wealthcycles.com / By The WealthCycles Staff / November 30, 2012
Do you know what Canada, the U.S., China and Ireland all have in common? If you guessed that they have all experienced, or are currently experiencing, a housing bubble, give yourself a gold star. As all bubbles ultimately do, the Canadian housing bubble is on the path to bursting. The good news, according to recent CIBC (Canadian Imperial Bank of Commerce) reports, is that Canadians are in much better shape than their neighbors to the south—despite the fact that the U.S. household debt as a percent of disposable income barely touched 130% at the peak of the bubble, whereas the Canadian ratio is above 160% and climbing.
According to CIBC economist Benjamin Tal, the thing that makes Canada’s housing bubble different from the catastrophic U.S. real estate bubble that burst in 2006 is borrower profiles.
The problem with using borrower profiles as an indicator is that they continue to look positive as long as the bubble hasn’t yet burst. It is not until the crash occurs that the real profiles emerge. For example, in the case of the U.S. housing crash consumer credit scores remained high up until the crash actually hit, peaking in late 2007, followed by a steep plunge in early 2008. As we all learned after the fact, many of those sub-prime borrowers were in reality far less credit-worthy than their credit scores reflected. Lenders were incented to “cook the books,” so to speak on loan documentation—anything to make the loans and rake in the fees, and in the process feed into the deceptively AAA-rated mortgage-backed securities mill that made a few folks very rich while decimating banks, nations and the future wellbeing of millions of individuals.
The chart below shows the trajectory of the Canadian debt-to-income ratio alongside that of the U.S.