In response to Canada's Household Debt Reaches Record $42,000 a Person I received an email from Paul Kilby of Canada (city unknown), who thinks it's different in Canada.

After correcting at least 20 typos and spelling errors

Paul writes ...

As a Canadian I take great umbrage at yet another irresponsible bearish article from you.

Reasons:

1)Your type of advice has lost investors a double over the past 15 months

2)You have no understanding of how high ratio mortgages are funded in Canada(hint: Its not the cowboy Fannie, Freddie, package them and sell them as AAA debts etc)

3)Canada's vast natural resources and tiny population largely insulate us from all but the direst long lasting downturn which we are obviously not having worldwide nor are we likely to

4)Our banks are very solidly capitalized and would require a 25% downturn in real estate values to even begin to dent this solid position as well as vast defaults on other debts. That's nationwide. We are not, I repeat not, oversupplied in housing in the vast majority of the country.

5) Barring a worldwide collapse that would make 08-early09 look like child's play what calamity do you have in mind that would knock Canadian RE values for such a loop.

Even you must admit the most likely scenario now is a world muddling through the next 3 to 5 years, hardly the stuff real estate collapses are made of.

Do I think we will have a correction in overheated markets (Van to Calgary. Yes, but nationally this will likely translate into a 10 to 15 % overall decline and likely take 18 months to 2 years to complete.

In case you haven't noticed, Bernanke, Geithner et al will not permit asset prices to collapse worldwide, the US dollar be damned. As an American this must be very upsetting to you but please don't pretend to know anything of Canada s economic position as you clearly don't.

Paul Kilby

Dear Paul...

It is not different in Canada no matter what you think.

However, let's start at the beginning of your rant. For starters, I did not cost anyone in Canada a dime. Most of my readers believe as I do and were not about to plunge into an overheated market no matter what I said.

The rest are fools like yourself who think laws of economics do not apply to Canada because "It's different here". Those people bought regardless of what I said.

Secondly, I am very aware of how the Canadian mortgage system works. Your system is arguably much worse than the US system of passing the trash to Fannie and Freddie.

Canadian banks can and do directly pass every garbage loan to the Canadian Central Bank. In the US, Fannie and Freddie (in spite of their numerous faults), were actually among the more sane players in avoiding subprime slime.

The worst of the trash in the US went to hedge funds, pension plans, foreign investors, etc.

Canada's policy avoided the bank failures we saw in the US, but at the expense of bloating the central bank balance sheet with garbage. That policy will work until it doesn't.

Paul, I have heard it all. I received taunts in 2005 about my housing crash call, in 2006 about my deflation call, in 2007 about my commercial real estate crash call, also in 2007 about my Europe is as bad as the US currency call.

I even received taunts from deflationists telling me that it was irrational to believe in deflation and gold at the same time.

My second favorite taunt came in October of 2007, the very day the market peaked. That day, I received an email from someone telling me "Mish, we are having Turkey for Thanksgiving and you are the turkey"

My favorite set of taunts came during summer of 2008 when crude hit $140. That week I received numerous emails calling me an idiot for saying all time record lows across the entire curve were coming in US treasuries.

Now, I have you telling me it's different in Canada. You sound just like the clowns who thought it was different in Florida, it was different in Las Vegas, it was different in San Diego, and it was different in Portland.

Well I have news for you. It was not different in any of those places and it is not different in Canada either.

That said, I certainly am not always right, especially on timing.

I freely admit I was surprised that Canada was able to keep its housing bubble going. The same applies to Australia where I greatly sympathize with Australian economist Steve Keen who recently lost a high profile bet on home prices down under.

As for "In case you haven't noticed, Bernanke, Geithner et al will not permit asset prices to collapse worldwide", that is one of the most ridiculous statements I have ever heard, because it it ignores hindsight, which should be 20-20.

The S&P crashed. The Nikkei crashed. China crashed and in spite of world record stimulus from numerous central banks, home prices in the US are still falling.

Thus, regardless of what Bernanke wanted, asset prices did crash, and they never fully recovered, especially housing.

Finally, you tell me it's different in Canada because of natural resources. Pray tell, what percentage of the Canadian population works in mining or natural resources sectors?

Another Email From Canada

Here is a second email from Canada, in response to the same subject. "Dan" writes ...

I just wanted to ensure that you know that not all Canadians are as clueless as your current comments would indicate. I will agree that most people here are living in this fantasy land mentality where 'our banks are secure' and 'we are not the US'. You are 100% correct when you predict that this will all come crashing down on us hard.

Our economy is only running on cheap credit and this misguided mentality.

Despite having a right leaning minority government we still have very deep rooted socialist-European-style-nanny-state governments here. We are have high taxes and loads of debt to maintain these legacy entitlements (provincial equalization, endless bailouts to farmers, fisheries and other have-not groups).

We are in line to be the 'next Greece' unless some dramatic steps are taken. My worry is that no political figure will have the guts to make the hard choices.

Dan

Canada Housing Fundamentals

Here are a couple charts from David Rosenberg, one of the world's leading economists.

Canada Home Price to Rent

Canada Home Price to Income

Canadian Home Prices Bubbly

In Canadian Home Prices Bubbly Rosenberg writes...

Take a look at the two charts above, which benchmark resale home prices to income and rents in Canada. Both show home prices in overvalued territory (while resale home prices have slipped from record highs, they are still running at 17% YoY).

Relative to labour income, home prices are about 1.5 standard deviations above norm (data going back to 1980).

The situation is even more dire when we look at resale home prices versus rental prices -- this metric is over 2.5 standard deviations above the average, which is very reminiscent of what we saw in the U.S. in 2004-2006.

Our statistical work implies that given current income and rent, we could see a price correction of around 15-35% if these ratios were to mean revert, which would certainly be a U.S.-style correction.

Rosenberg is far too generous. Home prices to rental prices was one of the key factors that signaled a major crash in the US. Moreover, when crashes occur, they tend to overshoot, not just revert to the mean.

A Canadian housing crash is a given. Timing it is the only issue. Furthermore, the bigger the bubble the bigger the crash. Only fools believe "It's different in Canada".

The pool of greater fools always exhausts itself. Timing it is the only problem. One timing indicator that frequently marks the top is taunts from the true believers who think "It's different this time."

It never is.