Wow! If you would have told me that 100 people would read my last blog post I would have bet a beer on the under, so I was floored when over 200k people read it! Clearly this topic of the top of the Canadian housing bubble has touched a nerve.
The key question to ask now is, what happens when the bubble bursts? Academics have found that a house price crash often results in a banking crisis (check out the book “This Time is Different” by Reinhart and Rogoff). I think this makes intuitive sense. After all, the banks are the ones that lend the money to buy the overpriced houses. If prices crash their loans are all suddenly much riskier.
But Canadian lenders have a reputation of being prudent and safe, right? Surely that can’t happen here... or can it?
Well, a house in Canada costs roughly 6.5x median income (leaving aside Toronto and Vancouver at 10x median income). In 2007, the house price to income ratio in the US peaked at 4. This means that Canadians, on average, are buying more house for their income than Americans were before their crash. Stated another way, lending by Canadian institutions is worse than the lending in the US prior to their crisis (despite all the subprime talk).
In my opinion, a lot of Canadian lenders are swimming naked, but the tide is still in. I have my suspicions about who is naked, but it is hard to know for sure. In Canada, a huge portion (~50%) of our mortgages are insured by CMHC and other mortgage insurers, and that does reduce the risk substantially for some lenders. However, the debt levels of Canadians apart from mortgages are at an all time high, so there are plenty of other loans that banks have extended (home equity loans, credit cards, unsecured lines of credit, etc.), that could turn risky if house prices crash.
There is only one publicly traded mortgage insurer in Canada. Since they have insured the riskiest mortgages (i.e. those with less than a 20% downpayment), I think there is a decent chance they run into trouble. I did a full report on the reasons I am short this company in my last newsletter. Reach out to me if you are interested in learning more.
If you don’t believe me that lender standards are weaker here, this video should give you a small taste of what is going on.
If this seems like a good way to lend money, I know of a Housing Expo you may be interested in attending…
It is not all doom and gloom over here at On Beyond Investing. My very bearish views on Canadian housing aside, my trade ideas are mostly long. My upcoming newsletter takes a look at buying shares in Kinder Morgan (KMI) and Westaim (WED). Subscribe here.Of course, if you want to discuss bearish Canadian housing trades I love doing that too...