US Exports Housing Bubble to Canada

The Canadians missed out on the Great Housing Bubble, but they are inflating one in the aftermath. O Canada!

2 NEVADA Irvine, CA 92606 kitchen

Irvine Home Address … 2 NEVADA Irvine, CA 92606
Resale Home Price …… $749,000


O Canada!

Our home and native land!
True patriot love in all thy sons command.

With glowing hearts we see thee rise,
The True North strong and free!

From far and wide,
O Canada, we stand on guard for thee.

God keep our land glorious and free!
O Canada, we stand on guard for thee.

O Canada, we stand on guard for thee.

O Canada — Théodore Robitaille

Over the last few weeks, I have been watching a growing body of newspaper reports that express a concern that Canada is inflating a real estate bubble. They are, and the local media has every right to be concerned and sound the alarm. Watching the response of legislators and realtors (coming tomorrow), the similarities between the two situations become apparent. Let’s hope they stop the process before the bubble gets very damaging to their housing market and economy.

What if the Housing Bubble never happened?

When I wrote the post, the History of Fundamental Value, I created the chart below to illustrate the impact Federal Reserve Policy is having on prices and affordability and provide a conceptual foundation for the FED’s reasoning when it comes to housing and the economy.

Comparison of home prices and value - Irvine California - 1997-2009

Obviously, the Federal Reserve is focused on lowering mortgage interest rates to soften the deflation of the housing bubble, but what impact would these policies be having on our real estate market if we didn’t have a housing bubble? To answer that question, we need to look at a housing market not impacted by mortgage policies of the United States, but still dependent upon the United States for capital flows and interest rate policy; Canada is the obvious choice.

The Canadian Housing Bubble

Prior to 2009, there was little talk about a real estate bubble in Canada because there wasn’t one. Prices in Canada have stayed relatively close to cashflow value for many years. Despite their over-reliance on adjustable-rate mortgages, their market has been a model of stability — at least it was until the implementation of new interest rate policies of the United States, a policy required by our own housing bubble (“It (expanding FHA) was
an effort to keep prices from falling too fast. That’s a policy.
” — Barney Frank).

When the Federal Reserve in the United States lowered interest rates, it caused affordability to increase about 20%.

Cashflow Value increased 20% in 2009

We also know what will happen when the Federal Reserve allows interest rates, particularly mortgage interest rates, to rise back to the level of the market; affordability will fall, and so will prices.

This is what Canada is facing, Canada housing market still ablaze in November:

OTTAWA, Dec 15 (Reuters) – Sales of existing homes in
Canada jumped 73 percent in November from a year earlier
just below the record high for the month, the Canadian Real
Estate Association said on Tuesday.

The robust figures were in stark contrast to those for the
overall economy, which is still struggling to pull out of
recession. [You think?]

“The report suggests that the Canadian housing market
remains on fire as the combination of low mortgage rates and
still favorable buying conditions continues to spur buying
activity,” said Millan Mulraine, economics strategist at TD

The central bank’s promise to keep its benchmark interest
rate at rock bottom at least until mid-2010, combined with
renewed consumer confidence, has fueled a house-buying spree in
Canada that has surpassed all expectations and raised fears of
a housing bubble that could explode when rates rise again

The real estate market slumped during the recession but
escaped a U.S.-style meltdown. In fact, in some regions demand
and prices merely eased from soaring heights seen before the
downturn, a correction that some economists think was overdue.

Existing home sales rose 5 percent in the first 11 months
of this year compared with the same period of 2008, but were
below levels for that period in each of the three preceding

Year-over-year gains were biggest in British Columbia and
Ontario at 165 percent and 77 percent, respectively.

The average national price in November rose 19 percent from
a year earlier to C$337,231
($318,142). Year-to-date, the
average price was up 4.4 percent from the same period of 2008.

More housing supply was coming on to the market, CREA said,
as sellers were lured back by the strong demand and price
hikes. Listings rose 5 percent in November from October, the
biggest monthly jump since January 2008.

Even so, the strong uptake meant that inventories continued
to be drawn down from year-earlier levels for the seventh
straight month.

($1=$1.06 Canadian)

How much more obvious can this situation be? Interest rates create a 20% increase in affordability, and during the depths of a deep recession, Canadians managed to make house prices go up 20%. Hmmm… I think cause and effect would indicate that prices have bubbled to match interest rates, and they will go back down when interest rates go up.


Some in Canada see the problem, “However, there was some concern about the unexpected and
unsustainable nature of the two main sources of growth – utilities and
housing sales – even as Ottawa warned this week of an overheating
property market and recent real estate data shows the property buying
spree continued in November. “Neither a cold winter nor a hot
real estate market is a sustainable source of economic growth,” Erin
Weir, an economist with the United Steelworkers, wrote in a note.” There are many in California who would argue that you can sustain an economy solely on increasing real estate prices, particularly with HELOC access to the appreciation.

The fears Canadians feel about their housing market are well founded — not that the politicians will say so…

Canada Denies Housing Bubble

Is it the responsibility of politicians everywhere to deny the obvious and foster dreams of Bailouts and False Hopes? They seem to excel in this area, Canada minister sees no housing bubble at present:

“If we see — which we have not seen — but if we see clear
evidence of an upward bubble, particularly with respect to
insured mortgages, then we have some tools available which
we’ve used before and we can use again,” he said in his Ottawa

We have tools. LOL! I feel totally secure knowing the government has a tool like this guy in charge of finances.

Flaherty said it was not surprising to see substantial
activity in the mortgage and housing markets given low interest
rates and the fact that people had held back on big investments
during the recession.

He said he was not as concerned about housing prices so
much as the ability of Canadians to service their debt.

“I’m more concerned about affordability (of mortgages) and
people not being lulled into a false sense of security, taking
out relatively low interest-rate mortgages, when we all know
that the mortgages rates have only one way to go over time —
and that’s up,
” he said.

Sorry to break the news to you Mr. Finance Minister, but you have inflated a housing bubble, and it will cause problems in your country as it did in ours. At least I give you high marks for choosing to do nothing about it. Perhaps the stooges in charge of our housing market can learn from you and do nothing further.

2 NEVADA Irvine, CA 92606 kitchen

Irvine Home Address … 2 NEVADA Irvine, CA 92606

Resale Home Price … $749,000

Income Requirement ……. $159,711
Downpayment Needed … $149,800
20% Down Conventional

Home Purchase Price … $710,000
Home Purchase Date …. 7/10/2003

Net Gain (Loss) ………. $(5,940)
Percent Change ………. 5.5%
Annual Appreciation … 0.8%

Mortgage Interest Rate ………. 5.26%
Monthly Mortgage Payment … $3,313
Monthly Cash Outlays ………… $4,300
Monthly Cost of Ownership … $3,270

Property Details for 2 NEVADA Irvine, CA 92606

Beds 4
Baths 2 full 1 part baths
Size 2,900 sq ft
($258 / sq ft)
Lot Size n/a
Year Built 1999
Days on Market 6
Listing Updated 12/23/2009
MLS Number 12132953
Property Type Single Family, Residential
Community Irvine
Tract Cb


ALL CAPS. Little info.

These owners appear to be attempting a breakeven exit, and with today’s interest rates, they will probably get their wish. There is a $568,000 first mortgage, and a $190,000 HELOC opened a year later. If they took out the HELOC and extracted their downpayment, they have little to lose other than their credit score… Oops, that is already trashed…

Foreclosure Record
Recording Date: 07/09/2009
Document Type: Notice of Sale (aka Notice of Trustee’s Sale)

Foreclosure Record
Recording Date: 03/30/2009
Document Type: Notice of Default

Las Vegas’s Housing Bubble

Since I was writing today about exported housing bubbles, I want to remind you that we have the textbook case of an exported housing bubble in nearby Nevada. Loose financing explains much, but California equity locusts made this happen…

Hard Landing Las Vegas

What will Canada’s housing bubble look like?

20 thoughts on “US Exports Housing Bubble to Canada

  1. IrvineRenter

    Government Housing Support Update

    # Federal Reserve MBS Purchase Program: This is scheduled to end March 31, 2010, from the Fed:

    [T]he Federal Reserve is in the process of purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt. In order to promote a smooth transition in markets, the Committee is gradually slowing the pace of these purchases, and it anticipates that these transactions will be executed by the end of the first quarter of 2010.

  2. IrvineRenter

    What do you think about this kitchen? Is the kitchen space too large, but not large enough to accommodate that island? It looks to me like that island would be in your way moving around the kitchen. Is anyone familiar with this floorplan and kitchen?

    1. Geoffrey Chaucer

      For those particular owners the design was perfect: open enough so that they had little trouble removing the fridge, stove, oven and dishwasher. And the island had just enough heft that they didn’t have to bother ripping it out as well.

      1. newbie2008

        Busted up laughing at your observations.
        You’re right they’re not in the picture. 1999 applicances should still be operational, but may need upgrading since this is Irvine.

        Seems like the Great Depression II with the Republicates bailing out the banks (with TARP loans that needed to be paid back and pyramid schemes) and Demoncrates bailing out the banks further (with free money and more pyramid schemes) and giving a few crumbs to the people as free rent and extended unemployment (if you didn’t accept a job that goes bust the next day).

        Banks made out great with the latest bailout.
        The new FHA loans and bank home modifications are pumping up the bubble, giving banks money up front as fees, transfering liability from the bank to Feds and sticking the taxpayer with the bills in a couple of years.

        Question is will the people put up with the bailout for commerical RE? Can’t use the ruse of saving people’s home.

        lowrydr310, With RE-speak, the $10,000 property tax is income deductable, so you are building your equility instead of paying rent that goes down the drain. At least the state/county got the money instead of some investment banks. Opps, my error on that last sentence with the govt funny financing through derviatives.

        winstongator, Most banks in the mid-west will not touch a Debt Service to Income of over 35%. That kept house at reasonable level, except when Coastal people came in with the equility from their old house or using refinancing on the old home to be used as purchase money for the new mid-west house. The rent vs. owning decison leans more on owning in most of the mid-west, but has large upkeep cost. Many of the local judges are directly related to the local bankers, who are also the developers.

        1. Investment bankers

          “..Most banks in the mid-west will not touch a Debt Service to Income of over 35%.”

          I would agree but for a while between 2002 and 2007, the investment (Wall Street) bankers were fueling the mortgage industry.

  3. IrvineRenter

    The Casey Serin of New York:

    He burst the bubble! Real estate speculator Lloyd Varma defaulted on 20 loans for 10 Queens homes

    Three years ago, Varma, a man of no visible wealth, convinced 10 different banks to hand him 20 separate mortgages to buy 10 homes across southern Queens.

    Amazingly, he did this in 51 days just before the housing market collapsed – getting loans for $6.4 million with no money down.

    Then, one by one, Varma defaulted on each loan, and by the end of 2007, eight of the homes were in foreclosure – a kiss of death to a neighborhood’s property values.

    Today, banks own four of the houses, while the others are in the process of being foreclosed.

    Varma’s trail of wreckage highlights a fatal flaw in the system: Banks blindly handed over money to borrowers like Varma without thoroughly checking them out.

    Buyers like Varma who got in way over their heads caused a ripple effect throughout the economy. Saddled with millions of dollars in bad loans, banks stopped lending.

    Foreclosures dragged down property values for neighboring homeowners who never got behind in their payments – and tenants in foreclosed homes found themselves out on the street.

    “There weren’t any checks on whether mortgages were affordable or viable, so subprime lenders were writing these mortgages because they could sell them to Wall Street,” said Josh Zinner of the nonprofit Neighborhood Economic Development Advocacy Project.

    He called the Varma loan situation “an egregious example of something that was rampant all over the city.”

    Experts say Varma may have been able to buy the homes in a short time because he went to different lenders for each house.

    “All probably weren’t aware of the other,” said Jonathan Pinard, head of the Empire State Mortgage Bankers Association.

    Zinner said Varma’s ability to get so many mortgages so quickly raised questions about what Varma disclosed about his liabilities on his mortgage applications.

    At one point last year, Varma filed for bankruptcy, listing only three of his properties – not the 10 he owned.

    Varma’s not talking. Reached by cell phone, he replied, “I am having trouble hearing you” before the line went dead.

    His lawyer, Nan Bedesi, also declined comment, saying, “I don’t have to answer your questions.”

    Varma went on his wild home-buying spree between Nov. 30, 2006 and Jan. 19, 2007, just before the crash.

    The properties – nine two-family homes and one one-family – are in poor, predominantly minority sections of three Queens neighborhoods with some of the worst foreclosure numbers in the city: Richmond Hill, Jamaica and Ozone Park.

  4. Stock Investor

    Do You know what people do after mortgage modification? Tightening expenses and struggling to pay off remaining debt? Right?

    No, You are wrong. They are buying new cars and complaining about credit score.

    “He had not fallen behind in his mortgage, but he was finding it harder to make ends meet after his overtime was cut and his property taxes skyrocketed. … Axelrod secured a $565 reduction in his monthly payments … his credit score has plummeted to 644 … He ordered a new car this summer, believing it would come with a lower monthly payment. It arrived in mid-December. But because of his newly blemished credit background, his two credit unions turned him down for a car loan. His dealership told him the best he could get is a 12% rate, a hefty hike from the 4.7% he was paying before.”

  5. lowrydr310

    It’s a quiet day today; even in my office only a handful of people are taking time off, but it’s still quiet.

    I have problems accepting the numbers again. First off, the redfin data shows property taxes of almost $10K. WOW, that’s a lot of money ‘wasted’ just like rent.

    The sales history shows:
    Nov 1998 $370,000 (sold)
    Jul 2003 $710,000 (sold)
    Dec 2009 $749,000 (listed)

    So let’s take the example of a family buying this house in 1998. What is that family’s income in 2003 and in 2009? Did everyone just make so much more money to drive home prices up? I can see a few cases where incomes may jump dramatically, but not enough to support widespread price increases of this magnitude.

    This is bubblemania! Supported by loose lending and widespread belief in the system.

    1. IrvineRenter

      Now that prices are being supported artificially, it looks like the people who bought from 2000-2002 were geniuses when in fact they were simply fortunate that they front-ran a large and truly ignorant herd.

  6. winstongator

    IR, how do you reconcile the fact that many causes people list for the housing bubble were nation-wide actions, but bubbles were definitely geographically dependent? FL prices nearly doubled up to the peak, while prices in lots of NC moved up maybe 10%. There is a missing link from fed actions to a bubble that is concentrated in FL, CA, NV & AZ. I don’t know exactly what it is, but a lot of it is the lure of appreciation and property speculators. Banks weren’t cautious enough with non-owner occupied loans which added some fuel. Answering the geography question is the one thing I have not seen much effort put into.

    1. IrvineRenter

      Malibu Renter has done some independent study on this issue, and Paul Krugman has noted the difference in the “zoned” zone. The most commonly accepted theory is that zoning restrictions create supply shortages in these areas that cause prices to take flight. Once that happens greed takes over. Without the zoning restrictions, it is argued that supply blunts any appreciation. However, this theory fails to explain Florida where the combination of easy permitting and rampant appreciation caused them to build a 10-year supply of homes.

      1. winstongator

        I don’t buy that, and it would somewhat absolve the fed & general underwriting standards. It also doesn’t address the price/rent deviation from normal (why people in some areas would pay so much more to own than rent an equivalent home/condo). Those things explain differences in prices that should be fixed, percentage-wise – a .1 acre lot in Irvine, CA is worth more than a similar lot in Lexington, NC, but less than one in Manhattan. Those relative values won’t change a whole lot. That doesn’t explain why those homes would appreciate at markedly different rates, especially relative to the national average.

        1. population flux

          The states that you name (FL, CA, NV & AZ) are all in the “sun belt” with population almost constantly increasing (ok, not since the bubble burst). This results in tipping the balance with many people desiring to buy but could not normally qualify. Reduce U/W standards, and you suddenly have people who now can qualify – resulting in increased actual demand. Add the fact that many homebuilders were intially careful not to over-build (learning from the lessons of the early 90’s), and then add some mania, fear of being left out by people who could actually qualify were we under normal R.E. prices, and lots of Kool-Aid to the mix, and you have a housing bubble.

          How about that for a theory?

          1. winstongator

            Sounds fairly good. Poor u/w alone isn’t enough to get what we got, but I don’t think it hits it all. Top 10 pop gain states, percentage-wise:

            North Carolina

            I think you’d have to account for hot-money specuvestment-type. One person moving in buying 3 or 4 properties won’t show up in the pop changes. But the people were specuvesting because prices were going up – the specuvestors can’t be both cause and effect.

            I think it is like Shiller talks about, pure bubble psychology. It’s only possible to believe the ‘running out of land’ story, or people always want to move there, in places that have a story – beach/coastal areas, or ski-type areas.

      2. LC

        1) California has more land than any all other states except Texas and Alaska.
        2) The Irvine Company hold a monopoly on land in Irvine, and can set whatever price they want for it, hence the higher prices in Irvine.

  7. thrifty

    Those who are concerned that the govt would remain involved in the housing bubble received confirmation on Christmas eve as noted in this quote from today’s Wall Street Journal:
    “Today the U.S. government, directly or indirectly, underwrites nine of every 10 new residential mortgages, nearly twice the percentage before the crisis. Just last week, the Treasury said it would cover an unlimited amount of losses at mortgage giants Fannie Mae and Freddie Mac through 2012.”

  8. CalifornianAtHeart

    According to this: this property’s income requirement puts you well into the the top 10% of income earners nationwide. I just don’t understand how if you’re in that top 10% you could convince yourself to spend so much for something so mediocre. I mean its not a bad house but most places outside of the major bubble areas in California you would be able to pick up this house for most likely at least 200,000 less. Is that the kinda of premium that Irvine really commands? really? I ask this as an outsider looking in, I love southern California and I think I would be happy to live there but the housing craziness has made everything more expensive (raising tax expectations based on bubble values being the most far reaching) and I just continue to watch on the sidelines hoping that things can deflate without everything going to hell. Is that too much to hope for?

  9. poor

    We didn’t learn anything from the experience of Greenspan and Bush ?

    “Government stimulus is keeping interest rates too low and running big deficits and all we get, as a result, is reckless spending and reckless gambling. Wall Street took all this cheap money and gambled with it. American individuals took all this cheap money and spent it and now we’re doing the same thing. We didn’t learn anything from the experience of Greenspan and Bush.

    We’re never going to have a real economic recovery until the government gets out of the way and allows the recession to run its course.”

    Obama didn’t learn anything from the experience of Greenspan and Bush ???

    No, but for 2012 election, Obama choice to replicate Bush’s cheap money policies.

    After all, it is becuse bank is too big to fail, but because Obama’s 2012 is too big to fail!

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