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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Mon Post #2: Robert Shiller, U.S. House Price Guru, Says He's ‘Not Investing In Vancouver Real Estate'

The Huffington Post: British Columbia picked up on US Housing Guru Robert Shiller's invterview on the Business News Network (BNN) last week in which Shiller said "Vancouver’s housing bubble is more extreme today than California’s was a few years ago."

Robert Shiller, co-creator of the Case-Shiller Index, which measures U.S. house prices, told BNN late last week that "Vancouver looks like part of California" when it comes to its housing market.

“Canada didn’t have the crash we had in the U.S. It’s just continuing to grow and it’s accumulating into some big price increases. So it’s looking like the bubble is — or at least has been, until recently — still alive in Canada.”

Shiller displayed a chart showing Vancouver house prices, adjusted for inflation, exceeding growth rates seen in San Francisco at the height of its bubble.

“San Francisco is a bubble city that’s talked about as one of the major boom and bust cities in the U.S. They’re no different in Vancouver, in fact it’s worse in Vancouver.”

The Yale University economist said that “Vancouver is San Francisco, lagging by a few years.”He added: “I have Vancouver doubling (house prices) in 22 years. So that’s even bigger than San Francisco['s bubble]. I’ll tell you one thing, I’m not investing in Vancouver real estate.”

Of course those that live her in the Village on the Edge of Denial see things differently.

Local economists like Tsur Sommerville argue the slowdown does not mean the market was ever in a bubble. Said Somerville, director of UBC’s Centre for Urban Economics, the Vancouver market hasn’t had the kind of irrational exuberance that bubble market exhibit.

“You can’t burst a bubble that wasn’t there.”

Denial is such a wonderful thing.

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The Illusion of Housing as a "Great Investment" - Robert Shiller

Still working on 'The China Trigger' topic I mentioned in the last post.

In the meantime, some interesting comments made by Yale professor Robert Shiller about real estate.

He says that historically home prices have not been a good financial investment - they essentially tracked the rate of inflation from 1890 to 1990.

But during the housing boom of the 2000s, the mind-set of most Americans (and Canadians) was that housing was a great capital-gains-generating investment.

Collectively we fell into that illusion and it created this spectacular bubble. We have to reflect now that we had a kind of crazy mind-set in the last couple of decades, and we have to get back to thinking like people used to think. Housing is a depreciating asset, goes out of style; it's going to end up in the wrong place. People will want to live somewhere else, so it's not any automatic capital gain.

And how did we fall into that illusion?

How did we get this idea that home prices only go up? There are a number of elements of it. I don't know where to start. One of them is that we had a lot of inflation. I'm talking psychology now. You're asking how we got into a wrong view. In the 70s and 80s, we had a lot of inflation and then Paul Volcker came in and stopped it. So inflation has been declining now for 30 years, and we've lived our lives in that environment.

But we still encounter examples when someone says, "My grandmother just sold her house." Especially five years ago, say this happened five years ago. Grandma sold their house for $300,000, and do you know what she paid for it in 1952? It was only $30,000 or something like that. So it went up ten-fold. Now those stories are in all of our repertory, but when you really look at it, what was just consumer price inflation over that period? It was something like that. She really didn't make any money off of it. And she was putting money into it year after year and maintaining it. So we forget that. It's that kind of bias.

Also I think that we're influenced not by population growth so much, but by the sense of the growing wealth of the world and the finiteness of land, and we mistake land for…well that's another thing that happened. We started to think of urban real estate as land. And that's a change in our thinking.

If you go back hundreds of years, there was land speculation in this country, but there was no housing, not much urban housing speculation. So it was common sense. Talk to George Washington, if you could, all right? George Washington was a land speculator, and he owned Mount Vernon as among his speculations. But for George Washington, speculating in real estate meant buying thousands of acres for a shilling an acre or something like that. Not buying a house in the city, so we've changed. It's become much more proliferated as something that everyone does. You buy this house and it's going to make you a lot of money.

It's also just the bubble itself -- the Fed had very loose policy and that encouraged the bubble and prices were going up fast, so that proliferated stories about real estate as an investment. Anyway, that's a complicated analysis of our psychology. But it is a unique phenomenon, really, that it was so national. And it also reflects our better communications now. It wasn't as easily so national in the past.

A video clip of the interview in which Shiller made these comments is on the website Motley Fool.

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