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Canadian housing will need more than the luck than the Irish

 

With Canadians having the second highest personal, business and government debt in the world (%GDP) and with house prices inflating more than anywhere, maybe a good time to look at the Irish crash of 2008.

 

Not a Problem:

Academic economist Morgan Kelly (with no history of studying current housing or banking) was ignored – academics gotta publish! In 2006 he predicted house prices could fall by up to 50 per cent. “We have spent the last five years learning to believe that exports and competitiveness do not matter and that we can get rich by selling houses to each other. We are likely to spend a painful few years as we unlearn that lesson.”

Nobody cared real estate was rising but rents/incomes were not – everyone was getting rich! Small decline OK - plan to hold property for decades.

 

A Little Problem:

A second article got more attention – brought banks into the picture. One year later the big Irish banks stocks dropped 20% to 50% on a single day. They had upped their real estate lending from 8% of lending to 28% in a decade. Some savvy investors would lose some money in their diversified portfolios – happened everywhere in 2008. Right?

 

The Big Problem:

Sadly, the government guaranteed any losses (even bonds) - they put the burden on future taxpayers. As in the US, bankers convinced governments that they were intertwined with Main street and if they lost money everyone would suffer. In other words, children should carry debts so adults never appear poorer.

Ireland General Government Gross Debt went from 25% to 120% of GDP in a few years and Unemployment went to 14% from 4%. Artificially low Interest rates have allowed some recovery. Capable young people started leaving Ireland. Again. Property values have still not recovered from 2008.

 

Canada today:

Housing is currently 40% of all capital spending in Canada (see Ireland Greece Spain 2007) while Business capital investment (excluding residential construction) fell 12 per cent last year. Spending on machinery and equipment down 18 per cent.

Canadian economist (that foresaw US meltdown) says Canadian housing biggest bubble with 18% growth year over year with no wage growth. Currently, average house prices are $719,000 and average income is $49,000 (a year). Economist Magazine at high end saying housing overvaluated 78% . Canadian households are the most indebted and half have said they are $200 a month away from insolvency in 2019. Canada checks all 5 boxes for a debt crisis.

 

Seems bad. What are governments doing about it? More damage. While even left leaning governments are reducing immigration to quell markets – Trudeau is increasing immigration levels. Huge budget deficits (with "printed" Bank of Canada $) will drive inflation further with zero to assist real producers.

 

The great news is that, unlike our governments, 5 Canadian banks are rated in the top 35 for stability - consistantly over 10 years.  Canadian babies may take a big hit supporting highly leveraged housing via CHMC but hopefully no further theft of their future earnings via CDIC though a buffer lowered.

 

No reason to bailout any adult with debt or create a regressive inflation tax via printing money. This time, it's not just one academic warning you and governments/banks have encouraged it.