Monday, June 17, 2013

Making the news in China - Canada vulnerable to 'big deleveraging shock'

The Chinese headline reads: 诺奖得主:加拿大经济极端脆弱 楼市泡沫要破灭

If your Mandarin is a little rusty, it reads: "Nobel Laureate: Canadian economy is extremely fragile. Housing bubble about to burst” (hat tip VMD on Vancouver Condo Info)

It's Paul Krugman's article, which on this side of the ocean has been headlined: Paul Krugman warns Canada vulnerable to a ‘big deleveraging shock’
The Nobel prize winner suggested Canada is an important test case for what lies behind the 2008-09 recession and the sluggish recovery. In other words, if the U.S. experience is anything to go by, Canada might be undergoing a housing and debt bubble, and if so, he advised people to watch what happens next.

With interest rates at ultra-low levels and Canadian household debt and housing market stabilizing, market strategists and economists like Krugman here are scrutinizing every bit of economic data for clues on what the economic outlook will bring....

Krugman sees potential red flags in the large spread between U.S. and Canadian house prices, and the fact that Canadian household debt levels are climbing even as U.S. ones are declining.

"So if the new non-centered bank view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks," he wrote. “Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the U.S. housing bubble took a long time to pop, too."
So Krugman now joins the chorus waiting for the Canadian bubble to burst, it's lofty real estate values not appearing to have realistic means of support.

And more importantly that viewpoint is gaining coverage in China.

Meanwhile Scotiabank is out with a report that notes:
"housing corrections often last years...and this one is unlikely to be any different"
So if HAM (Hot Asian Money) is going to come flooding back to support our housing values, it's going to have to buck the conventional wisdom that Vancouver is overvalued and a sure investment loser.

Meanwhile locals continue to insist Vancouver isn't overvalued.  The latest tidbit comes from our bud Helmut Pastick who insists:
"Prices in Vancouver are... fairly valued... It's a wonder that prices aren't even higher"
Are you ready for another round of R/E hype about how 'now's the time to buy?'


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  1. Good post Whisperer and very timely. We are hearing a great deal about the sudden flight of capital from China although it is not known how much will land on our shores. The rising US dollar and recent Treasury rate jump seem to be behind the destabilization. Fitch is now warning a credit crisis lies ahead due to the excessive imbalance in financial markets. Basically too much lending into a market where asset values are massively inflated We need to keep it in mind as we already know from the high correlation between Hong Kong real estate prices and those in Vancouver that economic troubles there spell big problems over here. Hong Kong is not China per se but is a proxy for credit issues on the mainland and observations of those R/E markets as they are more transparent can lead us to better conclusions about what is really transpiring in China itself. As usual, the events are slow to make an appearance though and it is usually a waste of breathe to warn people about what MIGHT be coming. I sure as hell would not want to be holding a fat mortgage with 20 or 25 years remaining on its amortization life when China experiences its inevitable credit bust!

    1. If there is a sudden flight of capital from China, would the money not make it's way to Canada (Vancouver)? If so, who cares if you are holding a big fat mortgage with 20 or 25 years?

    2. So blowing a bigger bubble is even better? Are you nuts man? Capital outflows are an economic distortion and in the case of China it can bring untold misery to the city of Vancouver over the long term.

      Try to make some SENSE with your posts please.

  2. Easy credit inflated assets and bubble creation. All house hype and sheep mentality.

  3. RE spec insanity of Lysenko proportions! Chinese planting two, three condos in multi-generational savings portfolios.. does not matter if cities empty! Lysenko say it ok!

    1. I wish I knew what you meant.

  4. who-t-f is Helmut Patsik, and why should anybody care about what this Patsi is saying!?

  5. How dare you quote Krugman and read Zerohedge at the same time Whisper. That's sacrilegious! :)

    That being said, Krugman makes a good point here. This is a rare thing and should be cherished, it may be the last good point he makes for another 5 years.