Speaking of rising household debt...

Yesterday we posted about CTV squaring off Garth Turner vs Sommerville/Pastrick over the topic of a real estate collapse over rising household debt.

It's not a theme exclusive to Garth Turner.

In fact CBC was, on the very same day, discussing that very topic.

Reporter Neil MacDonald (pictured above) was describing how a US style housing nightmare could hit Canada and how Canada resembles a slow motion replay of the American crash.

Stories are now routinely surfacing in the Canadian media suggesting collective madness when it comes to affordable living. I watched America's nightmare unfold, and it appears pretty evident to me that a sequel of some sort is coming to Canada. So I ran that thesis past Robert Shiller, of Yale University, probably the foremost authority on real estate in America. He co-founded the Case-Shiller Home Price Index and predicted the American collapse in 2005, a year before it happened. "I worry," he told me, "that what is happening in Canada is kind of a slow-motion version of what happened in the U.S."

The worries Shiller was getting at — and the Bank of Canada — is the debt Canadians are carrying. Contrary to Sommerville and Pastrick, both Carney and Shiller agree with Turner that rising household debt is a serious threat.

Household debt in Canada has grown by leaps and bounds. In the early 1990s it was a manageable 75% of household income. Today it has ballooned to 150%. That's just about exactly the level Americans were at when everything imploded there in 2006. Worse, there are concerns about the way the debt is concentrated.

As the Bank of Canada has been pointing out, Canadian debt is disproportionately concentrated in the most vulnerable households, defined as those devoting 40% or more of household income to paying interest charges. That means those households are extremely sensitive to any sort of shock — be it a rise in interest rates, a drop in home prices, or, worst of all, job loss. The central bank's analysis suggests that if interest rates rise to 4.25 by mid-2015, fully one fifth of all Canadian debt would be held by those households least able to finance it.

Don Drummond, a former chief economist of the TD Bank, says that's "rather scary."

Robert Shiller says;

"People are investing in real estate that is tough for their budgets because they think it will make them rich, and that can continue only as long as [prices] keep increasing. "When they stop increasing," he says, people back off, and the bubble then collapses. "So it has its own internal dynamic."

And it's that internal dynamic which Turner was warning is the trigger which is starting to send values cascading down today.

Of course who are you going to believe? The likes of Garth Turner, Mark Carney, Don Drummond and Robert Shiller?

Or a man you makes his living teaching university courses in Real Estate Finance and depends on a growing real estate market for his academic income?

Not really a tough call to make now, is it?

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Are we heading for a Cataclysmic Correction? "That's bunk", says Sommerville

The war of words is heating up in Vancouver's housing bubble.

Yesterday it was CBC's profile of Vancouver and today CTV picked up on the story.

Former Member of Parliament, and noted critic of the Canadian housing bubble, Garth Turner was profiled on CTV with his warnings about our overblown Vancouver Real Estate.

CTV told viewers that Turner's message was simple: Metro Vancouver's real estate market is about to collapse.

"I hope people are listening. This message needs to be heard. Sales in August were pretty awful and they continued to deteriote through September. But you know what? This is going to be a year or two or three before we hit bottom. And I think the market could lose 30 or 40% of it's value."

To balance Turner's warnings, CTV turned to the resident market defenders we have come to know and love the last few years: Tsur Sommerville  - Associate Professor, Real Estate Foundation Professorship in Real Estate Finance; Director, UBC Centre for Urban Economics and Real Estate (As one VCI contributor said... can we possibly use the term 'real estate' any more often in a title?) and Helmut Pastrick, Chief Economist for Central One Credit Union.

CTV tells us these local economists are shrugging off suggestions that our real estate market is setting itself up for a collapse.

Our buddy Sommerville doesn't mince words as he tries to deflect the rising angst about the worsening market dynamics by attacking Turner directly.

"He's being saying this for like four or five years. So if you keep saying this then possibly one time you could be right and then you get to be a genius."

Oh? What are you saying Tsur? That the reality is that - at some point - the market is going to collapse 40% in value and that it's a no brainer Turner will be right if he keeps repeating this mantra?

It begs the question, if you believe the market will collapse by 40% at some point, when do you think that will occur?  But I digress.

As for suggestions that the market collapse will be triggered by rising household debt, Sommerville is even more blunt:

"That's bunk. In order to get dramatic change, dramatic drops in housing markets, there has to be... the market has to be pushed."

And rising, unsustainable household debt isn't the lever that will push the market?

Next we cut away to Helmut Pastrick to pick up the theme dismissing a possible collapse as a result of rising household debt:

"It could only be the result of a major economic recession, a downturn, or perhaps a financial crisis, a political crisis, typically outside of BC's borders."

Garth Turner counter's that our region is so overvalued, the outside forces Pastrick refers to aren't needed.

"The world doesn't need to change, the ground doesn't need to shift, interest rates don't need to pop up to have a cataclysmic correction."

CTV then quotes several 'average' people and captures them in quintessential denial that any such  collapse is possible. The whole dilemma is summarized as divergent opinions common to the spectre of real estate.

But the mere fact bubble busting news is now common place on the nightly media and that gloomy sales statistics are undeniable means it is clear the desperate fight for market perception is ramping up to new level

If you want to see the full CTV story, it could not be embedded. You can watch it here.

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A Festivus for the Rest of Us

Ahh the rush of the holidays.

Had planned to do an indepth post today on the silver issue but after spending the morning at the beach with my dog, I got bogged down all afternoon with several lengthy emails. Before I knew it... I had to get ready for tonight's Festivus party.

And in the spirit of Festivus, I have to say that the plethora of news articles generated by our Central Banks debt warnings are nothing short of a 'Festivus Miracle'.

It's no longer a case of 'bitter bloggers' who are crying 'chicken little' that the sky is falling... rather the whole issue now has an aura of legitimacy.

Of course, until a collapse happens... the idea that we are in a bubble simply will not be accepted, even with Mark Carney sounding the alarm about the dangers that lie ahead.

Look for an intense counter-offensive by the Real Estate Industry.

The first shot has already been fired by the likes of Helmut Pastrick, chief economist of Central 1 Credit Union, who said:

• “I don’t see a price bubble and I don’t see that we need the mortgage criteria tightened as is suggested in some quarters”

Somehow the winter doldrums of January/February aren't going to be as boring as in past years.

Let the airing of grievances begin.

Happy Festivus everyone!

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