Thursday, June 16, 2011

What Canadian Housing Bubble? Oh, That One...

Jim Flaherty-Canadian Finance Minister, MP Oshawa—Whitby
Last November, Jim Flaherty told the House of Commons there was no housing bubble, only to reverse himself this week by tabling a budget implementation bill::
"Finance Minister Jim Flaherty tabled a budget implementation bill Tuesday he says will formalize his powers to intervene in Canada's hot housing market to restrain borrowing."
It doesn't give me a great deal of confidence in Flaherty and the Conservative government's ability to manage the economy, given that the statistics have shown a very different story that's been emerging over time::

Household debt, including mortgages, are taking up an increasing percentage of Canadian GDP. Canadian debt as a percentage of disposable income is outstripping the US::

but the kicker is how housing prices have been increasing at a rate far greater than incomes::

These statistics are particularly telling, i.e., the housing price to median income ratio::

So, generally speaking, in Toronto with a median family income of $66,560 {2007}, the average {unadjusted for inflation} housing price was 5.7 times the median, i.e., $379K in 2007 and over $457K in 2011 {using 2008 incomes} [these numbers reinforce this analysis]. This forces homebuyers to commit more disposable income to housing and a rise in interest rates can be disastrous to  those with adjustable rates, if the historically rock bottom rates go up. Beware of those fibbing with the numbers by comparing percentage increases of the ratios. In Toronto, the ratio went from 5.7 to 6.7 for a seemingly modest 18% jump between 2007 and 2011.  The reality is an extra $78K+ pricetag that increases the amount being financed, the monthly mortgage cost, and the interest payments to Bay Street. Just looking at the Vancouver ratio of 11.2 makes my head hurt.

I don't know if Flaherty is a liar or not too bright, or a combination of both, but in light of these numbers and his previous statements, as I've said already, I don't have much confidence in his ability to manage the economy. Plus, this week he went to the US to admonish lawmakers to address the deficit, which in my opinion is more deficit feedback loop that's more politics than economics. 

I understand why Flaherty would try to downplay a housing bubble. Housing has been driving GDP, accounting for 20% of it and employment has been bolstered by consumption in construction. While Flaherty's bill seeks to give him authority to cool off the now-acknowledged bubble by tightening lending requirements, the government took an active hand is building this bubble by creating tax incentives and has a history of economic liberalizing and retreating when the "bad idea" handwriting is on the wall.

Analysts expect business investment to pick up and growth to follow, which the Conservatives are praying for. The problem as I see it is that the economic environment is too uncertain {the strong dollar is throwing a monkey wrench into exports} and I wouldn't bet on Canadian businesses expanding, particularly if the housing bubble starts to deflate causing ripples in the economy. I also think that the blind faith in deficit reduction in this era of ultra cheap capital and low interest rates is odd and makes little sense. The Conservatives appear to be cherrypicking their definition of small government, almost as if they're using the deficit to re-engineer government that cuts spending in some areas, while holding on to rather hungry sacred cows like defense spending.

Twitterversion:: [blog] "What Canadian Housing Bubble? Oh, That One..." Jim Flaherty's most recent flip-flop. #cdnpoli @Prof_K


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