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  May 11, 2017

Canada's Housing Bubble is Larger than that of the US Before 2008

In most of Canada fewer and fewer people can afford housing because of a massive housing bubble explains white collar criminologist Bill Black
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William K. Black, author of THE BEST WAY TO ROB A BANK IS TO OWN ONE, teaches economics and law at the University of Missouri Kansas City (UMKC). He was the Executive Director of the Institute for Fraud Prevention from 2005-2007. Black was a central figure in exposing Congressional corruption during the Savings and Loan Crisis.


Kim Brown: Welcome to the Real News Network in Baltimore. I'm Kim Brown.

If you live north of the boarder, the real talk of the town, many towns, is the housing crisis. More specifically, the potential housing bubble that many have predicted is going to hit Canada's economy pretty much like a tsunami. Very similar to the housing crisis and the mortgage crisis that impacted the United States economy in such a devastating way in 2007 and 2008. The housing crisis and the market surge, especially in prices and in addition to a very shrinking inventory is not just isolated to the metropolitan hotbeds of both Toronto and Vancouver. In fact, many municipalities and suburbs of these areas are seeing this problem. Today, to discuss this, we're joined with Bill Black. He is an associate professor of both law and economics at the University of Missouri at Kansas City. He's also a white collar criminologist, a former financial regulator, an author of he book titled The Best Way To Rob A Bank Is To Own One. He joins us today from Minnesota. Bill Black, thank you again for being here.

Bill Black: Thank you.

Kim Brown: Let's talk about this housing crisis that is being reported upon and being fretted by by Canadians. Bill Black, I can tell you that I've been hearing rumors and rumblings of a housing crisis and a housing bubble burst north of the boarder for almost over a decade. Housing has been a very hot issue. Toronto, especially, wit prices not seeming to come down, and yet people continue to buy there. What exactly is going on?

Bill Black: The housing bubble, a massive housing bubble, a housing bubble as a percentage of GDP that is considerably greater than the US housing bubble that preceded the financial crisis here in 2007, 2008 as well. Yes, you've been hearing about it because it has been continuous. It began roughly the same time as the US massive housing expansion. It was pretty much at the same rate of expansion up to the crisis, but after the crisis, of course, and then shortly before the crisis, US housing prices began falling actually in late 2006. They did not, in Canada. They increased. There was a little bit of a stall in terms of the height of the great recession but not that much of one and in general acceleration of the growth that has continued to this day. You know, it's one minor correction that was tiny in percentage matters. The fundamental thing that you have to understand is the saying in the trade, which is: "A rolling loan gathers no loss." What that means, to roll a loan is to refinance it.

It's easy to refinance home loans or commercial real estate loans when property prices are accelerating which is to say a bubble can easily create a dynamic in which it feeds on itself but not forever. Bubbles don't last forever. They will blow up. Don't listen to the macro-economists on one. I'm going to quote a macro-economist describing his profession. "We are so loathed to second guess prices that we don't recognize a bubble until it blows up in our faces," so we can't look to those folks. Remember that real estate markets are not national. They're not provincial. They are, at most, by metropolitan area, but of course, everybody knows in terms of real estate that neighborhood is fundamentally important. There's a bunch of ways of looking at it. One way of looking at it is affordability index. How many people can actually afford to buy the homes? That has been collapsing in much of Canada, but in particular, in Toronto area and Vancouver, so fewer and fewer people are able to buy the homes as a percentage of the population.

Who's buying them? Well, in part, millennials. How are they buying them? Because Canadian growth of GDP has been good compared to the rest of the world, but not particularly good in absolute terms. It's been growing through most of this stage of this hyperinflation of the bubble since the global financial crisis, around 2% a year. Housing prices have been rising at particularly again, in these hot areas by much more than that. I mean dramatically more than that. Millennials are only able to buy in many cases because their parents are providing down payments and even financial support with monthly payments in a number of cases. That's one way, and we know it's simply not sustainable because as a percentage, fewer and fewer people are able to afford the housing. Another way is theoretically, and you shouldn't push this theory very far, housing prices should be linked to rental prices and they're not. They have massively diverged in Canada. That divergence is getting much, much greater.

Kim Brown: Bill Black, one moment real quick. I wanted to get back to something that you were saying about who is actually able to capitalize on purchasing homes in Canada with these skyrocketing prices. Some have even speculated that what we're seeing in, as you said, the metropolitan areas like Toronto and Vancouver is something very similar to what we've been seeing happening in New York City, particularly in Manhattan and Brooklyn where there are a lot of foreign investors and foreign buyers. People who don't even live in the country but yet they have this outside money. They're able to come and make these tremendous purchases, therefore taking the homes off of the market, out of the inventory and making things a lot more tighter. I've heard that this is also happening in places like Toronto as well. How does that impact what we're seeing really, as it relates to the housing bubble?

Bill Black: Well, two answers. Probably a lot and second, we don't fully know. Here's the great secret about real estate. We have really crummy data on real estate. These wonderful indexes, some of which I've been quoting are actually very iffy in lots of different ways. In particular, we don't know very much about foreign ownership. Ontario has just increased considerably the funding to try to look at that very question. Vancouver last year and Toronto following Vancouver have adopted, for example, laws that charge a special tax if you're a foreign investor buying these properties. As you noted, we certainly in New York where we do have somewhat better information but still not great, that an enormous number of these million-dollar plus units are simply not occupied. They're not occupied like in 360 days a year. They're not even vacation homes. They are bolt holes, apparently, for people who want a place if things get bad, particularly in the People's Republic of China to be able to flee to.

You know, certainly, you've been able to see for a very long time in Vancouver, simply by watching people on the street and in the restaurants and hotels and such, this substantial infusion of folks from the People's Republic of China. That's probably for the reasons we both talked about and an understatement, because in most cases, they don't actually occupy the units. Probably, their presence in ownership is dramatically larger. Social media supports that as well, but that's not the same as actual data.

Kim Brown: We're certainly going to keep an eye on this, obviously for reasons involving our founding. Our Senior Editor, Paul Jay is from Canada. We know we have a lot of viewers north of the boarder in Canada, so we definitely want you. If you're watching this, if you're in Canada, you have some knowledge about what's happening there, hop in our comments section. We absolutely want to hear from you about what you're observing in terms of this housing bubble, and according to the experts, looming housing crisis that's coming for the great north. We have been joined with Bill Black. He's an associate professor of law and economics at the University of Missouri at Kansas City. Bill Black, as always, a pleasure speaking with you, and thanks for your expertise today.

Bill Black: Thank you.

Kim Brown: Thank you for watching The Real News Network.


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