Adventures in Gloomy Distraction

Seeking Alpha has a two-part piece on the Canadian Housing market. Here is the upshot:

1. Some US housing markets (note that is plural) had a big run-up in prices.
2. US consumers had a lot of debt.
3. There was a significant collapse in house prices.
4. 1 is cause by 2 which all caused 3.
5. 1 and 2 are true in Canada.
Therefore housing collapse in Canada. QED.

For pushback on comment #4, listen to Eugene Fama on Econtalk. Or read Scott Sumner.

I did and read that there was no housing bubble. I read that there was a big, huge recession precipitated by shoddy monetary policy. I’ve wondered, then, if there is such a thing as a bubble. And I’m starting to think there might not be.

If you life in North America it’s easy to overstate similarities between Canada and the US. What else is there, anyway? Europe? China? We’re nothing like them, we must be like each other.

What about Australia?

1. Big housing run-up? Check
2. Debt-fueled? Check
3. Resource-based economy? Check
4. Big recession in 2008?…

Um… ahem… big recession in 2008?

Wasn’t there a big recession in 2008 with a housing collapse and a debt-deflation spiral? Like we got in the US? Like we’re going to get in Canada?

Nope. Here’s Sumner:

Nor can people point to the US housing bubble; a speculative bubble also hit Australian housing. The difference is that their bubble never burst, prices are still higher than in 2006. It may burst someday, but if and when it does it will produce a recession only if the Reserve Bank of Australian lets NGDP growth fall significantly.

Here’s the conclusion of the SA piece:


It is clear that the Canadian housing market has undergone a debt-fueled asset price inflation (i.e.: a bubble) that has greatly outpaced inflation. It is equally clear that Canadian home prices have not yet begun their price reversion to the mean.

On average, I suspect that housing prices will correct by about 25-30% across Canada, with some of the extremely overvalued markets (i.e.: Vancouver) declining more like 40% or more.

If the Canadian housing market crash behaves like the USA one, expect most of the losses to occur in the first two years, and then slow down after that.

Canadian banks will suffer, and may need a bailout. They are over-leveraged and over-exposed to housing market debt. I will not be surprised to see a Canadian banking crisis emerge in the next few years, and government bailouts to go with them.

Investment Action: shorting Canadian banks such as CM, BNS, RY, and TD. Also, shorting some home construction companies or commodity companies may work.

This is a bet that the Canadian central bank will let NGDP expectations plummet like the fed did in the US. Without a monetary contraction housing crashes don’t happen.

And I’m even not saying it’s a BAD bet, actually, I’m just saying that this article’s analysis is completely irrelevant to whether its conclusion is correct.

Is the Bank of Canada more like the Reserve Bank of Australia or the Fed or something in between? That’s the analysis you want to undertake.

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