By Mike Whitney
Wednesday, September 12th, 2012
Canada’s housing bubble is about to burst, and when it does, hundreds of billions of dollars in equity will be wiped out, unemployment will spike, and the economy will sink into a protracted slump. We know this will happen, because the same scenario unfolded in the US, Japan, Ireland and Spain. Housing bubbles always end badly.
Housing prices in Canada have more than doubled in the last 10 years while wages have remained relatively flat. That tells us that the soaring prices are not based on fundamentals, but on low interest rates, lax lending standards and speculation. What’s really driving prices is debt, that is, mortgages preferred to people who, many times, will not be able to repay their loans. As the number of defaults rises, banks will fail, housing prices will tumble, and economic activity will slow to a crawl. It’s the same everywhere.
What’s also the same, is the government’s response. Officials from the (Steven) Harper administration have repeatedly dismissed the idea of a bubble in order to lure more buyers into the market. Here’s an excerpt from an article in Reuters that makes that very point:
“The Canadian government’s housing agency signaled on Wednesday that it is not concerned about a housing bubble forming, declaring that the market is supported by fundamentals.
“Overall, Canadian housing markets are supported by economic and demographic fundamentals; however, CMHC (Canada Mortgage and Housing Corp) continues to closely monitor activity,” the agency said in its second-quarter financial report.
Canada has escaped the depressed real estate conditions seen in the United States and talk instead has focused on whether the market is becoming overheated. The government toughened mortgage rules on June 21 to try to cool the market.” (“Officials not worried about a housing bubble”, Reuters)
What a crock. Harper and his bank buddies know exactly what’s going on. They’re leading the sheep to slaughter and don’t give a damn who gets hurt. And all the nonsense about “tougher mortgage rules” is pure bunkum. Just look at this:
“The federal government has insured all these low down or no down payment mortgages through the Canadian Mortgage and Housing Corporation (CHMC), a state housing agency whose 10 member Board of Governors is heavily represented by the Housing industry — 3 developers, 1 real estate broker and 1 partner in a plumbing, renovation company. The CHMC would be the Canadian equivalent of the US government-backed Freddy Mac and Fanny Mae insurance holders. The banks therefore can lend money to house buyers with zero risk. By removing risk from lenders who do not have to worry about the credit worthiness of the borrower, the government has encouraged imprudent lending practices, according to Turner.”….(“Canada’s dirty little sub prime loan secret threatens to sink housing market”, Tim Pelzer, People’s World)
So tell me, dear reader, if the government agreed to guarantee 100% of every mortgage that you made, don’t you think you’d make a lot of crappy loans?
Of course you would, because the more mortgages you issued, the more money you’d make. It’s a question of incentives, bad incentives. That’s what’s going on in Canada.
In relative terms, the situation in Canada is more extreme than it was in the US because Canadians have taken on more personal debt. Here are the details from an article in Friday’s The Globe and Mail:
“Over the past 10 years, household debt in Canada has risen by 135 per cent, while disposable income and nominal GDP have risen by 54 per cent. Household debt growth over the past decade has risen nearly three times as fast as income growth, a trend that is clearly unsustainable. The average Canadian now has a record-high debt load equal to 154 per cent of their disposable income.” (“Is household debt threatening Canada’s economy”, The Globe and Mail)
At the peak, US household debt-to-disposable income was just 125%, far lower than Canada’s.
Eventually Canada’s credit boom will end precipitating a severe dropoff in demand that will trigger an uptick in joblessness and a slowdown in economic activity. The deleveraging-cycle could persist for up to a decade while households cut back expenses to get their balance sheets together. In the meantime, government receipts will plunge which will increase the deficits. That will lead to a call for slashing government programs for the poor, the sick and the elderly. Everywhere housing has crashed, we’ve seen this same scenario play out.
Already, we’re seeing signs of a turnaround in Toronto where “sales are now down 13% year over year” and Vancouver, where “sales have plunged by 17% over the same period, and are now at lows not seen since 1998.” As demand continues to dry up, sales will sputter, prices will slip, and over-extended homeowners will head into foreclosure. It’s all part of the grand scheme to reconfigure the economy and crush the meager social programs that assist ordinary working people and retirees.
Here’s more from an article in ETF Daily News:
“Harper’s Conservative government has totally unshackled Canada’s banks, and allowed them to run wild with reckless lending; exactly as occurred in the U.S…..Harper’s government has been rapidly building Canada’s own “Fannie Mae”: The Canada Mortgage and Housing Corporation.
The CMHC has been buying-up mortgages so fast that the Harper government has had to raise its legal borrowing limit twice just since the Conservatives took power, and will soon raise it a third time as it nears its new limit of $600 billion. In proportionate terms, it is now larger than Fannie Mae (at its peak), and this occurs as a Euro Pacific Capital report reveals that, “once small, Canada’s sub-prime mortgage industry is now booming.” It goes on to report that there are now $500 billion in “high-risk mortgages” in Canada’s housing market — nearly half of the entire mortgage market.
Meanwhile, the obscene “home equity” loan market has also exploded in Canada. These “HELOC” loans (once known as “second mortgages”) have exploded by more than 170% in Canada over the past decade. This massive increase in needless debt inevitably and substantially increases the magnitude of any housing-sector implosion.” (“The Canadian Housing Bubble Nears Implosion”, ETF Daily News)
Are the officials in the Harper administration so braindead that they really don’t see the monstrous bubble right below their noses or do they have some other objective in mind, like creating the (crisis) conditions they need to rebuild the economy in a way that better serves the needs of their moneybags constituents?
Isn’t that it? Isn’t that what Bubblenomics is really all about, creating a Capitalist Valhalla where pay-for schools and pay-for roads and pay-for health care are the norm, where the old and infirm must drain their bank accounts to buy their own medication and shelter, where the sick and unemployed are left to fend for themselves, and where all the working class gains of the last century are wiped out in one fell-swoop plunging the country into a Dickensian nightmare of 7-day-16 hour-workweeks with zilch benefits and zero pension?
In the eurozone, the bank-generated credit explosion has already pushed social policy in this very direction. In fact, in Italy child labor is on the rise (“tens of thousands of children have quit school to find work to support their parents….At age 10, these kids are already working 12 hours a day.”) while in Greece, Martin Schulz, the President of the European Parliament, wants to establish “special economic zones (SEZs) …. modeled on cheap labor facilities in poor Asian or African countries, would provide tax-free havens for companies to exploit workers to the bone. Schulz declared that such SEZs would be administered by a “European Growth Agency”—so that similar zones could be established across the continent after their implementation in Greece.” (“The Bankers Dictatorship in Greece”, World Socialist Web Site)
Isn’t this the driving force behind the perennial credit bubbles, to widen the divide between fantastically wealthy elites and the rest of us debt slaves?
I’ll bet Harper could answer that.