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."
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.
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."
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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