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Michael Hlinka: Is a Canadian housing bubble poised to burst?

Money Talks is a business column from CBC radio.

By Michael Hlinka, CBC business columnist

 
All of us know folks who are just downright negative by nature. You comment that it's a beautiful sunny day, and they'll tell you that the UV index is high. You talk about what a great steak you enjoyed the night before, and they'll warn you about the cholesterol you ingested.  Well, when it comes to negativity and financial markets, no-one beats James Grant. 
 
In the words of one wag: "Mr. Grant has been bearish on stocks and bonds since rocks were hard." Which is why when a friend sent me some of Grant's research, I was highly sceptical.  Grant argued that Canada may be on the cusp of a real estate crash as severe as the one that the U.S. just went through.
 
Then I delved into the work. 
 
Now, let it be known that Mr. Grant is actually very positive about the prospects for our country. But he cites a study by the International Monetary Fund that in mid-2009, prices relative to income were fifteen percent above the post-1970 Canadian average. And prices have gone up since then, in some markets, rather sharply. 
 
Mr. Grant notes that in America, even in the bubble years, the price/income relationship never rose by more that 11 per cent. And that same IMF study concluded that Canadian house prices were 60 per cent above their historical average.
 
It gets even worse. He flat out says that the median Canadian house - which is the price at which exactly half are cheaper and half are more expensive - is "certifiably unaffordable." A typical house eats up just more than 40 per cent of income. In Vancouver, it's more like 73 per cent. 
 
He quotes our own Bank of Canada: "The household debt-to-income ratio has remained on an upward trend ... as debt accumulation continues to outpace the growth in disposable income."
 
But households aren't the only entity overextended. CMHC, which insures these mortgages, has about $9 billion in equity, while it guarantees - get this - $770 billion in mortgages. 
 
That's more leverage that we saw from any U.S. bank or lending institution, by the way.
 
Speaking of banks, something tells me that they might be running a little bit scared. The Bank of Montreal Economics Department is very vocal in its arguments that the Federal Government should not be worried about deficit reduction at this time. The recovery is too fragile. These are curious words. Generally, bank economists are the first to argue that in the long-run, a strong economy is fostered by government exercising financial discipline. 
 
Maybe BMO recognizes, however, that the best hope for its continued success is to keep pumping money into the system. Its self-interest is better served by inflation than a crashing housing market, which that gloomy Gus, James Grant, persuasively argues is just around the corner.

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