More Trouble in Canada? – Massive Housing Bubble.

I recently discussed how some troubling economic trends are brewing in Canada. Our northerly neighbor tends to slip under the radar; but any economic developments in Canada, the USA’s largest trading partner, should be given serious attention.

In the previous article, I discussed the falling number of Actual Hours Worked falling in Canada, and how this may signify a decreased Q2 GDP. This is not the only troubling statistic coming out of Canada. Look below, ye mighty, and despair:

housing

This chart indicates a massive housing boom in Canada. Whereas prices in the USA have climbed only moderately and unevenly since 2008, Canada has since rebounded and lofted upwards. But this doesn’t just look like a boom; it looks like a bubble to me.

I’m not an expert on the Canadian housing market. I’m not certain why they are undergoing a housing bubble. Probably for the same reasons housing bubbles exist in the US: cheap money, and “greater-fool” speculation.

The ominous part is this: Canada does not do 30-year fixed rate mortgages. Mortgage loans only go out to 5 years. They roll over every five years. This means that when the bubble pops, many Canadians are going to have to scrounge up the money to refinance. But when the bubble pops, a lot of Canadians are going to lose a lot of money. This is bad situation for a lot of Canadians without significant cash in storage. A lot of Canadians are going to get evicted.

Furthermore, Canadian housing loans are generally full-recourse. This means that if a Canadian homeowner defaults on their loan, the bank can still get after them and garnish their future income. This is in stark contrast to the mostly non-full recourse housing loans in America, in which a homeowner can exit the property, hand the keys over to the bank, and escape the loan.

Bottom line: If the Canadian economy really is stagnating and they have the popping of a housing bubble looming on the horizon, then Canada could be in for an extremely serious recession in the near future.

What does this mean for the United States? It’s difficult to say exactly what it means for us, but as I mentioned, Canada is our major trading partner. It is never good news for a major trading partner to go bust.

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