Wall Street Journal picks up on Rosenberg's analysis of Canadian Housing Market

The Wall Street Journal is picking up on Gluskin Sheff economist David Rosenberg's recent analysis about the Canadian Housing Market.

In case you missed it, yesterday the Financial Post covered Rosenberg's analysis that Canadian housing prices are not sustainable.

Jumping on the story, the Journal headlines: Bubble vs. Rubble? Rosenberg Weighs in on Canada-U.S. Housing Divide.

Many economists balk at using the “B-word” to describe Canada’s housing market. Gluskin/Sheff’s David Rosenberg doesn’t.

And remember, he was the guy who called the U.S. housing bubble.

In a report out this week, Mr. Rosenberg describes the different real-estate market landscapes on either side of the Canada-U.S. border–”bubble versus the rubble.”

Rosenberg is highly respected in the United States as an economist who pulls no punches and he gained a high profile in financial markets when as the chief economist of Merrill Lynch he rang some early warning bells on the housing market crisis and subsequent recession in the U.S.

Mr. Rosenberg’s message now: Housing prices in Canada and the U.S. have never been this polarized, with Canada’s prices on average twice that south of the border. Historically, they have been close to parity, he says, and they can’t stay this far apart forever.

Toronto and Vancouver are “undeniably desirable places to live,” but that doesn’t mean that prices in Vancouver should be 4.4 times above the U.S. average, and Toronto three times higher.

Activity in the Canadian market should cool off, with condo sales vulnerable to a 20% drop in hot spots like Vancouver and Toronto. And another tightening of Canadian mortgage rules—which went into effect this week–is sure to bite into demand.

Our friends over on VREAA have summarized Rosenberg's report and his comparative graphs.

If there was any doubt before, you can't ignore it now. The word is out across America and the world about our housing bubble and that a crash is not only imminent, but expected.

Rosenberg summarizes the situation succinctly by declaring; “Not sustainable, my friends.”

Wasn't it Tsur Sommerville who insisted that wealth would continue to pour into Vancouver to support our housing prices?

I wonder if the Sauder School of Business will come out with a report analysing how wealth ignores the evidence when making investment decisions.

I mean, don't they already believe fundamentals don't apply?

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Do you see what I see?

As a child, everyone has seen the picture above which is the visual definition of "perception".

Some see the image of a young woman. Others can clearly see the image of an old woman.

Same image, two different perceptions.

And the same can be said of real estate in the Village on the Edge of the Rainforest. Yesterday the little red-headed girl told me she spends her weekends going to open houses, house lust working it's elusive magic.

Sigh.

Don't people see the picture I see?

Bouncing around the Internet today is like going from site to site with confirmation of so many of last year's blog insights playing themselves out in living colour.

Aren't they evident to all?

You've often see me refer to the Vancouver Real Estate Anecdote Archive, a blog which collects anecdotes found on various blogs or in mainstream media. Since most are anonymous, it is impossible to confirm the validity of the comments but they are interesting. What stands out are the number of comments being made by people who are starting to worry about their real estate purchases.

Some recent comments (click on first two words for link):

• “A buddy of mine on the Island put his home on the market in August…..not a sniff. He is freaking out as he had hoped to ‘move-up’ and is carrying a big monthly mortgage.”
  
  “I’m in the financial industry. People are one or two paycheques or missed mortgage payments away from real disaster. I think that bankruptcies will unfortunately become commonplace.”

These comments are reflective of events now unfolding as many of us in the blogosphere have predicted. Yesterday the chief economist of Gluskin Sheff + Associates, David Rosenberg, came out with a report that notes that housing starts, building permits and home prices have slipped.

Canada's recovery from the recession has been fuelled by the boom in the housing sector, a boom which was driven by the emergency level interest rates that sucked so many Canadians into the overpriced housing market over the past year. But that 'stimulus' has run it's course, the 'recovery' is now slowing, and "that goose is no longer laying any golden eggs."

Rosenberg foresees that same scenario we have been fearful of. He expects that a "rising number" of Canadian homeowners won't be able to meet their mortgage payments as interest rates rise and real estate values sink.

"Housing cycles, both up and down, tend to go further than anyone thinks, as we saw occur in the United States, which is still suffering from a post-bubble hangover three years after the initial turn down. Even if this correction in housing is a fraction as harsh as was the case south of the border, the economy, and the financial markets, are likely in for a rude awakening in coming quarters as lower home prices cut into household wealth, confidence and spending plans," said Rosenberg.

This comes out on the same day as a report from the Royal Bank of Canada that says home ownership costs in B.C. are quickly nearing record highs and that the result is that home ownership costs are testing the limits of household budgets. More importantly the report notes that “the Vancouver market is clearly vulnerable to a price correction."

“Generally, we have dismissed the case of housing market bubbles in Canada, but the situation in Vancouver is probably the closest to one in the country,” the report stated.

Interestingly the report calculates that the tenuous Vancouver market chews up more that 65% of pre-tax family income (the highest in the country). But this conclusion is based on buying a house at current prices with 25% down and a 25-year amortized mortgage.

Ummm... does anybody out there have a friend or acquaintance who has bought a house in Vancouver in the last five years who has paid a quarter of the purchase price in cash and has taken out a mortgage that was less than 35 years in length?

Royal's skewed analysis allows it to temper conclusions. Economist's like Rosenberg do not colour their outlook with such diversions.

The fact of the matter is that the finances of most Canadian households are in abysmal shape. As other economic reports have noted, debt is out of control in this country as Canadians have saddled themselves with record mortgage debt (household liabilities now equal 145% of earned income). Six in ten Canadians now live paycheque to paycheque. 40% are not even trying to save money anymore because there is no money left over after daily expenses.

The writing is on the wall for real estate in our little hamlet which sits on the Edge of the Rainforest. We will be ground zero for a massive real estate collapse.

Don't you see what I do?

Meanwhile... more on 'all that glitters'

Bloomberg reports that the U.S. Mint has suspended sales of its 1-ounce American Eagle gold coins after soaring commodity prices led collectors and investors to deplete supplies. It is the first time in two decades that the Mint halted sales of the coins.

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The Slow Melt will continue.

I get asked this all the time.

If the Bank of Canada is getting ready to regularly raise rates, doesn't that mean the economy is turning around and the worst has past?

No.

The problem is, the worst has not past.

And the reason is simple: debt. Massive amounts of debt.

The last 50 years have given rise to the biggest credit bubble in human history. And we are still in the early days of watching it collapse.

This is what many do not understand... or simply do not want to accept.

Our government tried to temporarily stave off the effects of this reckoning with the belief that buffering against the worldwide firestorm would allow us to bridge the gap to a world wide recovery.

But that recovery isn't materializing.

As David Rosenberg notes in today's Globe and Mail, we got a pause in initial phase of the 2008 collapse with a spectacular bear market rally in the final eight months of 2009 and early 2010. But we are now rolling back into a period of pronounced economic weakness, with contraction in gross domestic product likely to soon follow the stagnant economic conditions of the current quarter.

There is simply too much debt overhanging household balance sheets and the process of balance sheet repair is still in its infancy (particularly here in Canada).

"We are a long way off this deleveraging phase from running its course, both in magnitude and duration. If history is any guide, these transition periods to the next sustainable bull market and economic expansion typically last seven years."

Rosenberg observes that government has expended tremendous resources to cushion the blow but now we will see first hand what happens when policy stimulus and a mini-inventory cycle fade in a credit contraction: stagnation in the third quarter followed by renewed economic contraction in the fourth quarter.

We are in an extraordinary period of economic and financial history. We have seen an almost 80% rally in the stock market since the financial crisis. The last time that happened was in the early 1930s. That event was followed by gut-wrenching spasms to the downside.

With economic recovery not gaining traction in 2010, the parallels to 1930/31 are eerily similar.

For Vancouver real estate it means the slow melt will continue. With no worldwide economic recovery; there is nothing to drive a resurgence in real estate.

But, as mentioned yesterday, sellers are not prepared (by a long shot) to accept the changing realities of the market. Therefore we will see more and more listings pulled from the real estate market as those sellers (who have the financial means to do so) will attempt to outwait the stagnating market.

But less listings will not change the economic condition. Thus prices will continue to decline even with less listings out there.

Real estate this autumn will primarily showcase the four D's: death, debt, divorce and displacement. These are the forces which will push sellers to actually sell at market rates in the current stagnating climate.

And to entice buyers, sellers will have to cut asking prices.

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Email: village_whisperer@live.ca

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