Very interesting article in CBC New/World written by Neil Macdonald.
Although there are some similarities to the US experience, there are some fundamental differences as well.
Certainly Canadian debt level is a concern (I did blog about this earlier in the month), as it should be... the Toronto/Vancouver housing markets are soft and are undergoing a correction that is expected as a result of the Harper governments policies over the last several years to control the Toronto/Vancouver condo market specifically (as quoted by the Right Honourable Finance Minister), as well as decreased demand from Asian buyers.
The other similarities to the US crash as suggested by Neil Macdonald may be more "doom and gloom" than reality. Bad news sells more than good news.
"The US Government through Fannie Mae and Freddie Mac encouraged malinvestment and speculation. It was the Government guaranteeing home loans through these agencies such as Fannie Mae and Freddie Mac that eliminated risk as the lender would have the ability to make loans while the Government guaranteed its potential losses. As such there was no incentive to lend money conservatively (125% mortgages) as doing so would restrict the number of transactions while not minimizing potential losses since these losses were absent due to the Government guarantees. To make matters worse, Republicans and Democrats alike voted several times to increase the FHA loan limit during the housing bubble. This allowed people to take on greater debt and perfectly illustrates that government subsidies do not lower the price but make the underlying assets more costly. By raising the FHA(Federal Housing Administration) loan limits the Bureaucrats in Washington voted to extend the housing bubble, raise prices, and delay the inevitable correction.
While many self-proclaimed conservatives blame the Democrats for the social programs and anti-free market policies it was President Bush in 2002 who stated that a high down payments are a big barrier to first time owners. During “A Home Of Your Own” conference on May 17, 2002 President Bush urged Congress to use taxpayers money to interfere in the market place by lowering down payments for those that cannot afford to buy a home. During that speech President Bush also explained how the guarantees of home loans by the Government Sponsored Enterprises would streamline the underwriting process and basically neglect the risk variable. President Bush made it clear that his and Congress’ vision is to make homeownership a right and not a privilege."
The "delusion" Mr. Shiller and Drummond suggest Canadians are suffering from mirror the US crash.....that "it will make them rich" is not a valid argument. As pointed out is the article, the subprime mortgages to unqualified buyers was a significant reason for the crash....which we don't have and hopefully never will. Not to mention allowing these agencies to bundle and sell packages to Wall Street when they all knew it was going to fail and in fact bet on the investment to fail.
The underlying Canadian economic indicators are nothing like the US....and the delusion Canadians have is to simply own a home and build some equity.
At the end of the day, it was the irresponsible public agencies, investment bankers and banks that created the conditions and allowed the US bubble to grow and ultimately burst in their lap. They were greasing the slide while blowing up the balloons. Canada has nothing similar that would cause a US like crash. To say "The same sort of thing might well happen in Canada" is speculation at best and is just as easy to say the same sort of thing might well NOT happen in Canada.
So after the thunder clouds clear from the overall tone of the article, they predict a 10 - 15% correction in Canada....ya likely...but maybe not. Aside from Toronto/Vancouver, just about every other market in Canada is performing as it should....quite reasonably thank you very much.
That’s my 2 cents. :)