The Oil Drum: Canada

PeakTO,

Countless Canadians do think exactly that. Moreover, I understand that increasingly mortgages are offered in Canada of the 100% finance and/or 40-year amortization variety. All most people know about US housing problems is the word "subprime". And since Canada is said to not have those loans, all is well.

For the past year, I have at times literally begged Canadian friends to not buy property, unless they wish to sell within 1-2 years (and 2 may be too long), or can afford at least 50% down, plan to live in it for the next 20 years, and have the space to plant a vegetable garden.

Absolutely no-one, as far as I can see, has let that advice "disturb" their dreams and plans. I am just a spoil-sport, it alienates us. I don't do it no more. "Canada is not like the US, and Vancouver or Montreal is not like Canada", that is the typical "reasoning". People simply look for a picture of the world that fits their hopes for the future, no matter what it's based on.

My prediction is that all over the continent, and Europe looks no better, or Australia, real estate values will come down by at least 50% in the next 2-3 years, while interest rates keep rising. In practical terms that means that the property is no longer sufficient as equity for the loan, but payments will keep going up. Since prices are so high already, few people will have other possessions that can be used as collateral fill the equity gap. The lender or bank will come knocking for a "margin call". Ugliness ensues.

And it is a global phenomenon.

The "Debt Time Bomb" article posted above, about the UK, gives a telling stat:

Average house prices have gone up by 155 percent since 1997, while wages have risen only 18 percent over that time.

The Financial Times reports on Spain:

Spain caught in a credit squeeze

A year ago, banks were willing to lend up to 120 per cent of a real estate group's net asset value. An investment bank in Madrid says few banks will finance more than 30 per cent of net asset value for some real estate groups today. [..]

At the height of the Spanish housing boom three years ago, Spanish banks accounted for more than 80 per cent of mortgage securitisation in Europe. Investment bankers say there are no longer buyers for this kind of paper.

"The market has become very tough even for top quality issuers," says an investment banker. "Perception of country risk has deteriorated because of the real estate bubble. Investors don't know whether this is the beginning of a change in economic cycle, or whether we are witnessing a readjustment in asset prices. Either way, it is a very difficult moment, because lenders don't know what price to put on Spanish corporate debt."

Hi PeakTO,

I don't think for one moment that Canada will avoid what's currently happening in the US, which is why I cover the situation in the US in such detail. I think it's only a matter of time until we have to deal with the same issues, and Canadians would benefit from being forewarned. Canadians are just as addicted to credit as Americans and almost as much in debt as a result. Easy credit has been a global phenomenon, and credit tightening will be as well.

I personally would not recommend carrying more than a very small mortgage at most on any property, and then only if the source of income to pay for it was 'depression-proof' in some way. Renting is far better - pay someone else to take the price risk for you.