BLeP wrote:
I’ve been hearing that the housing bubble will pop in Canada for a very long time. Yet it doesn’t. So colour me skeptical that this is the time that it will actually pop.
Well, that brings up a salient quote from John Maynard Keynes
Quote:
The markets can stay irrational longer than you can stay solventThe catalyst for any bubble to burst always makes sense after the fact... and sometimes before. Right now the two frontrunners are a dearth of capital inflows from Asia into Canadian housing and a solvency crisis in Canada's oil and gas industry.
Let's back up and remember that households, unlike governments (in theory), are constrained in their expenditures. There are clear tradeoffs at any given point in time. So let's just say a solvency crisis in O&G prompts rate cuts by the BoC. The Loonie gets hit. If the Loonie falls relative to the dollar that makes imports more expensive because virtually all of Canada's foreign trade is settled in U.S. dollars. Households will be flexible in their consumption of some imports but be rigid in others. Those products they continue to consume will reduce disposable income available for other things... like paying a mortgage.
Note that the reason "why" a country willingly devalues its currency is almost as important as the devaluation itself. Canada's reason is not a good reason: one of its industries is on the rocks, possibly permanently. However we're just getting started: there are two other threats to Canada's housing sector: a lack of inflows from Asia (China) and Canada's own population.
There is one upside to a Loonie devaluation: it makes Canadian real estate cheaper to foreign buyers. However this assumes foreign buyers can make it to the door in the first place. The majority (65% last time I looked) of new immigrants into Canada for the last decade or so have been from Asia and the majority of those have been from China. Unfortunately for Canada, China is closing its doors as fast as it can.
I'll get more into China's dilemma in another thread but, suffice it to say, China is closing its own exit doors as fast as possible. The days of newly-minted Chinese millionaires buying real estate in Vancouver are at an end. Besides the capital controls that the Chinese government employs, there's another hard limit on the channels through which Chinese capital can leave: currency markets. Simply put, the only way to get a meaningful amount of capital out of China is to convert Renminbi into Dollars and then, if the individual wants to make their way to Canada, convert the Dollars into Loonies. There is no Loonie/Renminbi market to speak of outside of arbitragers. Further, if a Chinese individual were to try to do something stupid like convert $10mil USD in Renminbi to Loonies by "over-invoicing" (a common ploy for getting capital out of China) for Canadian imports, Chinese regulators would quickly spot the anomalous transaction and said individual would likely end up in a... ahem... "re-education facility".
Dollars have become rather dear in China recently but I won't get into that in this post. The short of it is, the on-shore dollar funding crisis in China will make it significantly harder for wealthy Chinese to buy Canadian real estate. Those marginal buyers are gone.
To make things significantly worse though, Canada is running out of its own buyers. Canada's domestic birth rate fell to ~1.6/couple in the early 90s. As a result, Canada has a distorted demography.
For perspective, this is what a "normal" population pyramid looks like:
I harp on this periodically on this forum but there's a lifecycle to consumption: when you enter the workforce at a young age your skills are low, your income is low, but your spending needs are somewhat high: car loans, college loans, credit cards. Earn, borrow, borrow, spend, spend, spend. As you age a bit you start earning more income but you start doing things like buying a house, starting a family... things that cost considerably more. Earn, earn, borrow, borrow, borrow, spend, spend.... spend. As you age more your income continues to rise. You're middle aged, kids are on their own (hopefully), and there are no major purchases on the horizon. This is when you earn and save. The key point here is that you earn more than you spend and this is the essence of a population with a high savings rate. It's also the essence of a population that can afford to be taxed a lot.
If you look at India's population pyramid, you see a country where the savings of the old very nearly balance out the borrowing of the young (slight skew in India toward consumption). As a result, India can consume everything it produces (and a bit more) which means there's an underlying inflationary force. Canada is aging toward a population pyramid that would make for a net-exporter but the problem is the only Canadian exports that are sort-of competitive now are oil and gas and ag commodities. However oil and gas exports are threatened by U.S. production and finished goods exports (think cars and trucks) are under severe threat by Mexico.
In a country like Canada, you can see that the population is nicely skewed toward middle aged circa 2010 and the population steadily ages thereafter. Older people aren't new home buyers almost by definition. They can trade amongst themselves but they won't constitute new demand. As every year ticks by, there are fewer and fewer young families to buy the homes of the deceased or those downsizing and, eventually, you hit an inflection point in the market where there's more supply than demand.
What does that inflection point look like? Inventory surges. Time on the market surges. That's the beginning. Owners and speculators get nervous. Speculators eye their carrying costs, feel out the market, and then.... hit the bid. Whatever bid they can find. This starts a cascade.
When will it happen? This week? This month? This year? Who knows. Timing is a fool's errand though I would say look at inventory and time on the market as indicators.
There's another important point to discuss about Canadian demography: healthcare.
For the last couple of decades, Canada has been in a sweet spot for healthcare. People in their 30s, 40s, and 50s are in a sweet spot for paying taxes and not needing a lot of (government provided) healthcare. As the cohorts of Canadians age into their 60s and 70s increase, this calculus will change (keep an eye on the 45-59 and 60+ age brackets). You'll have fewer people in their earning and tax-paying prime and more people needing more healthcare..... and thus necessitating greater fiscal outlays which will, in turn, require greater taxation.
So, in summary, Canada is staring down the following:
- over-levered households
- struggling oil and gas (and other resource) exports
- a dearth of incremental Chinese homebuyers
- a dearth of incremental domestic homebuyers
- heavy future fiscal outlays to deal with healthcare
