A recent Bloomberg article provided a view of the deteriorating condition of the Canadian housing market. It’s dire and in my opinion will get worse because the economy is being pushed to the edge by the Covid-19 coronavirus crisis.
Housing crises are slow-motion train wrecks, so don’t expect the pain to be immediately obvious, like in the stock market. While this might seem to make it more manageable, it actually extends the economic pain. If you are unfamiliar with what a housing-led economic implosion looks like, you should brush up on what happened to the US after 2006 and Canada after 1989.
The US housing collapse took years to eventually bottom, resulting in massive economic dislocation, human suffering and a near-collapse of the global financial system. Coming out the other side of the collapse was a long, slow uphill battle for most.
Canada saw the same after its real estate bust in the early 1990s. Years of stagnation and relatively high unemployment.
Of course, in both the US and Canada the real estate bust eventually created massive opportunities for many.
The following key stats from the Bloomberg article illustrate the immediate vulnerability of the Canadian housing market and the overall Canadian economy:
1) Nearly one in three workers have applied for income support.
2) Canadian households are among the world’s most indebted.
3) Real estate has become Canada’s largest sector. Including residential construction, it accounted for 15% of economic output last year; energy accounted for 9%.
4) The City of Vancouver fears it’s heading for insolvency after it surveyed residents and found that 45% of households say they can’t pay their full mortgage next month and a quarter expect to pay less than half of their property tax bills this year.
5) Canadian households owe C$1.76 for every dollar in disposable income. In Vancouver, that spikes to about C$2.40
6) Canadians owe C$2.3 trillion in mortgages, credit card, and other consumer debt, about equal to the country’s GDP, which is an even higher ratio than the U.S. had before its housing bust.
7) If only 2% of the housing stock were to be listed for sale, it would trigger the kind of supply shock behind a 1990 crash, according to Veritas. That’s most likely to come from investors, half of whom weren’t generating enough cash to cover the cost of owning their rental properties, Veritas found in a survey last September.
9) 30% of apartment rent due April 1 went uncollected, according to estimates by CIBC Economics.
10) Nearly a third of Canada’s Airbnb hosts — who jointly had 170,000 active listings in late 2019 — need the income to avoid foreclosure or eviction, Airbnb said in a letter to the Canadian government last month.
11) Nearly 6 million Canadians have applied for income support. Lenders had deferred nearly 600,000 mortgages, about 12% of the mortgages they hold, as of April 9.
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The Covid-19 economic crisis is gripping the world. After 20 years in the asset management business, it looks like we are fighting through unprecedented territory.
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