- the source for market opinions


June 29, 2016 | Bubbleless

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

bubble modified

Let’s review.

In order to buy an average detached house in Vancouver with a super-sized 25% deposit, the average family would have to spend 119.5% of their gross income on carrying costs. Yes, that’s 20% more than a couple earns even before paying income tax, CPP, EI or making a company RRSP contribution. So, it’s likely 140% of what they net.

In Toronto, says RBC, the average SFD house requires 72% of gross income, or about 90% of net. It leaves basically zippo to live on. These numbers, the bank adds, have never been this high. Not even when mortgages cost 20%.

It’s a crisis, says the prime minister. So as a result we now have a federal task force studying what to do about this:

VAN CHART modified

As you have been told here, a majority of buyers of million-dollar-plus houses in the GTA are now taking 30 or 35-year amortizations, in an attempt to keep monthly payments within their strained budgets. Four in ten (and six in ten in YVR) have debt equal to 450% or more of disposable income. These kinds of numbers have never previously existed.

Then there’s this. Mortgage debt in total has been hockey-sticking right along with house prices in Vancouver. Credit continues to expand even as the economy does not. The amount of borrowing is also at an historic level. And just look at the trend…

Residential Mortgages 1990-2015

The reason people are borrowing their brains out is simple. They want to own more than they can afford to buy. The average weekly earnings this year are up just 0.4% from last year, while the inflation rate is 1.5%. In fact, average wages are lower now than they were at the end of 2015 – thanks to a crappy economy, a collapse in oil prices, decline of the dollar and Justin Bieber sucking off too much of the GDP.

This chart is a few years old, but I am sure you get the drift…


It probably doesn’t take an economist to tell you this is a recipe for potential disaster. Either people in general have to earn a lot more money, borrow a lot less of it, or quit spending $1.3 million on a house which doubled in value over the past decade of tepid growth and flowering angst. Any kind of economic shock would obviously cause chaos, but the danger extends beyond that. This is a house of cards likely to topple inwards from its own bloated weight. No asset goes up forever. All booms end badly. Every bubble bursts.

Unless, of course, this ain’t no bubble. What if it’s all normal, and God intended for Vancouverites to be enslaved and Torontonians to be gelded? If you believe that, you must be a mortgage broker. Like this honest guy just helping bankrupt people buy properties…


The Mortgage Professionals Canada has issued a fat report, authored by chief economist Will Dunning, saying no housing bubble exists in Canada and that it would be “tragic” for Ottawa to try and reduce prices by curtailing demand. “There is a risk that changes in policies of lenders or mortgage insurers that reduce access to mortgages could cause an unnecessary drop in housing demand and housing prices, and bring consequent economic damage,” the brokers say. “At this time, we are hearing calls for more changes to macro-prudential regulation. The proponents want to make mortgage finance more difficult to obtain. That will result in reduced housing activity and, thereby, slow the growth rate for mortgage indebtedness.”

Like that – slowing the rate of indebtedness – is bad thing. Certainly to the people who lend the money it is. But not to the nation or the economy as a whole.

Despite all of the above (which Will well knows), why’s there no bubble in Canada? Even when average families in major markets can no longer afford average homes, and house prices have soared uncontrollably as mortgage rates snaked lower?

Because, say the brokers, a bubble only happens when “expectations of price growth… are self-fulfilling.” In other words, people start buying houses because they think they’ll continue to go up, which breeds higher prices partly because of the higher prices they just paid. To Dunning, careening house values detached from the economy indicate everything is cool. So buzz off. “Housing bubbles do not exist in Canada… Price growth in Canada, even in Vancouver and Toronto, is still consistent with the economic fundamental of interest rates and affordability.”

There is it. The official position of an 11,000-member regulated organization made up of people who sit across the desk from hopeful buyers, whether young, unemployed, without savings, bankrupt, with horrible cash flow or poor credit, and give them money to buy what they cannot afford. Because houses always go up. No risk. Just gains. And, above all, there’s no bubble.

God help us.

STAY INFORMED! Receive our Weekly Recap of thought provoking articles, podcasts, and radio delivered to your inbox for FREE! Sign up here for the Weekly Recap.

June 29th, 2016

Posted In: The Greater Fool

Post a Comment:

Your email address will not be published. Required fields are marked *

All Comments are moderated before appearing on the site


This site uses Akismet to reduce spam. Learn how your comment data is processed.