Canada's Pending Housing Crash

Bank of Canada warning on Toronto condominium market

It’s the giant unknown that is under a spotlight, yet again, in the wake of the Bank of Canada warning Thursday that Toronto’s highrise condo market is not only overbuilt and overpriced, but a risk to the country’s economic health.
No one really knows how many of the 55,342 condos now under construction across the GTA are owned by investors — or what they will do if Canada is hit by economic shock waves from other parts of the world that could send house prices tumbling and, with them, consumer confidence and spending.
The next 30 months will be key, the central bank makes clear in its latest assessment of Canada’s financial system, which singles out the growing inventory of unsold units in Toronto’s condo market and raises concerns that construction has been boosted by investor, rather than demographic, demand.
If that unsold inventory isn’t absorbed as projects come on stream over the next year to 30 months, prices could plunge and spread to the rest of the housing market, the central bank warns. “Such a correction would reduce household net worth, confidence and consumption spending, with negative spillovers to income and employment.”
The central bank’s warning comes a week after the OECD singled out Canada as one of just three countries with overvalued housing markets and as developers continue to put the brakes on new projects: Just nine developments with 2,604 suites launched in Q1 of this year, compared to 24 buildings with 6,141 units a year earlier, according to condo research firm Urbanation.
 My view:

With nearly 100,000 condos under construction or in the pre-construction phase, Toronto, the largest city in Canada, with a population equal to that of Phoenix, looks vulnerable.

What is not discussed is the upturn in Canadian bond yields.  This means one thing - higher mortgage interest rates are coming soon.

Unlike the United States and Europe, Canada has yet to experience a housing crash.

Yet all the elements for such an event are in place.

All that is needed is a trigger event, a catalyst for the calamity. 

Will it be a rise in unemployment rates?

A rise in interest rates?

Or a fall in commodity prices in a nation so export dependant?

My view is the last two events will be the trigger, with a fall in oil prices particularly pricking the bubble.

It is no coincidence that six of Canada's largest banks have just been declared "systemically  important".

While the media has not considered the significance of this little phrase, we are acutely aware of its malignant meaning.

This means the big six banks in Canada have been approved for the now infamous Cyprus style "bail-in" rescue by depositors.

Anyone with more that $100,000 in any of these institutions should be aware that this is the limit of the Canadian Deposit Insurance Corporation's coverage.

If you are retired, and have $500,000 in one of these banks, $400,000 of it is potentially subject to confiscation to recapitalize the bank should it get into trouble over bad loans.

My thoughts are:

Spread your risk.

Keep funds in several institutions or even outside of institutions.

Consider precious metals that are physically owned.

The financial crisis is far from being resolved.  And from the examples we've seen so far, governments are unwilling to stand behind your deposits for very long.

The largest change in the past 100 years is taking place in the monetary system, and there will be some rough patches ahead for those who trust in governments to take care of them.

Note:  This is not my graphic.  I would like to give credit to its producer, however, have been unable to locate the original source.