A familiar bubble north of the border…
Canada’s economy has been hailed as one of the better performing economies in the world since the financial crisis hit in 2007. Canada’s job market has stayed relatively stable, which is why the housing market has been so strong.
Canadian home prices have increased steadily since the financial crisis hit, which I’m sure will come as a big shock to the average American.
In 2011, average home prices increased 4.3% in Canada, but in the final quarter of the year, it slowed to just a 1.1% rise. Thus far in 2012, the slowdown in the appreciation of home prices has continued.
Building permits in Canada have been contracting over the last four months after rising steadily most of last year. The global economic slowdown has pressured the jobs market in Canada, which in turn is putting pressure on home prices and the housing market.
The Bank of Canada, very similar to the Federal Reserve here in the U.S., has kept interest rates at record lows and is looking to keep its one-percent target rate at least till 2013.
Very similar as well are the inflation numbers that are coming out of Canada. The country’s Consumer Price Index (CPI) increased at an annual rate of 2.6% in February from January’s 2.5% rate. This is the fastest rate of inflation the country has experienced in three years!
All of the major inflation components rose, including home prices and the housing market. Food, gas, the cost of electricity and items like car insurance all jumped higher. With this backdrop, the Bank of Canada is talking about raising interest rates sooner than later.
Shockingly, the major Canadian banks have actually lowered mortgage rates in the housing market to historic lows. Ads like this one are popping up in major newspapers all over the country.
(Source: Globe and Mail, Mar. 12, 2012)
If this sends a chill down my readers’ spines, it should. Canadian banks are responding to the slowing housing market and are trying to reinvigorate home prices and the housing market.
Unlike the Federal Reserve’s response in 2007, the Bank of Canada is extremely worried about the housing market in Canada, repeatedly warning that Canadians are getting into too much debt.
I’ve spoken to people in the hottest parts of the housing market in Canada: the cities of Toronto and Vancouver. There are more condo buildings going up in Toronto (over 100 planned) than any other city in the world. People are buying into the Canadian housing market believing that home prices “can’t go down.” This is similar to the feeling in America before U.S. housing prices started to collapse.
It gets worse. When the housing market finally popped toward the end of 2007 here in the U.S., the average American’s debt-to-income level was 127%. This means that the average American had $1.27 of debt for every dollar of disposable income earned. Since the end of 2007, the average American has been trying to pay down the debt and we are—in 2012; four years later—somewhere in the neighborhood of 1-to-1 currently (that is one dollar of debt for every dollar of disposable income).
In Canada, currently, the average Canadian is setting record levels of debt-to-income among industrialized nations. For every dollar of disposable income Canadians are earning, they are taking on very close to $1.51 of debt.
It may be a year or two away, but Canada is set up potentially for a very nasty, very protracted fall in home prices.
Where the Market Stands; Where it’s Headed:
The Dow Jones Industrial Average opens this morning up eight percent for the year. The bear market rally started strong this year, but is starting to lose steam as it fails to move higher up on the 13,000 ladder.
There are cracks starting to develop in the stock market’s advance, but they are early ones. In particular, the number of bearish stock advisors is falling rapidly. The current trend among stock advisors is more bulls and less bears, something we start to see near a market top.
What He Said:
“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.