When prices get bid up way ahead of fundamentals then corrections occur as we have seen in California, Florida, Japan, Dubai, Greece, Ireland, Spain, etal. The problem is not that prices drop but that the debt used to chase the prices up does not decline with the price.
The extreme example is the Netherlands where the percent household debt to income remains at +/- 250% (2012) and yet their housing index has plummeted +/-20% in the last 5 years.
The debt remains to be transformed into equity by the long process of amortization while the debtor continues to face depreciation, repair, and income risk. The alternative is the shorter trip to the foreclosure courts. But in Canada:
Almost all Canadian mortgages are “full recourse” loans, meaning that the borrower remains fully responsible for the mortgage even in the case of foreclosure. If a bank in Canada forecloses on a home with negative equity, it can file a deficiency judgment against the borrower, which allows it to attach the borrower’s other assets and even take legal action to garnish the borrower’s future wages.
As in Canada, mortgages in the Netherlands are also full recourse and as can been seen below, Dutch housing prices have plunged since 2008 and have left average mortgagors with very high debt to household income. In the U.S. mostly non recourse loans occur, and after prices blew out, borrowers who could not pay, quit their positions and negative equity was written off at the expense of the lender. Canadians continue to borrow.
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July 31, 2021
History, Charts & Curated Readings
"History, real solemn history, I cannot be interested in.... I read it a little as a duty; but it tells me nothing that does not either vex or weary me. The quarrels of popes and kings, with wars and pestilences in every page; the men all so good for nothing, and hardly any women at all - it is very tiresome." Jane Austen spoken by Catherine Morland in 'Northanger Abbey'
"Progress, far from consisting in change, depends on retentiveness. When change is absolute there remains no being to improve and no direction is set for possible improvement; and when experience is not retained, as among savages, infancy is perpetual. Those who cannot remember the past are condemned to repeat it." George Santayana Vol. I, Reason in Common Sense