Canada's Housing Bubble

Jn 19, 2010 Jonathan Tonge americacanada

According to the latest release by the Bank of Canada, the outstanding balances of various credit types held by Chartered Banks (only) have expanded by the following amounts during the period of February 2008 - November 2009 (1 year, 9 months):

• personal loans have increased 19%

• balances on credit cards have increased 14%

• 'other' types of loans have expanded by 14%.

• personal lines of credit have grown 39%

In the period of April 2008-October 2009 (1 year , 6 months)

• NHA securtized loans (government insured and securitized mortgages) has increased by 67%.

• total household credit (consumer credit and residential mortgages) grew 14% or by $165 billion.

Reflect on the economy over 2008-9:

• According to the Conference Board of Canada, Canada’s income per capita fell in 2008—the first time this has happened since the 1990–91 recession.

• The income gap between Canada and the U.S.—$6,400 per person in 2008—is double what it was in 1984.

• At $6,400 per person Americans earn more than 20.2% per person than Canadians.

• Canada's economy shrunk 5% from Q3 2008 to Q3 2009.

• Average home prices are up 20% in 2009

Conclusion

The $56 billion increase in outstanding personal lines of credit is the equivalent of a 4% increase in Canadian disposable income over the 21 month period. It has been a massive stimulus on the domestic economy. This credit can not inflate at this rate forever and therefore will be a huge hit on retailers and contractors when the expansion ceases (or possibly even contracts). A modest 2% YOY drop in outstanding personal lines of credit would drop Canadians current disposable income by up to 6%.

But that's just one type of credit. Total household credit expanded by $164.6 billion over the 1.5 year period from April 2008 to October 2009. This credit inflation represents a 13% increase in disposable income over the period. Almost all of this inflation was consumed in residential mortgages and home equity lines of credit. The rest was spent on consumption.

A housing bust would effectively stop this credit expansion and possibly shrink outstanding credit balances. When that happens, it will feel as though disposable income had just dropped by well over 13%. The result on the domestic economy and the circular effect of a credit deflation on house prices is predictable.

Interesting to see what happens when the Home Renovation Tax Credit (HRTC) expires on February 1st 2010. Without argument, the HRTC pulled demand forward encouraging the rise in personal lines of credit.