Soft Landing Ahead for Housing Markets in Canada and Australia

Global housing prices rose steadily from 2001 to about 2008 when the bubble eventually burst in the US. The problems in the US were a special case as a growing system of over-leveraged banks fueled by government subsidized guarantees led to a hard landing. During this time, resource driven economies such as Australia and Canada experienced a minor correction. With prices continuing to rally despite global deleveraging, China's major trading partners will bear the brunt of a soft landing. However, China's desperate need for resources will stabilize the imbalance.

The chart above clearly shows Australia, Canada, and Hong Kong being stubborn to the US correction post-08. Hong Kong's prices have risen sharply due to artificial demand as part of China's economic plans. Expect a major correction soon; stabilized afterward as China undergoes more "laissez-faire" economic reform.
** Click here for full interactive chart. Look at Sweden and South Africa! Poised to pop soon. **

Canada's Banks are Well Positioned, But Worries Remain

Emotions are mixed concerning Canada's housing market. Some reports indicate a hard landing, while others expect a steady correction. Whatever the belief, the problem should not be dismissed. The fact of the matter is that Canada has not escaped its housing bubble like the rest, and the time is now. The reasons for the prolonged bubble are pretty clear. 

Canada's banks are regulated differently than the US, and most mortgages are kept on the original bank's balance sheet. The systemic risks of a complex mortgage juggle did not exist in Canada. However, defaults and price corrections did occur; leaving banks with bad debt. Like the US, the Canadian government stepped in with a $75 billion bailout used to purchase bad debt and stored it in its own bad bank - The Canada Housing and Mortgage Corporation, CHMC. Essentially, this government 'bad bank' left the private banks flushed with cash. After the slight correction in its housing market and bailout, the banks continued to strategically invest in properties.

Major Canadian banks continued to invest in properties as the bubble grew beyond the 2008 downturn. Chinese investors aggressively propped up housing prices in Vancouver, and Toronto experienced a construction boom to accommodate for growing demand. 

Canada is experiencing a sharp correction in major cities, but in desolate (and resource rich) areas such as Alberta, prices remain steady. Vancouver's housing market experienced a 61% price jump from 2009 to early 2012. However, from April to July of 2012, prices have dropped 10%. Overall, prices are expected to  cool down modestly. 

Major Canadian banks are well positioned. This is not because of their own doing; these are essentially zombie banks that are under much government control, with excess cash that is poised to reap good returns. The heavy buying during the prolonged post-'08 bubble is leading to a sell-off right at the peak. 

Today, the Bank of Montreal and Scotiabank boosted its quarterly dividends, citing comfortable cash positions and solid returns. Remember, zombie banks in the US did the same earlier this year. Scotiabank posted a 57% jump Q3 earnings with $5.59 billion in total revenues. The bank expects to meet its 2012 earnings growth target of 5-10%. Pay close attention to the C$614 million after-tax gain from the sale of its Scotia Plaza Toronto office building. Much of these properties acquired during the boom are being sold at peak value. Two weeks ago, Scotiabank even predicted a 10% drop in prices across Canada. 

Worries remain about exposure to mortgage risk as the bubble softens. Bank of Montreal has C$237 million in bad loans, up 3% YoY. Fitch Ratings estimated that Canada's six largest banks have $730 billion in mortgage exposure. Household debt remains a big concern; the debt to income ratio is greater than pre-recession levels at 150%. However, the Canadian government is taking necessary steps to protect homeowners/buyers  -- reducing the maximum allowable amortization on insured mortgages and enforcing a leverage limit during refinancing. 

Stable Conditions in Australia Despite China's Slowdown

Mixed emotions in Australia remain as the country posted a 5.6% decline in new home sales in July vs. June. Australia is China's largest trading partner, and is experiencing a slow-down in productivity as China shifts its strategy towards domestic demand by encouraging a growing base of middle class consumers. Australia's housing market is correlated with China's demand, and thereby the country's economic growth. For example, the mining boom out West in Perth led to an increase in demand for housing as an influx of businesses and workers flooded the area. Home builders had to meet the demand, benefiting from the inevitable economics of a housing bubble. Although the export productivity has slowed, the demands from China will not end. Conditions have just stabilized, and Australia will face a soft landing for the good. 

The Australian dollar has advanced throughout China's rapid growth. A lower Aussie will help revive manufacturers who struggled with selling expensive exports. The government worked to boost well balanced economies in its major cities, promoted high employment, continuous years of economic growth, and its relations with China and the SE Asian region remain strong. However, its failure to return to surplus will be a major test of its domestic strength on the fiscal side. 

We must remember that China, its major partners such as Australia, and other resource driven economies like Canada must correct to continue a more sustainable growth path. China will undergo a gradual change, which will hopefully fit into its strategy. Fundamentally, its domestic economy is in desperate need for resources -- industrial in its thriving eastern cities, and agricultural in its poor and ageing west. The latter demand is being fulfilled by land grabs in Africa and Latin America, the former benefits from close ties to countries like Australia. At home, it must boost its GDP per capita and ease its business barriers.