Tuesday, March 20, 2018

Housing: Part 288 - A tale of two bursting bubbles

Housing bubbles may be about to burst in both Canada and Australia.  It appears as though Canada is following the American model and doing it the wrong way while Australia may be doing it the right way.

In Canada, there doesn't seem to have been much of a supply response.  (See here, here, and here.)  The central bank is raising rates and tightening lending regulations.  Here, Bloomberg uses my least favorite word - "Canada’s biggest housing market has been correcting".  Here, they interview Steve Eisman of "The Big Short" fame, who also uses the word.

This is "correct".  It is something to be accepted - even cheered.  Sucking cash out of the economy will achieve this end.  And, now, "Canadians Using Real Estate To Secure More Debt Reaches New Growth Record"  Why are Canadians tapping credit lines?  Presumably because they need cash.  But, if Canadian officials create cash, that will mess up the correction.  And, Canadians using debt to get cash is just one more sign of their recklessness - exactly the reason they need some discipline.

This all looks like it is heading down the road the US took in 2006-2008.

The bubble in Australia might also be bursting.  But, there, it appears to be mostly for the right reasons.


Here are housing starts in New South Wales (Sydney) and Victoria (Melbourne).  Both have increased approvals of new units to highs not seen in decades, if ever.  Sydney is double the level of a few years ago.

And, rent inflation, which had been generally high since 2007 has finally trended back toward the general level of price inflation.

So, it appears that Australia might be popping the bubble by creating supply.  Prices have only just begun to stabilize, so only time will tell.

Australia has implemented some demand side policies, but the central bank isn't raising interest rates, and the demand side policies don't seem that significant to me.

But, I suspect that if both bubbles pop, both will be generally attributed to "corrections" in demand.

PS: I forgot to add this article from "Better Dwelling", a Canadian housing news site, titled, "Canada Didn’t Skip The Great Recession, We Delayed It. Here’s The Chart", which closes with:
Now the Bank of Canada has two options, they can continue to expand the supply or start to shrink it. Continuing the expansion, i.e. keeping rates low, will cause further asset inflation with a minimal contribution to the GDP. If they raise rates, the supply will shrink, likely triggering a recession. People fear the consequences of a recession, but it actually addresses a very useful purpose. It corrects misallocation of capital, whether human or financial. Our ten year experiment of trying to avoid correcting the misallocation, has only made it worse.
The reason capital is "misallocated" is because monopolistic power of existing homeowners allows them to capture economic rents from the productive economy.  This is the case whether Canada enters a recession or not.  Certainly, Canada can reduce the size of that transfer by hamstringing its economy.  That's what the US did.  But, it doesn't actually work in the long run.  Home sellers and home equity borrowers do capture more of the economy's current production by tapping the value of their real estate assets for spending.  This is a form of consumption smoothing, which utilized the market value of those assets.  But, in the end, those market values are a product of high rents.  The transfer of economic rents to real estate owners happens over time as the rent on their properties rises above replacement value.  Recessions do nothing to stop that.  In fact, we can see that the recession in the US made it worse.  After a brief period of chaos, rent inflation has risen again.  And, we can see from the wild swings in Closed Access migration that economic contraction led households to remain in Closed Access cities in order to have access to higher incomes.  The expansion from 2002 to 2006 was allowing Americans to escape those high rents by moving away from the Closed Access cities.

The social and psychological forces that lead to consensus calls for economic contraction and even panic are fascinating.  But, it really is strange when you take a step back from it.  I hope that eventually we will come to a place of understanding where these intuitions are mostly seen as errors in human nature.  Instead of imposing "discipline" on the market by indulging these intuitions, we must discipline the intuitions.


  1. - Real estate prices in the state of Western Australia (Australia is, like the US, a federation) already have fallen A LOT. See this video:


    (MacroBusiness is a VERY good australian website)


    1. Interesting. Thanks.

      PS. Is my description of the Australian market in the post here fair?

  2. @Kevin:
    - Real estate prices in West-Australia are already falling. And now prices on the australian east coast have started to fall as well.
    - You should look at the amount of credit. If the RATE of credit growth starts to fall then that's already enough to cause a recession.
    - The amount of building approvals in Australia are already falling. Keep in mind that a builder also needs credit to build a building/home/office.
    - Australians simply LOVE real estate. One MAJOR reason is that there're 2 real estate related tax deductions.
    - Australian banks were VERY determined to increase aggressively their loan portfolio and were also involved in predatory lending. Very similar to what happened here in the US between say 1995 and 2005.
    - I fear Australia is now in the first stages of a housing collapse. With all the ramifications for the australian population and the australian economy.
    - If you want see another housing bubble then look at .... New Zealand !!


  3. More on Toronto's slump.

    1. Thanks.

      This line toward the end, “But everyone’s been calling for a condo crash in Toronto for 10 years -- it’s hard to predict.”
      pretty much says it all, doesn't it?

  4. @Kevin: Please read my comments (think: videos) in this thread.