Does Regina have a housing bubble?

I have been asked quite a few times about doing something for Regina's housing market. This will take a few posts.  I will take a look at average and median house prices over time, median family and household incomes, inflation, house price to income, house price to rent, rent prices and vacancy over time, new home price index, affordability, population growth, housing starts, household size, employment, supply and demand.  Do I got it all?  Hope so. So here we go.

What is a housing bubble?

From Wikipedia :
"A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by a reduction in price levels."

Some say that economic bubbles can not be identified until after the fact, while others say that bubbles can be defined by economic measurements.  I believe economic bubbles can be identified.



How should house prices grow in the long term?
From The Great Housing Bubble: Why Did House Prices Fall? by Lawrence Roberts.

"Since 1890 houses have appreciated at 0.7% over the general rate of inflation. Over the long term house values are tied to incomes because most people buy houses with mortgages for which they must qualify based on their income. Inflation keeps pace with wage growth because people will bid up the prices of goods and services with their available income. Therefore, over the long term house prices, wages and inflation all move in concert. There are short-term fluctuations in this relationship due to variations in financing terms, migration patterns, employment, local limits on construction and irrational exuberance, but any such deviations from the mean will be corrected over time by market forces. As an investment, houses serve as a hedge against the corrosive effect of inflation, but over the long term appreciation much in excess of the general rate of inflation is not possible. In this regard, houses are little better than savings accounts as an asset class, and they are inferior to stocks or bonds in the long term."

So inflation, wages and house prices should all move in concert for a long term sustainable housing market.
Let's use some of those economic measurements and find out if Regina has a housing bubble.

Regina Consumer Price Index

Inflation in Regina has stayed within the 1% to 3% rate over the last 20 years.  Nothing to really write home about.


Average Regina House

Looks like the average house price grew at about the same pace as inflation from 1990 to 2006 and then wham! something happened in 2007.  Could not have been global real estate fever? Could it?


From the National Post

From 2000 to 2010, the average value of a Canadian home doubled, rising to $339,030 from $163,951.  Regina topped the list of surging housing prices. The average price of a home rose 173%, climbing to more than $258,000 from $94,518 in 10 years.

For those keeping score, inflation in that time period increased by 27%.

From Newstalk 650

The average price of a home went up to a new high of $284,744 last month ( Jan 2012). That's up 10 per cent from 2011.

The next two charts are from Royal Lepage.  This one is from the third quarter of 2011 and it breaks down pricing for bungalows, two storeys and condos.

For Regina:

Bungalow $316,500

Two Storey $300,000

Condo $198,000

This graph is from the fourth quarter of 2006

For Regina:

Bungalow $150,375

Two Storey $146,500

Condo $96,500

 

This is from Royal Lepage in 2001

Based on the Regina markets examined, the average price for a detached bungalow marginally dipped to $109,000 (-0.9 %), while a standard two-storey home slightly increased to $111,500 (+1.4 %) and a standard condominium property increased to $86,000 (18.6 %), year-over-year.

Regina experienced the the biggest increase in house prices across Canada in the ten year period of 2000 to 2010 at 173%, while the increase in inflation totaled 27%.  From 2010 to Feb 2012, the average price has increased by another 10%.

New Home Price Index

What makes these graphs interesting is that Calgary experienced a boom in the new home price index about a year earlier. Check it out.

For those that think that construction costs were one of the reasons for the launch in house prices in different markets in Canada, can not explain why the new house price index had lift off at different time periods across the country.  Simply put, the housing bubble in most centers launched construction costs which included land, construction wages and some materials. Most cities in Canada cranked up the cost of new lots for new home buyers for an increase in revenue so they can increase spending. This has allowed them to keep any rise in property taxes to a lower level.  Keeping property tax increases at low levels is always a great way to buy votes.  But what cities have done, is that they have shifted the burden of debt from their balance sheets to home buyers.  I call this a "hidden tax". 

And as for the increase in house costs which includes wages and material costs, construction wages have increased more than average wages but not to the extent that justify the huge increase in house cost increases.  What has happened here is that the profit margins for home builders have increased by quite a bit. Simply put, it has been a great time to be a home builder owner in the last few years.  As for material costs,  I will have a post up in the next couple of weeks that shows that much of the materials for a home except concrete have not risen much in the last half decade.

Median Family Income

This is not median household income, but all families income.  In 2005, according to Stats Canada, median income for all households was $54,443 in Regina.  While median income for all families in 2005 was near $70,000.  That is a significant difference.  In 2000, according to Stats Canada, median income for all households was $46,847.  While median income for all families in 2000 was near $57,000.  Most people mistaken believe that all family income is median household income, it isn't.  Median household income was estimated to be $74,000 for Regina in 2011.

House Price to Income
While using median incomes and average house prices together is not optimum, we can still calculate how house prices and incomes have changed over the years.  We will use Royal Lepage numbers of an average bungalow, (because that is what most families buy) and median family income.

• In 2001, a median family income of $59,000 and an average family bungalow of  $109,000 gives us a ratio of 1.84.
• In 2006, a median family income of $68,000 and an average family bungalow of  $150,375, gives us a ratio of 2.21.
• In 2011, a median family income of $83,000 and an average family bungalow of $316,500, gives us a ratio of 3.8.

A rule of thumb is that a ratio under 3 is affordable. The house price to income ratio is showing that Regina is a bit bubblicious.

Median Multiple

Demographia does an affordability study every year for for English speaking countries around the world.  In 2011, Regina had a median multiple of 3.3, which is deemed "moderately unaffordable".  This came from a calculation of a median house price of $244,000 and a median household income of $74,200.  This is down from a medium multiple high of 3.5 in 2010.  But is significantly up from from 2006, when the median house price was $115,000 and the median household income was $57,500.  The median multiple was 2.0.

Again, another measurement that is shows that Regina is a bit bubblicious.

House price to disposable income
Ben at the economic analyst has a great post on house prices and disposable incomes. 

It should be abundantly clear that in order to sustain an increased mortgage burden while still saving for other life priorities, it requires a higher salary.  Therefore, house price appreciation and income gains have historically been relatively tethered.  Periods of over-performance in house prices are followed by periods of under-performance, and vice versa.  The price-income ratio is a fundamental metric that usually exhibits stability over long periods of time.  The price-income ratio is calculated by taking a house price measure and dividing it by a measure of income.

Regina:

Just like many other major markets in Canada, Regina's house price growth has deviated from income growth.  But Regina came late to the party ( like Saskatoon), using an explosive expansion in credit growth to launch house prices skyward starting in 2007, when other major markets in Canada had their rise in 1 to 3 years earlier.  It's a good thing Regina is "catching up" to other cities in Canada.  Nobody wants to be left behind in any housing bubble party.


When I get a chance, ( hopefully in the next couple of days) I will take a look at rents, population growth housing starts and supply and demand.  The left overs such as employment and labor force indicators will be in the third post.  Then I will combine all three and make a major post for Regina that I will add to in the future.

Here it is: Macleans: Time to panic about the housing market

From Macleans Time to panic about the housing market

Why is everybody ignoring this unfolding disaster?

Back in the heady days of 2005, America looked like an awfully nice place to buy a house. Home prices were marching ever upwards. Home ownership was at record levels. Mortgage rates were at historic lows. Unemployment was falling while the economy was growing at a healthy clip.
Home sales had started showing their first signs of slowing that year, but that didn’t sway the National Association of Realtors from its persistently sunny view of the country’s housing market. “We’re confident that housing is landing softly,” David Lereah, the association’s chief economist, wrote in a November 2005 report just before house prices started a descent that would eventually wipe out nearly $30 trillion in global wealth.
Looking back, the signs of a country burying its head in the sand about a housing bubble seem obvious: the well-told tales of tricky teaser rates, of mortgage fraud and of gigantic home loans handed out to buyers with no income or assets. Household finances were even sketchier. In 2005, the average American owed $1.30 in debt for every dollar of income. Home equity was eroding as Americans pulled more than $900 billion out of their homes to buy cars, granite countertops and put their kids through college.

Then in 2008, the housewarming party was over as the country’s major banks teetered on the brink of collapse and took the economy with them.
Here in Canada, we patted our backs for not falling into the same trap, and basked in the spotlight as the world’s new beacon for financial stewardship. It’s a compelling narrative that has been promoted by the federal government and the Bank of Canada as they encouraged Canadians to spend their way through global economic turmoil.
But pry through the pocketbooks and bank accounts of the average Canadian and the country looks remarkably like the America of 2005—or even worse by some measures—complete with record house prices and unprecedented debt. “One of the really terrible narratives we’ve allowed to develop in the minds of Canadians is that somehow we are better than the U.S. and so that means we have nothing to be concerned about,” says Ben Rabidoux, who runs The Economic Analyst website and parlayed his obsession with watching the housing market into a job with a Wall Street firm that advises institutional investors on how not to get caught up in the Canadian miracle/disaster.
What Rabidoux and others have seen is just how much Canada’s economy has come to rely on the country’s housing boom—and how much consumers have been digging themselves into debt just to keep it going.
Since 2008, Canada’s ratio of debt to after-tax income has exploded. By the third quarter of 2011, Canadians owed an average of $1.53 for every dollar they brought in, up 40 per cent in the past 10 years and just below where the U.S. was before its housing crash. By the end of 2010, the average homeowner had just 34.3 per cent equity in their home, the lowest level in two decades and a 20 per cent drop in just four years.
“Everybody points out the differences in the U.S., about financial regulations and subprime mortgages,” said David Madani, a former Bank of Canada analyst now with Capital Economics. “But to me this is all a borderline attempt to misdirect the whole debate because we’re engaging in that type of discussion and only that discussion. It ignores the big elephants in the room.”
The elephants Madani sees include a sharp run-up in house prices compared to income: the average Canadian home now costs five times the average income, well above the multiple of three that is considered affordable. There’s also a sharp rise in home ownership rates, which at about 68 per cent of Canadians mirrors closely the 69 per cent at the top of the U.S. bubble. Madani also points to continued overbuilding and Canada’s still healthy construction industry. New building permits reached $6.8 billion in December, a 4.5-year high.
The biggest elephant of all is how much the boom has been fuelled by cheap and abundant credit thanks to a low interest rate policy pursued by the Bank of Canada, along with government-insured mortgages. “All the warning signs are there,” Madani says. “We just have to connect the dots.”
There is evidence the tide may already be turning in Canada’s housing market. The Canadian Real Estate Association reported home sales had fallen 4.5 per cent in January compared to December, the steepest decline since July 2010. Prices still rose, but by just two per cent, the slowest in the past year. Kelowna, B.C., a popular spot for retirees and vacation homes, reported a tenfold increase in foreclosures compared to three years ago. The hard landing might already be upon us.
In some major housing markets like Toronto, the signs of a bubble are as glaring as ever. Driven by a glut of condos that has made single-family homes a rarity, house prices have soared to nearly $500,000 on average. Even more proof that the city’s homebuyers have lost their heads: in January a west Toronto renovator’s dream went for $200,000 over asking price.
Nicole Austin, 31, and her boyfriend, Jim Varlas, know the mania all too well. The couple decided to sell their downtown Toronto condos and buy a house in Markham, a suburb north of the city. They moved in with Varlas’s parents and started shopping around for a house with a budget of $400,000. “Either the homes in our price range were really outdated and hadn’t been touched since the 1970s, or they would need to be renovated,” Austin says. They upped their budget to $500,000 and bid on three homes. They lost all three in bidding wars that pushed prices up as high as $575,000. “In some cases we knew what the house was worth and there was a certain point where we’d just walk away because it was getting ridiculous,” Austin says.
Earlier this month, the couple settled on a new build, paying “in the mid-to-high 500s.” But Austin says taking on a larger mortgage than expected was a fair tradeoff for finding a house in their chosen city. The couple say they expect prices to crash, but that doesn’t matter much since they plan to be in their home for at least 10 years.
With an average price topping $348,000 in January, Canadian homes are now worth a total of $3 trillion, nearly twice the country’s GDP. Home prices have doubled since 2002 and risen 13 per cent since the global recession hit in 2008.
When home prices rise, so does consumer confidence. Canadians, believing that their bricks and mortar are a gold mine, have become ever more willing to open their wallets. In less than 10 years, consumer spending has gone from 58 per cent of Canada’s GDP to 65 per cent.
The housing boom has helped prop up Canada’s construction industry, which now represents 7.4 per cent of the labour force, higher than it was in the U.S. at the height of its boom. Add in other housing-related industries, such as real estate agents, mortgage brokers and insurance companies, and the sector represents a staggering 27 per cent of the Canadian workforce. In the U.S., those same numbers peaked at 23.5 per cent. “We are far more dependent directly and indirectly on this current housing boom than they were in the U.S.,” says Rabidoux. “How in the world are you going to orchestrate a soft landing?”
More worrisome is where consumers have been getting their spending money. As wages stagnate and credit card use levels off, Canadian consumers have increasingly turned to their homes as a source of cash. As of last year, Canadians had pulled roughly $220 billion from their houses in revolving home equity lines of credit, a per capita amount three times larger than the U.S. at its peak.
Home equity lines of credit, known in the industry as HELOCs, have increased 170 per cent in the past decade, twice as fast as new mortgages. The federal government recognized just how risky HELOCs had become last April, when it announced it would no longer allow the Canada Mortgage and Housing Corporation to insure them.
Such home equity withdrawals were a large factor in fuelling the economic recovery. In 2007, Rabidoux says, home equity withdrawals in B.C. alone reached 4.5 per cent of the province’s GDP. “This is the real story of the Canadian economic miracle,” he says. “There’s nothing else that did such a fine job of pulling the country out of a recession than inviting people to take three per cent worth of GDP out of their homes.”
Of course, so long as home prices keep rising as fast as they have—averaging five per cent a quarter through 2011—the risk of all this debt seems minimal. It’s when the prices start to slide, as they have recently, that household debt becomes a problem.
Madani thinks the Canadian housing market has already hit a wall. “Overconfidence is what’s driving the market. It’s been fuelled by cheap credit. That just can’t keep going on forever,” he says. “I think it’s going to end badly.”
It’s hard to blame consumers for taking on huge mortgages when banks are offering five-year rates as low as 2.99 per cent. “Low interest rates are like a drug,” says TD Economics chief economist Craig Alexander. “The low interest rates are encouraging people to buy houses and take on debt. When they’re unhooked from that drug, they’re going to have to be unhooked very gradually because going cold turkey is going to hurt them.”
Banks themselves can only be blamed so much for offering consumers mortgages for next to nothing. The Bank of Canada has held its key interest rate at one per cent since September 2010, and most economists expect the bank to keep it there until well into next year.
It’s a dangerous game. Low interest rates might sound great for anyone looking to take out a loan, but they can have a perverse effect on an economy when they stay low for years.
Low interest rates had as much to do with the U.S. housing bubble as subprime mortgages, even working to make such lending more popular, says Stanford University economist John Taylor. He argues there never would have been a housing boom or a bust at all if the U.S. Federal Reserve and its chairman, Alan Greenspan, hadn’t slashed interest rates in the wake of the 2000 dot-com bust and then held them low until 2005. Not only did low rates encourage Americans to take on larger mortgages, but they pushed banks to make more aggressive loans in search of profits and increased demand for higher-yielding—and therefore riskier—debt.
Given what happened in the U.S., many question why the Bank of Canada is sticking to the same strategy. The bank is well aware that its monetary policy has encouraged Canadians to pile on the debt. Governor Mark Carney has taken to sounding the alarm bells about household finances every chance he gets, telling the CBC in December, “The greatest risk to the domestic economy is household debt.”
The warnings have, predictably, fallen on deaf ears. Who, after all, can resist the lure of free money? The damage was done in 2009, when the Bank of Canada slashed interest rates to 0.25 per cent in April and promised to keep them there until the second quarter of 2010 on the condition that inflation didn’t spiral out of control. Inflation spent much of 2011 at three per cent, above the bank’s target rate of two per cent.
“You could argue that the Bank of Canada, by keeping interest rates so low for a long time, violated to a certain degree its mandate in terms of price stability,” says Thorsten Koeppl, the Queen’s University economist who spent much of 2011 advocating for higher interest rates to curb inflation.
So if Carney is partly to blame for inflating the bubble, could he have done anything differently? Most economists say Carney’s hands have been somewhat tied by the U.S. Federal Reserve, which is expected to keep its interest rate at near zero until 2014. Raising Canada’s rates too high by comparison would inflate the loonie, punishing exports and manufacturing.
But at some point the risks of a housing bubble begin to eclipse those of harming the export economy, and some economists have started calling on Carney to stop just scolding profligate consumers and start setting interest rates based not just on inflation, but on the stability of the financial system, including rising levels of household debt.
“I don’t know how effective his talks will be if we see lower and lower and lower rates,” Koeppl says. “The stakes are much higher, the imbalances are larger, the risks are larger and the moral suasion works less and less. The issue really here is when do we go back to a normal monetary policy regime?”
Getting back to normal interest rates of three to four per cent becomes increasingly difficult the longer rates stay low. Carney may be caught between trying to boost employment by getting business to spend their unused capital and trying to stop consumers from digging themselves into a hole. But he may also have backed himself into a corner if inflation or unemployment rises unexpectedly.
“One of the problems with getting out at the extremes of things like debt and financial crises is that all of your policy options get harder and harder and harder and you can’t fix one problem without another major side effect. And we’re in side effect city,” says University of Manitoba finance professor John McCallum.
TD’s Alexander believes an interest rate hike of two percentage points would push 10 per cent of Canadians into danger territory where they would be spending upwards of 40 per cent of their income on debt payments. “The economy is very sensitive to shocks,” he says. “Every quarter-point increase in the interest rate could have a far greater impact on the economy than a quarter-point increase could have had 10 years ago.”
Mortgage rates are especially vulnerable. Shorter-term variable rates, which are linked to the Bank of Canada’s overnight rate, have become increasingly popular, now making up about 40 per cent of the market. Nearly half a million homeowners swapped their fixed-rate mortgage for variable rates last year. “If you’ve got a very big variable rate mortgage and those rates moved up two to three per cent, I think a lot of families are right at the line in terms of spending and suddenly they’re looking at a very big jump,” McCallum says.
Where analysts say there is more room to move is in Canada’s housing policy, including reining in the growth of mortgages insured by the CMHC. This month, the government-backed insurance corporation warned that it was close to maxing out its $600-billion budget for insurance, driven in large part by banks insuring portfolios of low-risk mortgages, which are repackaged as bonds and sold to investors, primarily in the U.S.
Since they were first introduced in Canada in 2007, such investments, known as covered bonds, have grown from a $2-billion industry to $50 billion, with much of the growth coming in just the last year. The rise in mortgage bonds has also worked to drive mortgage rates down by freeing up banks’ money to make more loans.
The Conservative government has taken some steps to tighten mortgage rules, including lowering amortization periods to 30 years from 40, and raising the minimum down payment for CMHC insurance to five per cent from nothing. CMHC says it will limit the amount of portfolio insurance it offers to banks.
Rabidoux thinks the CMHC should reinstate a cap on the price of mortgages it will insure. Until 2003, the corporation would only insure mortgages up to $300,000 in markets like Vancouver and Toronto. After a decade of relatively flat growth, house prices rose steadily once the CMHC removed the cap. “The point of the CMHC is not really to get people into their dream house off the backs of taxpayers,” says Rabidoux.
But the debate has already morphed into one over whether the Canadian government should be in the mortgage insurance business at all, or whether the CHMC is the product of a bygone era when working stiffs had little opportunity to buy their first home without a huge down payment.
“It may be those times are past and we need to take another look at the whole of housing policy,” says economist David Laidler, a professor emeritus at the University of Western Ontario. “It’s something you need to think about as a major policy issue on the same level of health care.”
Of course, it may be too late for such a discussion. As the U.S. showed in 2005, no matter how loud the alarm bells and how long they’ve been ringing, a housing crash always comes as a surprise to the people paying the mortgage.
Or as John McCallum puts it: “The thing with household debt is it’s not a problem until it’s a problem. But when it becomes a problem, it’s usually a really big problem.”

The Post-2009 Northern & Western European Housing Bubble

From the Bubble Bubble.  Here is an excellent analysis of the Northern and Western European housing markets that have not busted yet, but are well on their way.  The Post-2009 Northern & Western European Housing Bubble Canada will not only have Australia as company in a housing bust.

Could Sweden or Finland be the scene of the next European financial crisis? It is actually far likelier than most people realize. While the world has been laser-focused on the woes of the heavily-indebted PIIGS nations for the last couple of years, property markets in Northern and Western European countries have been bubbling up to dizzying new heights in a repeat performance of the very property bubbles that caused the global financial crisis in the first place. Nordic and Western European countries such as Norway and Switzerland have attracted strong investment inflows due to their perceived economic safe-haven statuses, serving to further inflate these countries’ preexisting property bubbles that had expanded from the mid-1990s until 2008. With their overheated economies and ballooning property bubbles, today’s safe-haven European countries may very well be tomorrow’s Greeces and Italys.


The UK and London Housing Bubble


Chart Source: GlobalPropertyGuide.com
UK housing prices have nearly quadrupled from the mid-1990s to 2008, briefly fell 20% in 2009 and have since rebounded enough to keep property prices firmly in the stratosphere. UK property prices are very overvalued, currently valued at 128% of their historic price-to-income ratio and 140% of their historic price-to-rent ratio. [1] In a pattern similar to France, the UK housing bubble (since 2008) has been primarily driven by price gains in the capital city of London. Prime London housing prices rose a hearty 11.4% in the 12 months to October 2011 [2], up 40% from their post-credit crunch low [3], while most other investment markets fell in a very volatile year.
Like Paris, the city of London has such a strong level of international “brand recognition” and a perceived safe-haven status that wealthy foreign investors are clamoring to buy property in prime areas such as central London. “London property is the ‘Swiss bank account’ of the 21st century,” says Robin Hardy, an analyst at London investment firm Peel Hunt. Rich people in places like Egypt, Syria and southern Europe are rushing to get their money away from the turmoil, and for want of a better alternative, they are plunking it down in the “millionaire’s playground” of central London. [4] The nouveau riche of China, India and other emerging markets are also keen on diversifying their wealth into prime Western property markets such as London, Vancouver and Manhattan, while one hedge-fund manager said that London property was a “laundromat for Russian money.” An entire generation is locked out of the city’s broken and outrageously-bubbled housing markets as the average Londoner would need to triple their salary to £87,000 to buy an average price property. [5] The prime London property bubble is highly vulnerable to the popping of the precariously-teetering China and emerging markets bubbles as well as job losses and decreasing bonuses for City of London financial workers. [6]
UK and London Housing Bubble Articles List


The French Housing Bubble (incl. Paris Housing Bubble)


Chart Source: Bulle-Immobiliere.org
After zooming 120% from 2000 to 2008 and briefly dipping 5.6% in 2009, French property prices have continued their inexorable march higher since late 2009. French property prices are strongly overvalued, currently valued at 135% of their historic price-to-income ratio and 150% of their historic price-to-rent ratio. [1] Though property prices are strongly rising throughout France, the French housing bubble is strongly driven by the Paris region, where prices have jumped 18% in 2010 and approximately 10% in 2011, up more than 40% since 2005. Some posh districts in Paris have risen at a 27% rate in 2011. [2] France’s housing bubble was goosed by a 2009 law that was meant to stimulate the housing market by creating a significant tax incentive for buyers. Mortgage rates that plunged from 6.5% in late 2008 to 3.5% in 2011 were another major catalyst for soaring property prices, causing fixed-rate mortgage lending to increase by 73% by early 2011. [3]
The French property market now has the dubious distinction of being the most overvalued in Europe and the third most overvalued market in the world, behind only Hong Kong and Australia [4], which have property bubbles of their own. The Paris-based OECD warned that “there is a risk that a prolonged period of easy finance could result in a price bubble,” which may endanger French banks [5], while Hervé Boulhol, the OECD’s France economist, warned against treating French real estate as a safe-haven and that the property market’s powerful rise without a corresponding rise in income “may signal a bubble phenomenon, as a bubble is a disconnection with fundamentals.” [6] Moody’s also issued a warning that the French property market was overheating and that the least cautious lenders could face steep losses in a more price severe drop. [7] By early 2012, the French property lending boom showed signs of an abrupt slowdown, with new mortgage loans dropping 25.7% in January 2012 (yoy) and a 49.4% drop in loans between December 2011 and January 2012. [8]
French Housing Bubble Articles List

The German Housing Bubble

While Germany was fortunate and sensible enough to have avoided engaging in the 2000s housing bubble folly with the rest of the world, Germans certainly seem eager to make up for lost time. The European Central Bank’s ultra-low key interest rate, while appropriate for the ailing PIIGS nations, is too low for faster-growing Germany resulting in negative real interest rates and fears of inflation. As is common in countries with negative real interest rates, German investors are pulling money out of low-yielding bank accounts and investments and plowing it into all types of real estate, causing prices to boom for the first time in a very long while. Property prices in Munich and Hamburg rose by more than 10% in 2011 [1] , while obscure fields and forests in northeastern Germany’s Uckermark region have soared by as much as 20 to 30 percent. [2] It is too early to determine if Germany is in the midst of a property bubble, but it is certainly a situation that warrants monitoring, especially if there is an improvement in global economic growth and sentiment.
German Housing Bubble Articles List


The Swiss Housing Bubble


Chart Source: GlobalPropertyGuide.com
Global and EU economic turmoil have heighted Switzerland’s traditional economic safe-haven appeal, particularly due to the fact that Switzerland is not a part of the EU and has its own currency, the Swiss Franc. After suffering from a 1980s property bubble, Swiss property prices rose an average 42% since the year 2000, with prices doubling in some spots, for reasons similar to those of concurrent European housing booms. The median price for a house across Switzerland is now a California circa 2005-esque $850,000, $2.1 million in Zurich and an astronomical $2.55 million in Geneva. [1] Switzerland’s central bank (the Swiss National Bank), in an effort to stem the rapid EU-crisis induced rise in the Swiss Franc, cut interest rates to 0% and instituted a currency ceiling in the summer of 2011, creating alarmingly similar monetary conditions to those that caused Switzerland’s 1980s property bubble. [2]
In response to rising Swiss real estate prices, UBS launched a Swiss real estate bubble index, which hit a 20-year high in February 2012 [3], while the Swiss National Bank Chairman Philipp Hildebrand warned that, “A rise in real-estate prices is among the greatest threats to Switzerland’s economy.” [4] Most worrisome is the warning of Janwillem Acket, chief economist for Julius Baer Group Ltd. (BAER), who claims that Switzerland could experience its own version of the subprime borrowing crisis, saying, “People who shouldn’t be borrowing are now seriously considering entering the housing market.” [5]  
Swiss Housing Bubble Articles List


The Belgian Housing Bubble


Chart Source: GlobalPropertyGuide.com
Belgium, which is the sixth-largest economy in the euro area and has not had a government in almost two years, has seen its property prices roughly double since the year 2000, barely pausing during the financial crisis in 2009. When property prices hit an all-time high in 2011, The Economist magazine included the Belgian housing market in a list of housing markets that were overvalued by 25% or more according to price-to-income and price-to-rent ratios and described the market as “more overvalued than it was in America at the peak of its bubble.” [1]
Belgian Housing Bubble Articles List


The Dutch Housing Bubble


Chart Source: GlobalPropertyGuide.com
While Dutch housing prices have moderately deflated since 2008 after doubling since the late 1990s, they are still firmly in bubble-territory, according to a report by The Economist magazine. The Netherlands’ property market ranks among the most overvalued property markets in the world, overvalued by over 25% according to price-to-income ratio and price-to-rent ratios, common property-market valuation measures. [1]  Like many countries in recent decades, the Netherlands engaged in a mortgage-borrowing binge that sent property prices soaring, saddling Dutch households with a level of household debt that exceeds 240% of disposable income, the highest level in the euro zone by far. [2] 
Dutch Housing Bubble Articles List


The Luxembourg Housing Bubble


Chart Source: GlobalPropertyGuide.com
The tiny country of Luxembourg has not been immune to the European property bubble epidemic as already lofty property prices have risen 11% since 2009 as mortgage rates fell 2.4% in Q2 2009, in line with ECB key rate cuts, from 4.5% in Q4 2008 [1]. By late 2011, year over year rent prices for houses have exploded by nearly 18% and 8.35% for apartments [2], causing people to flee Luxembourg city in pursuit of cheaper housing.[3] Luxembourg’s soaring cost of housing has caused its residents to sink deeply into debt, with the average household’s level of indebtedness up an incredible 172% since the year 2000. [4]
Luxembourg Housing Bubble Articles List


The Austrian Housing Bubble


Chart Source: GlobalPropertyGuide.com
Austria’s housing prices are up a stout 60% since 2005, a rise completely unabated by the global financial crisis. Negative real interest rates and a relatively-low unemployment rate of 4.9% have encouraged Austrians to close low-yielding checking accounts and park their life savings in local property for rental income and capital gains. [1] Austria’s obvious property bubble poses serious risks to the country’s banks, which are already teetering on the brink after losing billions of euros in an Eastern European mortgage-lending scheme that has gone terribly awry since 2008. [2]  
Austrian Housing Bubble Articles List

The Danish Housing Bubble


Chart Source: GlobalPropertyGuide.com
Although Danish housing prices have leveled-off after doubling from the late 1990s to 2008, prices are still thoroughly in nosebleed territory and are among the most overvalued in the entire world. Jes Asmussen, chief economist at Svenska Handelsbanken AB, claims that Denmark’s housing market may still be as much as 25 percent overvalued. [1] Denmark’s overleveraged banking system, with banking assets as a percentage of GDP at 454% versus the U.S.’s 90%, will experience unimaginable pain when the country’s housing bubble deflates in earnest. For all of the worry that Greece’s $462 billion sovereign debt has caused the world, Denmark’s ticking-time-bomb mortgage market alone is worth more than $500 billion, with nearly 70% of new mortgages being of the highly-risky adjustable rate variety (ARMs). [2]
Danish Housing Bubble Articles List


The Swedish Housing Bubble


Chart Source: GlobalPropertyGuide.com
In a pattern similar to other Nordic property markets, Swedish property prices have nearly tripled since the mid-1990s and shrugged off the Great Recession woes to rise to incredible new heights. Swedish property prices are overvalued, currently valued at 120% of their historic price-to-income ratio and 140% of their historic price-to-rent ratio. [1] The most recent phase of Sweden’s housing bubble is fueled by mortgage interest rates that have fallen from 6% in August 2008 to a just above 3%, with adjustable rate mortgages falling to under 2%. [2] Tommy Waidelich, the Social Democrats’ economy spokesman, warned that Sweden may have a housing bubble and that "A drop in house prices would hit growth, employment and state finances” and also saying, "If the reason that the price is high today is only because investors believe that the selling price will be high tomorrow – when ”fundamental” factors do not seem to justify such a price – then a bubble exists.” [3] 
The IMF has also warned of a possible Swedish housing bubble, saying  "There is significant risk of a decline in house prices in coming years, even in a relatively benign economic scenario,” [4] while the OECD warned that Swedish housing prices are overvalued by about 30 percent in relation to income. [5] Robert Shiller, the economist who successfully predicted the popping of the Dot-com and U.S. housing bubbles, warned investors against treating Sweden and Norway’s markets as safe-havens as the Nordic region is caught up in asset bubbles that will end with plunging asset prices. [6] A Danish finance minister has even warned Sweden of the risks of its housing bubble, saying, “Do not make the same mistake as we did in Denmark,” [7] referring to the Danish property bubble that has been deflating since 2008.
Swedish Housing Bubble Articles List


The Norwegian Housing Bubble


Chart Source: GlobalPropertyGuide.com
Norwegian property prices have tripled since the mid-1990s, up nearly 30% since the Great Recession as the oil-rich nation rode the coattails of the commodities bubble and has benefitted from the same “flight to safety” capital flows that have benefitted (and inflated bubbles in) other Nordic countries. Norwegian property prices are highly overvalued, currently valued at 125% of their historic price-to-income ratio and an incredible 170% of their historic price-to-rent ratio. [1] Norway’s Prime Minister Jens Stoltenberg admitted that he was “afraid” that the Norwegian property bubble might burst [2], while renowned U.S. bubble skeptic Robert Shiller said of Norwegian property prices, “This really does look like a bubble.” [3]  and that policy makers “should start worrying now because when the home prices get so high there’s a problem.” The euro area’s crisis has sparked “flight to safety” capital flows into Norway’s highly-desirable investment assets, pushing the Krone currency to undesirable export-harming heights and forcing the country’s central bank to cut interest rates to stem the inflow. Norway’s ballooning housing bubble is a side-effect of the nation’s excessively low interest rates relative to economic growth and inflation rates.
In February 2012, the IMF cut Norway’s growth forecast, saying that the Norwegian housing bubble is the country’s biggest economic risk and threatens everything from banks to economic growth. [4] Norway’s booming housing markets and cheap interest rates are encouraging households to engage in a typical bubble-style debt binge as private debt burdens are estimated to grow to about 204 percent of disposable incomes in 2012. [5] A  major risk to Norway’s economy  (and possible bubble-popping catalyst) that virtually no mainstream commentators have acknowledged is the very real possibility that oil prices might drop and sharply reduce the country’s oil profits and thus economic growth.
Norwegian Housing Bubble Articles List


The Finnish Housing Bubble


Chart Source: GlobalPropertyGuide.com
Finnish property prices soared a dizzying 250% from the mid-1990s to 2008 [1], dipped slightly in the 2009 recession and bolted 20% higher as Finland and other Nordic countries recovered from the recession faster than their European neighbors to the south. The Finnish property bubble is being fueled by a mortgage market in which a jaw-dropping 90% of loans are of the highly dangerous adjustable rate variety, while banks are taking a page straight out of the U.S. housing bubble as they push reverse mortgages on their elderly customers. A Finnish bank advertisement for reverse mortgages even shows a cartoon person taking a vacation paid for with cash withdrawn from an ATM that is attached to their house! [See cartoon] It is as if nobody has learned a thing from the U.S. housing bubble – the saying, “those who don’t learn from history are doomed to repeat it” could not apply to a better scenario than the Finnish housing bubble.
Finnish Housing Bubble Articles List

Conclusion
It is simply mind-boggling that the world is back to blowing massive property bubbles so soon after the U.S. and peripheral European housing bubbles popped and caused such incredible economic carnage. The Western and Northern European housing bubble is proof that we are living in the era of The Bubble Bubble (a bubble of bubbles) as well as an era characterized by the most outrageous arrogance and hubris that humanity has ever experienced. The 2008 global financial crisis should have taught everyone their lesson once and for all, but we are clearly living in a world filled with excruciatingly slow-learners. More punishment is coming our way and will keep coming until we finally learn from our mistakes. Sadly, by the time we learn from our mistakes, it will likely be too late.

Macrobusiness: Canadian bubble goes mainstream

An excellent article from Macrobusiness "Canadian bubble goes mainstream"

Friday’s article, Canadian Bubble Trouble, noted how the mainstream media (MSM) appeared to be turning from cheerleaders of the rapid rise in Canadian house prices to warning of a possible bubble and/or projecting falling housing prices.
Over the past few days, the Canadian MSM appears to be shifting into overdrive, headlined by the dire warnings of the nation’s leading current affairs magazine, Macleans.ca, which has the following front cover for its upcoming March issue:

Talk about alarmist. “You’re about to get burned… Why it’s officially time to panic”.
The upcoming Macleans front cover ups the ante on Canadian Business’ effort on its January 24 to February 20 issue:

In addition to the above magazines, there was an swag of newspaper articles published late last week and over the weekend warning about Canada’s record level of household debt and the risk of falling house prices.
Much of the latest coverage of the Canadian housing market has been driven by the Bank of Canada’s release late last week of a series of papers examining household debt, house prices, and consumption in the economy.
I read these papers over the weekend, and if you read between the lines, they paint a worrying picture of a nation of highly indebted households that are highly exposed to falling house prices, as well as an economy that is too reliant on unsustainable debt-fuelled consumption.
Some key quotes and charts from the Bank of Canada papers are highlighted below.
First, there’s this quote and chart from the paper on Canadian house prices:

After more than 10 years of appreciation in many parts of the country, house prices have reached a historically high level relative to income and, given the increase in household indebtedness, the exposure of households and the financial system to fluctuations in house prices has increased markedly…

Note the huge run-up in prices in Canada’s bubbliest provence, British Columbia, which is home to one of the world’s most expensive housing markets, Vancouver.
And from the household debt paper, the Bank of Canada notes that the strong growth in overal household debt has been driven by both higher mortgage debt as well as personal debt primarily secured against rising home values (called “home equity lines of credit” or HELOCs). Just like the Americans did, Canadians have been using their homes as ATMs:

As shown in Chart 2, the ratio of consumer debt to disposable income was relatively stable until the mid-1990s when it began to move persistently higher. The predominant source of this upward trend has been secured personal lines of credit (PLCs), which grew at a much faster pace than more traditional forms of consumer credit such as credit card debt. Secured PLCs, which are mostly secured by housing assets (i.e., home-equity lines of credit), have risen sharply both in absolute terms and as a share of total consumer credit. In 1995, secured PLCs represented about 11 per cent of consumer credit; by the end of 2011, this share was close to 50 per cent (Chart 10).

The Bank of Canada paper on household borrowing and spending brings the above points together and highlights the key risks now facing the Canadian economy from falling house prices:

The sizable increase in the ratio of household debt to income in Canada over the past decade has coincided with a period of sustained strong growth in house prices. The main driver of the rise in household debt has been home-equity extraction — household borrowing against equity in existing homes through increases in mortgage debt and draws on home equity lines of credit…
…if increases in household debt are used primarily for spending, a fall in house prices that reduces home equity could decrease household borrowing and consumption (i.e., owing to a reduction in the value of the collateral)…
The evidence indicates that a significant share of borrowed funds from home-equity extraction was used to finance consumption and home renovation in Canada from 1999 to 2010. Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in house prices…
Simulation results suggest that a 10 per cent decline in house prices can generate a peak drop in consumption of about 1 per cent…
These findings suggest that household indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to substantial negative economic consequences in the event of a correction in house prices.

The Vancouver Sun, which published an article summarising the Bank of Canada’s findings, also quoted the Canadian Finance Minister, Jim Flaherty, who warned Canadians that the current level of mortgage interest rates – currently at all-time lows – have nowhere to go but up:

“Interest rates are going to go up. They have nowhere to go but up. So people need to ensure that they can afford higher mortgage interest, for example,” he told reporters in Toronto. “It isn’t necessarily for everyone to have most expensive house they could possibly buy, maxing out the 10-year mortgage they can get from a financial institution.”

Finally, the below video extract from the Canadian Broadcasting Corporation provides a nice quick overview of the issues highlighted by the Bank of Canada:

It looks like interesting times ahead for our friends in the north.

Canadian Household Debt at $1.598 Trillion

January household debt numbers are out from the Bank of Canada.
Household debt is at $1.598 trillion
Mortgage debt is at $1.110 trillion
Consumer debt is at $487 billion.

Mortgage debt growth slowed in Jan. to 6.2% year over year.

This is actually the slowest mortgage credit has grown since Feb 2002.

This may make Flaherty and company breath a bit easier as this is a sign that mortgage debt growth is slowing and this is exactly what they want as Canadians have been borrowing way too much.   But whether or not this will continue remains to be seen.  And it makes one wonder if mortgage changes are still on the stable.

Sask. retail sales boom built on credit?; Potash shutdown longer than expected

From News talk 650 "Sask. retail sales boom"

Saskatchewan has a booming economy, and it's being proven at retailers across the province.Doug Elliot, publisher of Sask Trends Monitor, said spending has been way up for most of the year."For the entire 2011 we had sales eight and a half per cent higher than a year ago," he said. "I'm a little concerned though, that some of the people doing this buying can't afford that."He noted that income hasn't gone up by the same amount as spending, and so some of the increase has to be on credit.

Touche Doug,

This goes along with what the Bank of Canada said yesterday in their report about debt financed growth.  Not sustainable.


Potash shutdown longer than expected
From the Star Phoenix

SASKATOON — PotashCorp is extending the shutdown at its Lanigan and Rocanville mines by an additional four weeks. Both mines are now scheduled to resume production by March 31. That means Rocanville will have ceased production for a total of 14 weeks while Lanigan has been shut down since Jan. 8. Despite ceasing production, there are no layoffs at either mine, said PotashCorp spokesperson Bill Johnson. There are about 600 workers at the Lanigan mine and 475 in Rocanville. The $2.8 billion expansion at Rocanville means there is plenty of work to be done even with production shut down.

If not for the expansion at the mines, these guys would be laid off.  Resources will always be volatile.  To think that resources will save our housing bubble from popping is foolish thinking. 

 

Macleans: Canadian Real Estate Crisis: You're About To Get Burned

I'll do a follow up when I read the article.  The housing bubble articles are coming fast and furious.

Bank of Canada, Brace for Debt Shock

From the Financial Post

The Bank of Canada has renewed its warning that debt-laden Canadians could face a “significant shock” if housing prices fall.
With the ratio of household debt to income reaching 153%, fanned by low interest rates, there are concerns that some consumers could soon be at the breaking point.
“Households are a central component of Canada’s economy and, hence, its financial stability. Although Canada has weathered the global turmoil relatively well, the robustness of domestics household finances remains an important determinant of the country’s economic and financial well-being,” the bank said Thursday in a series of special reports.
The Bank of Canada Review focuses on household debt and changes in the value of Canadian’s “single-most important asset” — their homes.
While there has been a steady rise in the ratio of household debt to personal disposable income, house prices have been steadily increasing since 2000, the review says.
“These facts are interrelated, since rising house prices can facilitate the accumulation of debt. Households could, therefore, experience a significant shock if house prices were to reverse,” it said.
“The evidence indicates that a significant share of borrowed funds from home-equity extraction was used to finance consumption and home renovation in Canada from 1999 to 2010. Such indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to a potential decline in house prices.”

No doubt that Canadians have been extracting more equity from their homes over the years.  These graphs are from the Bank of Canada report.  Highly recommend reading the report if one has the time.

And even though house prices have increased by on average $250,000 in 2005 to $339,000 in 2010, home equity actually decreased because of heloc's.

And now Canada is left with a household debt to income ratio of 153%.

And Canada also has a household debt to GDP ratio of 94%. The Americans peaked at 98%, now they are at 89%.

Again, there is a tonne of good stuff in the report.  Click here to read it.

Why property taxes are going way, way up

From the Star Phoenix " Build city with long term view"

The city's infrastructure deficit a couple of years ago was at approximately $930 million, which is deferred maintenance, upgrades and replacements that we as a city know are needed but hadn't done, hoping that all will be OK.
Add in the fact that we have a condemned bridge to replace, and we are looking at a billion-dollar tab that's starting to come due. It's the municipal equivalent of ignoring that grinding noise from the brakes on your car, hoping that it's really nothing. (If that strategy actually worked, my wife would be running for city council).

It is estimated that Saskatoon would need a property tax increase of 33 per cent to close the infrastructure gap

So the city has a billion-dollar infrastructure deficit and on the other hand is piling into debt to "grow" the city in the short term, hoping the city has endless growth in the long term and we never have to worry about debt. This is not sustainable as former mayor Henry Dayday says in an article in the Star Phoenix a few months ago

The purpose of this letter is to answer the concerns that the taxpayers have raised. How do we pay for this spending and how will it impact on future tax increases?

To date, we have a borrowing limit of $400M with $175M already borrowed. We have a projected unfunded liability to the end of 2015 for reserves of$144M. We the have a number of expensive projects that are already started with funds committed such as the $131M police station, the $67M Art Gallery, the $26M traffic bridge and a $200M approved financing plan for a new transit headquarters and the relocation of the city yards without knowing the funding sources. These commitments already appear to exceed the borrowing limit.

A few stats:

• Capital spending in 2011 was projected to be $352 million
• Capital spending in 2005 was $165 million
• City debt in 2003 was $23 million
• City debt by the end of 2011 is near $175 million
• For every $1 of taxes brought in, 5 cents is paid to debt servicing. 

It should be noted that while the debt limit for Saskatoon is $414 million, it was $298 million just 2 years ago.

City expenditures are through the roof and it is of no secret that new lot prices are through the roof, having doubled in about 5 years. Part of the reason lot prices have doubled is that the city can offset a potential increase of taxes because of the increase in spending from current homeowners onto buyers of new homes. This is a big "hidden tax" that the city can use to generate revenue without raise property taxes.  This is one of the reasons why house prices are totally out of whack from incomes.  But the consequences are that because incomes have not increased as so, more private debt is needed to fill in that gap. 

One has to wonder what happens if the "boom" ends and lot sales do not bring in as much revenue.

One of the reasons why all booms end in bust is that if a big part of the economy is growing because of debt financing and at some point it hits the ceiling, it will bust.  If the city of Saskatoon hits the debt ceiling of $400 million in a few years, do they continue to raise the ceiling so that the "momentum" can continue?   Does the city wait until the infrastructure deficit hits $1.2 or $1.3 billion to fix the problem, most likely at a time when the Federal government is firmly entrenched with austerity measures? And if lot sales fall, what does the city do to generate that revenue they have grown accustomed to?  My answer is that property taxes are going to have increase and not just in low single digits in the not too distant future.  I also expect some services to be cut or scaled back.  Closing our eyes and crossing our fingers hoping for endless growth to keep the momentum going while things like infrastructure deficits are put off and private and public debt are piling up is not sustainable.  And because it is not sustainable, the tax situation could be interesting in this city in the next decade.

Canada isn’t as well-positioned as it was in 2008 to take a hit to the economy. Here is why

It is no secret that housing related and Government spending pulled Canada out of recession in 2008-09.

But at what cost?
The Federal Government and households dug deeper into debt. 

Together this is how it looks.

Put together we get this

 

Remember that these stats from 2010.  2011 numbers will probably put us well over 180%.

If one wants to look at Federal and Provincial Debt take a look here You will notice there is a refresh tab.  Click on it, the numbers will come out different than mine, as the debt keeps growing or shrinking depending on the province.  I could not get it to fit properly on the website.

Public Sector Debt Clock

	Federal	Provincial/Territorial	Total	/pers
Canada	$645,089,071,538	$478,292,216,757	$1,123,381,288,295	$32,423
Newfoundland and Labrador	$9,440,486,114	$8,592,502,916	$18,032,989,030	$35,565
Prince Edward Island	$2,711,078,319	$1,760,429,919	$4,471,508,238	$30,708
Nova Scotia	$17,558,973,367	$13,623,161,902	$31,182,135,269	$33,064
New Brunswick	$14,051,976,512	$10,102,665,145	$24,154,641,657	$32,004
Quebec	$149,304,990,073	$164,780,987,760	$314,085,977,833	$39,167
Ontario	$250,130,204,296	$237,143,515,105	$487,273,719,400	$36,270
Manitoba	$23,454,394,509	$14,518,485,796	$37,972,880,305	$30,143
Saskatchewan	$19,826,825,884	$3,606,548,790	$23,433,374,673	$22,005
Alberta	$70,834,476,556	-$12,286,654,890	$58,547,821,665	$15,389
British Columbia	$85,696,507,080	$36,188,672,979	$121,885,180,059	$26,481
Yukon	$642,476,255	-$132,796,518	$509,679,737	$14,770
Northwest Territories	$806,455,240	$217,017,748	$1,023,472,988	$23,629
Nunavut	$630,227,334	$177,680,105	$807,907,440	$23,868

Saskatchewan looks to be better shape relatively speaking, but we should remember that Crown Corporation debt is not included in this and I believe there is a strong case that it should, as Crown Corporation debt is growing and overall debt in Saskatchewan is actually growing.

The last time Canada went into recession, the Feds used the home reno tax credit and the Economic Action Plan to stimulate the economy.  Interest rates were also lowered to all time lows.  What will happen this time, if there is a recession around the corner?  Who knows, but what I do know is that Canada is not as well-positioned as it was in 2008 to take a hit to the economy.