3 thoughts on “A Canadian housing bubble? Evidence from capital inflows

  1. Housing prices in Canada have been defying expectations (including mine!) for so long that there must be something else going on. With wages and the income share of labour suppressed, we’re in a world awash with capital — and that money has to be parked somewhere.

    Following the financial crisis people are of course wary of the speculative nature of stock markets, returns on bonds and short-term paper are low, so people are putting it into cash (up $250 billion since 2007) into real estate (up $270 billion), land (up another $250 billion) as well as cars, and household fixin’s (up $40 billion). These account for pretty much all (and more) of the increase in net wealth of households since 2007 (see Cansim 378-0051). At least these are all mostly tangible and won’t completely disappear into thin air as a result of some financial manipulations or shenanigans.

    Foreign inflows of capital are no doubt playing some part especially in certain markets, but a lot appears to be domestic capital — and this isn’t just a Canadian phenomenon, with other real estate markets also getting elevated again so soon after their recent crashes.

    1. I think you’re right that inflows of outside capital are not having a huge effect on housing directly, i.e. most of the foreign capital coming in is not going into real estate. The argument is that foreign inflows, especially into debt-related assets, are highly correlated with real estate booms. The causality, however, usually does not go directly from capital flows to real estate prices. Both are likely the result of a background cycle of the kind described in the paper where asset values of all sorts start to explode simply because people start to believe that they are worth more and so are willing to leverage them for more. Although this indirect relationship is usually the case, it would be interesting to see how much of a direct relationship there was in the most recent crisis in the US crisis, as so much of the asset boom was based on mortgage-backed securities, including CDS, etc. and there was so much foreign dollar-denominated capital floating around globally due to US external deficits.

      I agree that this is not the situation in Canada at the moment (and may not have been in the US). There is just generally lots of capital around in the economy, whether foreign or domestic, and this is boosting all manner of assets. Another reason more foreign capital might be coming because our real rates, while low, are still likely higher than the others who are practicing aggressive QE. And still lots of domestic capital around because of the explosion of household debt and corporate cash reserves (the high-profit, low-investment situation I’ve been harping on about!). All this is fueling booms in assets across the board including in real estate, even though the housing boom in particular, as you point out, most certainly is almost exclusively coming from domestic capital. Regardless, the vicious cycle seems to be going strong.

      On a side note, I imagine large parts of the foreign capital might be going into corporate bonds, which are being issued in vast quantities. Over $100 billion issued so far this year (see this article in The Globe and Mail) and still going strong. Corporations happy to issue debt as long as there are buyers, but the money, again, isn’t going into investment but financial transactions, largely debt refinancing, some M&A.

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