Canada Real Estate: A Ponzi Scheme About to Burst?

Pinnacle Digest writes: Real estate in Canada has been on a tear. If you have owned your home for 10 or more years, you have done quite well. However, transactions have been declining in key hot spot regions around the country. Most recently, Vancouver's July 2012 market report noted 18% fewer transactions (sales) than in July of 2011. This is very significant and a slowdown is beginning to occur in many real estate hot beds around the country.

In Canada, inflation is running somewhere in the neighborhood of 2-3% and homes, on average, have been increasing in value by 5% annually.  A homeowner easily beats inflation and has his or her taxes and most other costs covered through appreciation (at least until now). Therefore, the homeowner essentially lives for free (on paper) and earns a 5% return on their initial investment.  The banks get paid roughly 4% a year by issuing a mortgage almost out of thin air under fractional reserve and fiat banking.  The government earns property taxes and income taxes. The only person whose been losing for the past 30 years is the guy renting who cannot afford the down payment.

Vin Maru of the Golden Trader explains that the real estate boom will last as long as Canada maintains the same environment that created and continues to sustain this boom. We still have low interest rates, a stable and strong economy and buyers believing that real estate prices will continue to rise. This real estate boom in Canada has gone on much longer than any of us would have thought and the prices in many regions are still trending higher.

The housing boom in the US came after the tech bust, a drop in interest rates and a loosening of lending policies.  The US real estate bust came with the subprime scandal. Who paid for that bust?  Everyone in the world paid for it with the financial meltdown we saw in 2008. Since then, most real estate markets around the world have gone bust.  Few countries around the world haven’t had a decent correction in real estate.  Most have corrected or are in the process of correcting.  Yet certain markets in Canada seem to defy economic gravity.

Is the real-estate ponzi scheme, created by the Federal Government of Canada, going down the same road as America?


Although Canada's lending laws are much stricter and much has been done recently to cool the markets, risk continues to increase. The Canada Mortgage and Housing Corporation, also known as CMHC, insures mortgages banks deem to be higher risk and is similar to Freddie and Fannie down in the United States. High-risk mortgages are insured by the federal government, which means the Canadian taxpayers are on the hook if the housing bubble should ever burst. Sound familiar?


The elephant in the room is interest rates. Mortgage rates in Canada continue to bounce along the bottom of record all time lows. Why is this the case if Mark Carney wants to cool real estate prices? Carney is the governor of the Bank of Canada. Just like in the US, he is encouraging the privatization of benefits and the socialization of costs or losses if they should occur. He is perpetuating this boom so that the Ponzi scheme can continue. By leaving interest rates low it keeps interest payments low on Canada's growing debt and helps the export economy by preventing a stronger Canadian dollar. Does this sound familiar??

This is exactly what the US has been doing for years and something we at Pinnacle discuss often. The reality is that Canadians hold record high levels of household debt and raising interest rates in this fragile global economy is clearly something Carney is not willing to risk. So the boom continues.


As a result of these inflationary real estate policies the percentage of income that goes toward rent or homeownership keeps rising for new entrants to the market.  Many first time home buyers, including young couples and new immigrants, have been priced out of many housing markets within Canada.


Like most bubbles or ponzi schemes, the real estate bubble will continue as long as new entrants/buyers are willing to buy from the people who got in earlier.

Status Quo in Trouble

There is a lot of evidence that the real estate bubble in Canada is already deflating.  It seems like a few pockets of real estate, such as Vancouver and certain areas of Alberta, are already cooling off. These areas became more over inflated than the average real estate market during the commodities boom and influx of money from China.

Maru suggests that in a world where central banks create booms and busts, you are better off finding another ponzi scheme they are creating and get in early.


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