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Wednesday, June 14, 2006 12:25 AM

Bubble Trouble in Canada and Spain

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The Globe Investor is reporting Bubble trouble in western real estate.

The housing market in Western Canada is showing dangerous signs of "bubble-like activity," with double-digit increases in prices that could cause an "ugly end to this housing cycle," a report warns.

Prices for existing homes in Calgary have jumped close to 30 per cent so far this year, Douglas Porter, deputy chief economist with Bank of Montreal, observes in a report released late yesterday. The average home price in Vancouver is now in the neighbourhood of $500,000.

Industry experts in the West yesterday were quick to pour cold water on any talk of a bubble there. They argued that rising home prices are clearly being supported by the fundamentals of the local market, which include a massive influx of workers and huge employment growth.

"If you are looking for a bubble, don't point to Alberta," said Richard Corriveau, regional economist for the Prairies with Canada Mortgage and Housing Corp.

Last year, 59,000 people moved to the province and this year employment growth is at 3.4 per cent, compared with the national average of 1.9 per cent.

Growth in the market is based on "hard market fundamentals" that are unlikely to shift and cause a drop in prices, he said. The much larger concern is the growing problem with finding affordable housing.

Elton Ash, executive vice-president with Re/Max Western Canada, called the bubble debate "old hat." Only a jump in interest rates or a major slowdown in the energy and resource sector would cause a bust in western markets, he said. "That is just not going to happen."
It Can't Happen Here

I remain amazed at the number of people that think "It Can't Happen Here". They said the same thing in Florida, in Las Vegas, in Boston, and in San Diego. Now some realtor from Re/Max with a vested interest in the outcome says "That is just not going to happen." In other words "It's Different Here".

I have news for Elton Ash and forgive me for being blunt: It is because of clowns like Elton Ash who promote such ideas that bubble mentality takes hold in the first place. The simple fact of the matter is that unless wages are rising in proportion to property values, there will be a bust. A jump in interest rates is not going to happen? Really? A slowdown in energy "Can't Happen"? Really? Prices paid are irrelevant? Really?

Elton Ash...
Please take a good hard look at Florida.
They said the same thing there.
30% annual price gains are not sustainable and I confidently predict that 100% of that 30% will be given back, and probably much much more.

Toronto Anecdotes

Kestral on the Motley Fool writes:
Here in Toronto (biggest city in Canada with about 6 million people) per capita household income is ~$62,000. $350,000 if you are lucky will buy you a very average home with a lot the size of a postage stamp.

Take any suburb of Toronto or even any area within a 2 hour drive of Toronto and they have fully participated in the real estate bubble. $350,000 won't buy you an 1800 sq ft 4 bedroom on a puny lot in Markham (about an 45-60 minutes north of Toronto) where I grew up. $120,000 and a paper bag in this real estate market is worth the paper bag.

If I moved away from Toronto, where would I go? Vancouver real estate is even more expensive than Toronto. Montreal I would have to speak French. So where? Nova Scotia? Manitoba?
Here is a two bedroom two bathroom house in Toronto listed for $419,000.

Rosethorn School Area, Quiet Street. Beautiful Lot With Perennial Garden, Renovated Kitchen, 2 Pce Ensuite In Master, Hardwood Floors (Some Broadloom) Main Floor Family Room Off Kitchen.

I am not familiar with the Toronto but the location is 78 Hillcroft Dr Toronto, ON M9B4X7.

In what sense of the imagination is that house worth over $400K? One listing does not a city make but some listings I looked at in Toronto and Vancouver are as silly as prices in California or Florida.

Let's move on to Spain

Admittedly I know less about Spain than Canada. Far less. But I want to share an email I received a few weeks ago. Following is an email from Felix. For those that may not be aware, the European practice is to use a decimal point "." where we would use a comma ",".
Dear Michael,
Congratulations for your page and sorry for my English, it is not as good as I would like.

Hello from Spain, just would like to tell you about the Spanish property bubble but would be great if you can make a little article in your page, our bubble is bigger than yours :)

- We're building about 800.000 homes a year, that's more than the sum of Germany, France and UK, all of these countries have more population than Spain. Our economy is now based in residential construction and tourism, in my opinion it will collapse but at least we're in the Euro zone.

- This will surprise you (I think any American would be surprised), this is the country where 'young' people go away from the parent's home at a later age. 51% of people between 18 and 35 still live with their parents, young people is much more prepared (idioms, technically, ...) than their parents but their salaries are much lower. Only 2% of youngsters between 18 and 24 buy a home, 42% between 25 and 29, and 59% between 30 and 34 years. This is a country where more than 90% buy
houses, less than 10% rent.

- Housing prices grew 89% between 2001 and 2004 while salaries only grew 14%. Housing prices grew 150% between 1998 and 2005.

- Families invest 40% of the rent to get a house but more than 50% in the younger families with mortgages of 30 and 40 years, almost all (98%) at variable rates, most of them signed with the lowest rates in history. People is paying around 300.000 EURO for small flats that in your country would be for poor people, you can't get a decent rent near a city for less than 700 EURO a month, our salaries are very far from the American ones and also very far from the ones of our neighbor countries
like France or Germany where housing is cheaper.

- Families debt is by far the biggest in Spanish history, around 70% of GDP. Credit is growing around 8% in Europe but 25% in Spain. Our banks are getting credit from other countries namely Germany and we're wasting the money.

- This is a real problem and people are getting really tired. Last week there were protests in 60 cities (most of them small, but the big cities, Madrid and Barcelona got a nice party), more protests today, and more next week. There are about 3 million empty houses in a country with 14 million houses, speculation is rampant.

Some images from last week protests

Some videos from last week in Madrid

From the news I've heard, you can expect harder pics and videos this week, but don't get the wrong opinion, most people think Spanish economy is great and are very happy, they just don't know what's coming in the next few years.

- Corruption is as rampant as speculation, in this country you can only build if the land is urban land, local government decides what is urban land so a piece of countryside can multiply 100 times its value with a single pen stroke from the local politician, yes this is amazing.

- 9% of people from Barcelona (the second biggest city in the country, the city were I live) changed its residence in 2005.

- The govern laughs at us, they give you some nice shoes so you can walk and find a great home. I'm not joking, our politicians are: http://www.kelifinder.com/

- The European parliament is studying 24 cases of urban abuse, 15 are from Spain.

- Magazines like the Economist and institutions like the European central bank and even the Spanish central bank are complaining and warning us but nobody seems to hear.

Well, that's it, thanks for your time, thanks for your page, and if you have any questions do not hesitate to ask.

Best regards,
An international thanks to Felix (and everyone else tuned in)

Felix, thank you very much for your Email. Rest assured your English is far better than my Spanish or my French or for that matter any other language than English. It never ceases to amaze me how much the rest of the world knows and understands the US and how little the US knows and understands about the rest of the world. Many people here could not locate Spain or Australia on a global map and yes I am serious about that.

I am pleased as well as fortunate that I have readers from Spain, Germany, China, the UK, Canada, Australia, Venezuela, Russia, Greece, Turkey, Iran, Iraq, France, Ukraine, Belgium, Cayman Islands, Singapore, Thailand, New Zealand, Italy, and numerous other countries that many the US do not even know exist. I want to take this opportunity to officially welcome all of my global readers.

Felix, I took the liberty to post your Email as you know far better than I do what is happening in Spain. I thank you for taking the time to inform Mish readers everywhere about the global housing bubble. By the way, your English is just fine. My spellchecker did not catch a single misspelling.

Best wishes to you and all my international readers.

Mike Shedlock / Mish

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