Throwing Caution to the Wind

We have discussed the dangerous housing and consumer credit bubble in Canada in these pages on several previous occasions in some detail (see “Carney’s Legacy” and “A Tale of Two Bubbles” as examples). Since we first wrote about Canadian real estate, the bubble has continued to grow with nary a pause. Why are we calling it a bubble? The gap between incomes and house prices is widening ever more, and has been far above what is considered normal for several years already.

This decline in affordability is the result of monetary pumping and ultra-low administered interest rates imposed by Canada’s central bank. Moreover, the boom is subsidized by a giant state-owned mortgage insurer, an institution that has the potential to severely impair the government’s finances once the bubble bursts.

 

van-twilightVancouver skyline at night – no doubt a nice place, but a bit pricey.

Photo credit: Mohsen Kamalzadeh, imaginion.wordpress.com

 

The housing bubble is most pronounced in big cities like Toronto and especially Vancouver. Trophy properties are selling like hotcakes to people who evidently don’t care much about money. In fact, the frenzy proves that the demand for money has long been overwhelmed by the huge growth in its supply among the richer strata of society.

 

A friend has pointed us to a short video at CTV News about a recent high end property sale in Vancouver that is quite remarkable, to say the least.

 

A bidding frenzy breaks out over a Vancouver trophy property

 

Consider the background to this sale – within just 12 days of being listed, the house sold for almost 35% above the asking price and a full 55% above its recently assessed value. The bubble has evidently reached the sheer insanity stage.

 

“A Tudor mansion in Vancouver’s tony Shaughnessy neighbourhood has sold for millions over the asking price, fueling more fears about affordability in the city’s red hot real estate market.

The stately home at 1383 West 32nd Avenue was listed for $5.99-million on Feb. 5, and sold 12 days later for a cool $8,010,000. That’s 33 per cent more than the initial asking price. The deal was finalized two weeks ago.

According to the City of Vancouver, the property was assessed this year at $5,094,600, which means the sale was $2.9-million above the assessed value.

A March report found that the average price for a detached home in Vancouver passed the $1 million mark in both cities.

In his report, Cameron Muir, chief economist for the Greater Vancouver real estate association, says a perfect storm of rock bottom interest rates and rising consumer confidence has fueled an all-out realty frenzy.

“Many board areas are now exhibiting sellers’ market conditions with home prices advancing well above the rate of inflation,” Muir said.

 

(emphasis added)

At least the house is not a hovel – still, the last time it was renovated was in the 1970s, so presumably it is a bit of a fixer-upper anyway.

 

M1-CanadaCanada – narrow money M1 with annual growth rate – recently money supply growth has been slowing again and is already far below the 2009/2010 growth momentum peak. A sustained decline below the 5% mark may well spark bubble trouble – click to enlarge.

 

The Boom Will Never End!

Toronto has seen enormous price increases as well. What is just as astonishing as the sale described above is the widespread conviction that the bubble not only represents the “new normal”, but that it will never end. A recent Vancity Credit Union report is already predicting huge price increases out to the year 2030:

 

Another report from Vancity Credit Union predicted that the average home price in Vancouver will exceed $2.1 million by 2030.

Vancouver isn’t the only real estate market breaking records. A report from Christie’s International Real Estate just ranked Toronto the world’s “hottest” luxury market.

The report compared Toronto’s housing market to those of Dubai, Hong Kong, London, Los Angeles, Miami, New York, Paris, San Francisco and Sydney.

An “extremely low” supply of houses in Toronto pushed prices to approximately $1.2 million for “relatively average” houses, according to Christie’s.

 

(emphasis added)

Needless to say, the cities that are compared with Toronto above are basically the “real estate bubble capitals” of the world. If global money supply growth slows down or anything happens that forces central banks to entertain rate hikes, it is easily imaginable that several or maybe even all of them meet their demise at once. That would undoubteldy bring back “interesting times” for the financial system.

 

Conclusion

The fact that the bubble has continued to grow to ever more absurd heights underscores how difficult it is to forecast the timing of a boom’s demise, especially when monetary policy around the world is becoming ever looser. However, experience also tells us that when buying frenzies such as the one described above are starting to break out, it is often a sign that things are about to get dicey.

High end buyers, may even regard these purchases as legitimate inflation hedges, but they will be in for a surprise if consumer price inflation should actually revive. There is a range of CPI “price inflation” that is as a rule not friendly to overpriced assets that have benefited from very low interest rates.

 

Canada central bank rateCanada’s administered overnight interest rate. It should be no surprise that assets like real estate have experienced insane price increases. While interest rates have remained extremely low for several years now, there can be no guarantee that this will remain the case. At some point the huge flood of money the central banks have created is likely to exert effects on consumer prices. The long lag time could well mean that the effects will turn out to be unexpectedly pronounced. The game could however also end if credit expansion comes to a halt in spite of low rates – click to enlarge.

 

Charts by: St. Louis Federal Reserve Research

 

 
 

 
 

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3 Responses to “High End Real Estate in Canada in Frenzied Bubble Blow-Off”

  • Kreditanstalt:

    Not everywhere in Canada, and not even merely in places with job opportunities. Trophy markets, indicating that buyers do not need to work for a living, can pay the taxes and maintenance and probably aren’t borrowing locally to pay for these purchases, either.

    Prices in small towns or even major cities outside bubble-land have not gone up at all or have risen only slightly. Many “assessed values” have declined in recent years. This is not local working class money, but it tens to drive up asking prices everywhere. The supply of listings everywhere has grown, actual sales slowed and time on the market risen dramatically.

    Like most things from art to cars to jewelry to toys, vendors and producers are chasing Big Spenders while ignoring the rest.

  • No6:

    Sydney (also mentioned on this site) is in hot pursuit. The Australian central bank has just reduced interest rates further in order to give Vancouver some real competition.

  • If memory serves me right, Canada escaped the worst of the sub-prime mortgage bubble. It seems Canada has now joined the lemming rush towards the cliff.

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