Canada's Bacon may be fried!!



Dodging a bullet or bleeding to death?

Canadians believed the worst was behind them, in 2008 the global financial crisis hit Canada but the impact was no where near as damaging as it had been here in the US. The reasons offered for Canada's reprieve included a more fiscally conservative population, less radical spending by government and no desire to chase after cheap and easy wealth through manias such as the sub prime mortgage debacle.

So were Canadians just a lot smarter than their neighbors to the south? Were they simply more responsible and able to refrain from rash exuberance? If you're a Canadian, living in Canada you'd probably like to think so, sadly the truth is becoming painfully obvious.

A Canadian's house is his castle... But the barbarians are at the gate!

Canada's housing market has exploded in the last 10 years, as the following chart indicates Homes values in cities such as Vancouver have increased 142% since 2002, this trend has been repeated in cities throughout British Columbia and Ontario.




When the 2008 Global financial crisis occurred in 2008 home prices across Canada began to dip only to recover in late 2009/early 2010 to go on to reach all new highs in 2011. Had Canada discovered some kind of secret sauce which enabled them to prevent their property bubble to collapse as it had in the US? By 2008 the US Housing Market had already began to soften and a rapid collapse in the US Housing Bubble followed the collapse in October 2008.




Sadly for Canadians the only sauce which has been found is near zero interest rates, following America's lead, Canada has lowered interest rates to near zero since 2008. This has created a flood of cheap money which has flowed into the housing construction sector, re-inflating the housing bubble to new all time highs. Unlike in America where the vast majority of the liquidity created from easy monetary policy flowed into the Stock Market, pushing the Dow Jones back up to within 7% of its all time high, the Canadian Stock Market has stayed over 15% down from it's all time high whereas its house prices have, until very recently, continued their upward march.




So how can we be sure that this is in effect a housing bubble? Well economics 101 teaches us about supply, demand and prices; when supply goes up demand is usually filled and price falls, when there is contraction in supply, demand will rise and so will price. One of the surest ways to measure the real demand in a Housing market is to examine rental rates. Like any other good/service, if there is ample demand among a limited supply, rent rates will increase.




As you can see from the preceding chart, while home prices have sky rocketed since 2002, the increase in rents in Toronto has increased at a modest pace and have flat lined in the last two years. There isn't enough demand for housing to force this rate to rise in conjunction with the home ownership rates which are driving house prices higher.

So is Canada on the verge of a US style housing collapse? We believe that what Canada is approaching is actually closer to an Irish or Spanish style collapse which is going to see a much larger decline in home prices, a larger loss of equity and will generate a much bigger rise in unemployment.



Examining the cause and effect of a collapse in the Canadian Housing Market

In our latest interview PARADIMESHIFT sat down with Anthony Mayfield, author of 'On the Brink: Resource Depletion, Debt Collapse and Super Technology' a Canadian based journalism 2.0 venture which seeks to educate the Canadian and American populous that a major economic leg down is about to take place in Canada. We discussed the background of the housing bubble, the recent softening of the housing market in Vancouver and Toronto and what impact a Canadian recession could have for the United States.




So what impact will an economic implosion in Canada have for the United States? Remember Canada is the US' largest trade partner trading almost $600 Billion annually. What's really important to note is that the US exports over three times the volume of products to Canada than it does to the US' second largest trading partner, China. If the Canadian economy slows down significantly there will no doubt be a reduction in that $300 Billion export market which will in turn hurt the fragile US economy.

How to benefit from this collapse?

Bulls make money, bears make money but pigs get slaughtered! There is always money to be made regardless of the economic conditions. So how can a person benefit from a collapse in the Canadian housing market?

As with any bubble that is about to burst the smart thing to do is liquidate your assets tied to that bubble and reinvest those assets in a newly forming bubble. In the case of the Canadian housing market the most obvious way to get out is to sell any residential property one might hold in Canada. Rents are low right now so selling a home renting is a good idea.

Now if you don't own a home in Canada or even live in Canada can you profit from the Canadian housing collapse? Of course! One way to do this is to short companies who are intrinsically linked to the Canadian housing market, here are a couple of examples:

Brookfield Real Estate Services (BREUF) dropped to the $5 range in 2009 and has rebounded to $12, a collapse would see at least another 50% drop in this stock.

Home Capital Group (HMCBF) is trading 12% off its all time high, it is ripe for a drop as the housing market wobbles.

Another way to short the Canadian Housing Market is to short financial industries that are heavily invested in the housing market:

Royal Bank of Canada is considered to be Canada's largest bank, both by assets and market cap. Residential mortgages form the largest part of the bank's retail loans portfolio, with a 66% weight.

Toronto Dominion Bank is the sixth largest bank in North America on the basis of branches. Residential mortgage form a significant 59% of the bank's retail loans portfolio.

There's a lot of money to be made by studying, extracting and then acting upon the trends. Remember we're in the midst of of a complete change in the Global Economic Paradigm - THE PARADIMESHIFT!

About the Author

Karl Gray

Author & Editor

Karl has been investing in financial markets all over the world for the last 10 years. Forecasting both the commodities bull markets of the naughties and the rise of crypto currencies, Karl has a proven track record in identifying global trends.

2 comments:

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