It’s been 4 years now since we were told it was upon us. And we are still waiting…
Since we witnessed a huge housing crash in theUSAback in 2008, Canadians are praying to avoid this mess on their side of the border (as if you could avoid 200 elephants running towards you!). But so far, prayers have been heard by the mortgage lords and the Canadian housing market has been spared from a crash. In fact, besides a few heated markets that ran cold for a few months back in 2008, the housing market inCanadacontinues to grow.
This is what is scaring many financial analysts and gurus
You already know that about me, I am easily annoyed by the media and other fatalists when it comes to announcing a market crash. However recently, I read some finance research and must admit that, for the first time during the past 4 years, I’m concerned about the housing market inCanada. I’m not saying that it will collapse, but I think you should be aware of what I have learned recently (especially if you are thinking about investing in real estate!).
Press Rewind and look back at the US housing market before it collapsed
In order to assess if we are on the edge of a crash or not, we must look at the “winning conditions” that led to theUShousing market bust:
– US consumer debt = 94% of GDP (Canada is at 92% at the moment).
– High loan to value ratio (you could borrow more than 100% of the value of your house at one point).
– Remortgaging considered as a national sport (many Canadians do see their homes like an ATM too).
– Greedy practices from banks which repackaged mortgages into toxic commercial paper.
– A slowing economy leading to job cuts and then, the inability for consumers to pay their crazy mortgages.
Fast Forward Today in the Canadian Housing Market
First, I’m going to start with the bad news just so you understand where my concerns come from:
– Canadians are using their homes like an ATM: consumer spending went from 56% to 63% ofGDP, thanks to home equity!
– Home Equity Lines of Credit are booming: Canadian banks have a $400 billion exposure in this product. This is a 700% increase over 2000.
– Housing price growth does not match the fundamentals: the average price for a house back in 1980 was $50,000 and it is now over $350,000.
– Since 1980, Canadian housing prices are way higher than the US market: TheUS housing market crashed when it reached a growth of 430% compared to 1980.While theUS market price is now at 300%, Canadian housing market continued to grow and is now at 600%.
– More importantly, disposable income has only grown by 375% during that period. This is unsustainable over time.
– Inflation rate grew by 280% during the same period. Technically, housing prices should follow inflation over a long period of time.
– 2000-2011 Canadian housing boom is larger than previous ones: house prices have surged by about 90% during that period while they increased by 50% to 60% during previous boom of 1985-1989 and 1970-1974.
– There are more condo towers being built in Toronto at the moment than New York, Chicago, Miami and Boston combined!
– Demographics are not on our side: with more and more people retiring and therefore downsizing their homes, how can this market be sustainable?
So, do you have enough facts to be scared? Yeah I know, the research I have been reading recently are pretty alarmist. Now that I have your attention, let’s take a lucid look at the situation. There are important differences between the Canadian and US housing market:
– We don’t have much high debt ratio loans (maximum financing allowed is now at 95%).
– Canadian Government has tightened mortgaging rules (higher minimum cash down, mortgage qualification based on 5% + interest rates and maximum amortization down to 30 years).
– The Canadian economy is concentrated in good sectors (This is obviously a temporary advantage but there is definitely a good side to having 78% concentrated in financials, energy and materials sectors as the 3 sectors are booming).
What I really think will happen
While I’m a bit concerned about the housing market in Canada, I don’t think we will see a collapse happening in the upcoming years. I think that a low interest rate environment combined with booming economic sector will sustain employment so households can still pay their mortgages.
However, if you are expecting to buy a condo and make a quick buck on it, I would definitely think twice about it. The money is to be made in the Real Estate won’t be easy anymore. If you are about to buy a house, I would advise to do it… as long as you plan to live in it for several years and don’t expect to make profit out of it!
How Can You Benefit From The Situation?
One thing I hate even more about alarmists than their apocalyptical theories is that they don’t make money from their predictions and they don’t help people how to make money out of them. For example, were any financial gurus leveraged for 500K to short the market in 2008 when they were so sure that it would crash? I mean, if you are confident enough to tell the world that the market is going to collapse, how come you are not making money out of it????
I’m not a financial guru and I’m not telling you that I know what is going to happen. However, with the current economic situation and a housing market on the edge, I would bet on a stable low interest rate environment in Canadafor a few more years. And THIS is good news for all Canadian REIT buyers ;-). (I’ve published the Top Canadian REITs for 2012)
If interest rates stay low, it will be easier for Canadian REITs to manage their debt structures. Since mortgages are the bulk of their debt, a low interest rate environment leads to income distribution sustainability ;-).
What do you think of the housing situation in Canada? Do you think that we are going to experience a situation similar to that in the US?