Marc Faber Mentions Canada Housing Bubble

LvMIC (considering I blog here predominantly, I figure it's important to cover the looming housing bubble in Canada):

In another interview filled with dire predictions of money printing and inept central banking, the always great Marc Faber makes a passing mention of housing bubble in Canada- see around the 4:00 mark.


Faber:

Previous to that I was in Canada.  In Canada, in the cities, you have boom conditions and real estate prices are very high, four or five times as in Arizona.  In Arizona you can buy a beautiful house for $150,000.

In a recent Bloomberg article, Andrew Mayeda mentioned the similarities between the U.S. housing market during the heyday of the boom years and Canada’s market today (my emphasis added):

Canadian lenders are loosening standards, offering mortgages similar to U.S. subprime loans that pose an “emerging risk” to financial institutions, according to the country’s banking regulator.
Banks and other lenders are becoming “increasingly liberal” with mortgages and home-equity credit lines that don’t require individuals to prove their income, according to 152 pages of documents obtained by Bloomberg News under freedom of information law from the Office of the Superintendent of Financial Institutions. The mortgages, typically granted to the self-employed and recent immigrants, “have some similarities to non-prime loans in the U.S. retail lending market,” the documents show.

When Bank of Canada head Mark Carney and his board of central planners flooded the market with liquidity in 2008, the easy credit appears to have financed a speculative bubble in housing.  Since November 2007, the variable mortgage rate in Canada has dropped from about 6.25% to a low of 2.25% in May of 2009 and has increased slightly to 3% as of January of 2012.  In the same time period, the 5 year fixed rate has dropped from 6% to 3.79%.  At the same time, M3 money supply in Canada has jumped from $1,110,823,000,000 in 2007 to $1,448,852,000,000 in 2011- an increase of about 30%.

As Austrian economist Joseph Salerno documents, this correlation bears a resemblance to the conditions of the housing market in the U.S. (my emphasis added):

From the beginning of 2001 to the end of 2005, the Fed’s MZM monetary aggregate increased by about $1billon per week and the M2 aggregate by about $750 million per week. During the same period the monetary base, which is completely controlled by the Fed, increased by about $200 billion, a cumulative increase of 33.3 percent.

The Fed Funds rate was driven down below 2 percent and held there for almost three years, pegged at 1 percent for a year. Rates on 30-year conventional mortgages fell sharply from over 7 percent in 2002 to a low of 5.25% in 2003 and, aside from brief upticks in 2003 and again in 2004, fluctuated between 5.5 percent and 6.0 percent until late 2005. Perhaps, more significantly, 1-year ARM rates plummeted from a high of 7.17 percent in 2000 to a low of 3.74 percent in 2003, rising to 4.1 percent in 2004 and to slightly over 5 percent in 2005. In addition, credit standards were loosened and unconventional mortgages, including interest-only, negative equity, and no-down-payment mortgages, proliferated.

As I have said before, the housing market in Canada appears to be in a bubble.  Unlike, the blindness that pervaded the housing bubble in the U.S., there is a lot more awareness of the looming downturn this time around.  Even Mark Carney has acknowledged that the housing market may be “overvalued.”  Unfortunately for him, it’s his own policies that have created the boom in the first place.  Should Carney need to reverse the historically low interest rates to curtail higher inflation expectancies, or should the malinvestment finally reveal itself in the form of capital unknowingly consumed due to an inflation fueled equity mirage, Canada will likely fall back into recession.  As the Austrian school teaches, accurate predictions can’t be made in the sphere of human action but trends can be analyzed and applied to possible future events.  The day of reckoning must come for the Great Northern White as Mises pronounced:

Credit expansion is not a nostrum to make people happy. The boom it engenders must inevitably lead to a debacle and unhappiness.

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Also of note, I had an article at the American Thinker today entitled "The Tobin Tax: Stealing From Not Just The Rich."  It's is a reiteration of an older post of mine.