Friday, 29 June 2012

Are There Similarities Between Spain and Canada?

I read this in today's Toronto Star.

It's about Spain's debt crisis and some things from the article stood out.

Friede, 48, offers the bare storyline of the preceding years: her arrival from Cameroon in 1990, one in a flood of immigrants to Spain at the time. The acquisition of an apartment in 2004, with a 30-year mortgage on which she and her husband paid little more than interest, the loss of her job and her husband’s ultimate skipping out of her life. And now what? {...} 
From Madrid, Fernando Rodriguez de Acuna Martinez contextualizes Spain’s housing bubble. Parts of the storyline are familiar, echoing first the U.S. and later, Ireland. Take an easy credit recipe mixed with a lending war between financial institutions, topped up with real estate developers hoping to capitalize both on internal demand driven by a latent baby boom and external demand for vacation properties on Spain’s Mediterranean coast. {...}
The construction boom fuelled employment. Easy credit fed consumption. And the risk levels were only heightened as the banks strong-armed the country’s valuation companies to artificially inflate real estate values. It went like this: historically the recommended loan-to-value guideline for borrowers was set at 60 per cent. That galloped to 80 per cent. 
“They took all those valuations aside and started to give all the way up to 100 per cent,” de Acuna says. And beyond. Between 2004 and the peak in 2008, valuation companies were over-valuating homes by as much as 20 to 30 per cent. 
Here’s an ugly number. De Acuna’s real estate research firm, which has been crunching sector data since 1980, has tallied Spain’s surplus housing stock: 1.9 million units sit empty. 
If the economy doesn’t worsen — and that’s a big if — there could be recovery here in Barcelona two or three years hence. Look south, however, and note the ghostly apparition of empty buildings dotting the coastal regions through the provinces of Castellon and Valencia and on. “Castellon is so overdeveloped we don’t see the probability of recovery in the next 20 years,” de Acuna says.
A key ingredient missing from the "recipe" are immigrants.  You can't make loans without someone to sign it and this is where immigrants come in.

What I found interesting is that woman profiled in the article is an immigrant to Spain from Cameroon, one among "a flood of immigrants."  And she arrived in 1990.

That's an important year because that's around the time Canada was upping it's immigrant intake quotas as well.  It's also around the time the U.S. housing bubble started to take off.

I've written about immigrants and housing bubbles already and it's not far fetched to believe Canada's banking institutions lobbied the government to increase immigration levels because they wanted a steady and increasing flow of clients to sign loans since the Canadian population wasn't growing fast enough for their quarterly profit reports and indeed threatened to contract in the near future.  This is not good for share holder value.

Other things to note are that Canada's interest rates are at historic lows making credit cheap.  No wonder then that Canadian household debt is bigger than ever causing the Bank of Canada to call it the biggest domestic risk.  Economic growth is crawling at a snails pace while real income remain stagnant.  And let's not forget Canada's housing market is "red hot" which is a euphemism for "over valued" thanks in large part to Asian speculative capital and immigrants buying houses on cheap credit.

I hope Canada is not in a housing bubble but it could be.  The fact that the government has no intentions to decrease immigrant intake quotas - the largest in the world per capita - in a time of low growth and high unemployment may be a nod to the realization that the housing market has become so dependant on the immigration system now that to even turn down the tap just a little may be the catalyst that triggers a housing market crash of Canada's own making.

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