Who Is the Greater Fool - The Fool or the One that Follows?
The main point is that Canadians could have learned by what happened in the U.S., Spain, Ireland, Iceland etc. with all of those housing busts, but instead they chose the path of willful ignorance which is always the path most taken when greed is involved. Let's be real, many people across the globe have been warning Canadians for years that their market is in a bubble, but few have listened. From the man on the street, to the banks, to the media and politicians, the majority wrapped themselves in an insular bubble of smug wishful thinking. In the U.S. bust there was at least an element of uncertainty because it was the first major real estate crack up in years (well, at least since the S&L bust). Canada was the one country that could have learned from the mistakes of 2008 and taken proactive steps to reduce risk. Instead, they did the solo reach around - bent over, head straight up their own ass. Notice that first article I cited above from the Vancouver Sun, it starts out by saying that debt levels are eerily similar to levels at the U.S. top, but in some bizarro non sequitur, it ends up concluding that a crash is highly unlikely. WTF? Let's not forget that real estate is one of the last sources of advertising for newspapers, so every story must have an obligatory happy ending.
I won't go into the gory chart-porn details of the Canadian RE trainwreck, shown here on ZeroHedge, only suffice to say it went on far longer and farther than anyone predicted. Even now there are well placed denialists spinning tall tales as to how this time it will be different. This guy explains that Canada's current debt to income ratio which exceeds that of the U.S. circa 2006 is not a concern because 'other' countries have had a higher ratio. Unfortunately, he conveniently doesn't tell us which other countries.
I'm not going to pile onto these stories, because there is a whole other dimension to this story that has largely been overlooked. First off, the fundamental economic driver behind Canada's real estate boom is China. Back in 2008, Canada was on course to have its own real estate meltdown like everyone else, but was then rescued by the massive fiscal stimulus coming out of China that largely benefited resource producing nations. The other key factor pertaining to China is that the Chinese middle class are getting very concerned about their own country's stability. So they have been flocking to countries like Canada where they can buy a visa, cash on the barrel head. TheEconomist just had an article on this situation, last week. A Canadian visa and domicile is essentially their insurance policy against social unrest at home. And while they are at it, might as well plough a few mil into local real estate, since the Canadian buy-your-own visa stipulation requires "investment" of a fixed amount of capital.
None of those U.S.-style shenanigans up here...
Then there are the other aspects of this real estate equation that have been totally overlooked. Canadians are willfully ignorant about the differences between the U.S. market and their own. Unfortunately most Americans don't know enough about the Canadian market to politely correct their delusional neighbours. For example, we all know that the U.S. real estate crash was caused by "subprime" mortgages. Well, ask most Canadians and they will tell you, we don't have subprime in Canada. Well, guess what, that is total bullshit. Subprime just means someone with a low credit score - which essentially fits the description of half my family (I won't say which half). So, sure, call it what you will, but of course Canada has subprime. Meanwhile, another factor in the U.S. crash was "no money down mortgages". In Canada it's just called a second mortgage. With a second mortgage, Canadians can borrow 95% of their house value, which is close enough to no money down to obliterate them on the other side of the mountain. Canadians have to get the last 20% insured, which just means that the taxpayer at large will be the bagholder for over-speculation. Next there was Adjustable Rate Mortgages which caused a lot of pain when they reset to market interest rates after a few years. Unlike the U.S., EVERY mortgage in Canada is adjustable rate i.e. there is no such option to take a low risk 15 or 30 year mortgage with a locked-in rate for the entire amortization period. It's only due to the availability of long-term fixed rate mortgages, that millions more Americans were not caught up in the refinancing clusterfuck when the U.S. bubble burst. With an ARM, it's the periodic forced refinancing in a shit market that causes all the problems i.e. when the three forced sales on your block just sliced 20-30% off your appraised house value overnight. At that point, the interest rate is the least of your worries, because the real problem is coughing up the additional tens or hundreds of thousands in negative equity, just to roll over your loan. Lastly, and likely most importantly, in many U.S. states, mortgages are non-recourse, meaning if you can't make the payment you can hand the keys back to the bank and walk away keeping your other assets and wages intact. In Canada, there are no non-recourse mortgages meaning if you can't pay your mortgage and your house value falls below the value of the mortgage you are now not just in foreclosure, you are now bankrupt. What is really ironic is that this article spells out the exact same factors as I mentioned above, but highlights them as advantages of the Canadian banking system. That's right, they give advantage to the lender by shifting risk to the borrower. Maybe I should have been a bit more clear about that.
Getting back to my point at the beginning, the real problem is that this is not 2006 and the likelihood of another save-the-day globally coordinated stimulus package is wishful thinking. Canadians unlike many other countries around the world, are entering this new downturn with all time high debt. And for that they can thank their clueless Central Bankster Mark Carney. Carney, like Bernanke, has done his level best to subsidize this latent clusterfuck with copious amounts of cheap debt, providing Canadians with a tree, a horse, and as much rope as possible. Carney is a former Goldman Sachs Alum, who is held in very high regard in Canada because everyone assumes he successfully side stepped the 2008 carnage. Now that the debt hook is fully set, he will ultimately be seen as the man who obliterated the Canadian middle class. Goldman Sachs strikes again.
But don't take my word for it. After 2008, the Irishman warned this would happen everywhere - "Everybody gets their day in the sunshine..."
