Canada may be on the cusp of a “severe” housing correction as real estate investment surges above a tipping point relative to economic output, according to George Athanassakos, professor of finance at the Richard Ivey School of Business.
The CHART OF THE DAY (click on image above) shows Canada’s housing investment as a percentage of gross domestic product, and the declines in inflation-adjusted house prices that follow when this ratio tops 7 percent.
“Eventually, everything boils down to demand and supply,” Athanassakos said in a telephone interview from Western University in London, Ontario. “Whenever this ratio goes over 7 percent, it signifies overinvestment in housing and two or three years later, we have a severe correction.”
Canada’s housing market is booming as historically-low interest rates fuel purchases, driving up home prices and adding to record household debt. Canada’s ratio of housing investment to GDP has averaged 5.8 percent over the last 50 years and is currently at about 7 percent, based on Statistics Canada figures as of the third quarter of 2011, Athanassakos said. Housing investment includes spending on new homes, renovations and real estate transaction fees.
U.S. housing prices plunged by a third between the peak in July 2006 and November 2011, according to the S&P/Case-Shiller Composite-20 Home Price Index. By comparison, Canadian housing prices rose 30 percent in the same period, according to the Canadian Real Estate Association.
“We have experienced bubbles and busts before in Canada, it’s nothing new,” Athanassakos said. “I don’t know why this time would be different.”
This time isn't different. Only delusional fools listening to official rhetoric and rosy scenarios from Canada's mortgage monster and bank economists think so. That's why Mark Carney will shrug the uptick in prices and why Canada's primary dealers see no rate hike until 2013.
I know, Canada is the best, we are smarter than everyone else, our economy is immune to bubbles and our regulators are on top of it. Utter rubbish!!! We too are in for the housing downturn of the century and when this housing bubble bursts, look out below.
But don't listen to me, professor Athanassakos and others. Listen to the CMHC who predicts a stable Canadian housing market in 2012. If you ask me, the CMHC and Canadian banks must be nervous as hell if they're coming out, vehemently denying any housing bubble.
Below, Housing and Urban Development Secretary Shaun Donovan talks about the U.S. housing market and the agency's operations. Donovan, talking with Scarlet Fu and Tom Keene on Bloomberg Television's "InsideTrack," also comments on the government's $25 billion settlement with five banks to end a probe of abusive foreclosure practices. Mark my words, in the future, we'll see our own probe into Canada's subprime crisis and it won't be pretty.