Based on what the market could bear, the majority of single family homes should not have exceeded 100,000 dollars...yet they were over twice that amount. Quite a nasty , big bubble ( our area was one of the hardest hit with predatory lending practices).
There was also little option to rent as landlords raised their monthly fees to equal what average mortgage payments were going for, and without the tax advantage to interest deduction.
When bankers are allowed to run free, unfettered by the morals and ethics most professions , at least on the surface, claim to value, with all profits privatized and all losses paid for by the public, they will always "win" and the average American will always lose.

[Aman A.K.A. Ahamburger]

Thanks for showing me that i had posted five cities, when there were six first off Kate!

The 40% is the Historical wage to household cost of a sustainable real estate market. So every city but three in Canada is under 40%. Rent is high for good places, rent is high for bad places. Most cities have rental vacancy below 2%. Until this last quarter Regina had a rental vacancy of .6%!!

@neoh..
I agree that the topic of Canadian debt linked to extremely high housing costs in 50% of the Canadian real estate market is a topic for discussion. However, this thread is to discuss the bottom of the US market; not the top of the Canadian one. The housing market is a leg that if got some foundation this year would help propel 2012 even further.
On that note the article you posted says that

That sounds like a scary number, and it probably is when you consider that just before the U.S. housing bubble burst, prices there were tracking 30 per cent above their historical average and have almost fallen back to that level....

Which actually goes to the thread topic of a 2011 housing bottom in the US!! Thanks neo!

[neohguy]

Thanks for the interesting topic Ahamburger. Most people are able to comment based on personal observations where they live.
I'm pretty certain that housing prices have not reached a bottom in the US. I'm certain that they haven't reached a bottom where I live. There was a thread on the old MT board that discussed this. One of our posters commented that they felt that a bottom had been reached in northern California. I'm not familiar with that area but I tried to learn what I could by checking out the San Jose residential market. I selected some zip codes in San Jose that seemed to be middle to slightly upper middle income neighborhoods. What I found was that 40%-50% of the advertised properties (I used trulia) were in some type of foreclosure or financially distressed sales. I also noticed that the properties sold for 200%-300% more than what similar properties sold for in my area. My area also has a high foreclosure rate but properties are not moving fast.
One of our posters from northern California said the price was higher because California is desired by many but can only be afforded by a few. The afforded by a few stuck out to me. Prices will continue to fall until the existing inventory can be afforded by more than a few.
The cost of a new house is affordable to fewer yet at this time so I expect that sector to languish for many years yet. The only thing that I can see that would change this would be another speculative bubble combined with easy access to credit. A rise in the median wage that would make the properties more affordable to more people. Or some new "financial innovation". Two of the three would would be bad and I don't see real wages increasing. jmo.

[vl]

Remember... NOTHING has been done to stabilize the credit from a portfolio perspective. We are still stuck with the same old banks pushing it likes drug dealers, sloppily booked and then off to some crooked fund. The entire system MUST be scrapped so real LENDERS can get back in and rebuild the discipline.
Close the banks, trash Wall Street... Save America.

[comokate]

I agree with you V.L.
The worst is still yet to come. God help us all.

"Home Prices Tumble in Largest U.S. Cities"
www.msnbc.msn.com/id/40827654/ns/business-real_estate

[decoy409]

Hi Como! Any thoughts? Why yes indeed after viewing the latest and colaborating round the block numbers. And I would agree that MILLIONS of homes are coming in a crashing.
Sure wish they would release the juicy Commercial aspect so the party can really get a great kick off!

[Aman A.K.A. Ahamburger]

Thanks for the interesting topic Ahamburger. Most people are able to comment based on personal observations where they live.

Thanks neoh. That's what I was hoping for.

Kate. There is no doubt that 2010 was a bad year, however as I pointed out above prices could drop, if sales rose, a recovery would follow.

Housing Starts Seen Rising to Three-Year High With Belated U.S. Jobs Boost
www.bloomberg.com/news/2010-12-28/housing-starts-seen-rising-to-three-year-high-with-belated-u-s-jobs-boost.html

[neohguy]

Just my personal local observations. The foreclosed inventory for sale, which is being sold for 30%-50% less than similar houses for sale, would move a lot quicker if they made it easier for first time homeowners to buy. Most of these title agencies and banks want cash at closing. And they want it in a hurry. A young family does not have that kind of dry powder available.
Fannie isn't helping by making me jump through hoops to get a waiver so I can flip it at cost to a relative.

[decoy409]

Have housing bottom thoughts? Best start reading. HO! HO! HO! Over a TRILLION to be wed with RESIDENTIAL.

Ok, enough for me. Have a beautiful day!

[Aman A.K.A. Ahamburger]

Good points neoh!

[kman]

Hard to say where the bottom is. It took 25 years from 1929- 1950s before existing developments started to build again. I guess, this would be the worst case.

[The Virginian]

We can't recover until we hit bottom - My bets on 2012 - then another 5-10 years for a true recovery - Just my opinion - no facts to back it up but my guess is as good as anyones!

[Aman A.K.A. Ahamburger]

What's the market like in your neck of the woods kman and the Virginian?? You were saying that the market was decent this summer in your neck of the woods kman..
IMO, it's getting to the point where housing bottom=gold top.

[comokate]

Here's a active map of statistical information , with average weekly wages listed ( scroll down under map of US to see data table):
beta.bls.gov/maps/cew/us
Multiply the weekly average wage by 52. Now multiply that number by 2.5 This number you arrive at is what the majority of homes, in your area, should be priced at.
How do the current, average, home prices in your area compare ? If they continue, on average, to be above that number, the prices are still inflated for what the local economy can bear.
More information can be found throughout the BLS ( Bureau of Labor Statistics) with regards to employment numbers, consumer price indexes, etc.
Mass layoffs continue. For most areas in the US, wages have stagnated or declined. This will continue to affect the price of homes as lower wages drive down what consumers can spend on housing.

[texasredneck]

This message has been deleted.

[Aman A.K.A. Ahamburger]

Thanks for the info kate and redneck. Let's see what 2011 has to hold.

[kman]

Ahamburger, The housing market here , is as stable as ever. High taxes,...cheap housing...never really moves in one way or another. I would rather have low taxes and a volital home price . The value of my home is part of my net worth. The taxes I pay..are the taxes I pay.

[Aman A.K.A. Ahamburger]

Taxes the terrible!

[kman]

The old saying around here, is that we never had the boom...so we never had the bust....Great...I'll take a boom anytime...I don't invest in a flat line!

[kman]

Bite me!!! Wheres the friggin bat. Try $5,500.00 ...Last house...3500 sqft $8,500.00....+ State income tax

Just curious......I'm taxed at twice the national average..How are your municipal bonds?