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?
Good essay Mike. My sense is that our decline could be quite regional. The west is doing very well thank you. If oil stays high or goes higher, I don’t think we’ll see any major decline west of Thunder Bay! Central Canada is much more sensitive to the general economy, although the auto sector seems to be picking up steam. The high dollar is a problem for the manufacturers. Combined with the Toronto condo situation, real esate there could be set for a decline. Quecbec with “Plan Nord” is heading in the right direction. The Eastern provinces are not the “have nots” of yesteryears. We should see a small boom there. Relatives over there, tell me that industries are looking for more workers. All in all, I agree with you Mike, as long as rates don’t start climbing quickly, housing should do fairly well.
You forget one fact in your post: the immigrants. I bet they will save our asses. I live in the lower laurentides and you should see the amount of new houses that were built in the past 10 years. Crazy. And you know what? I don’t see any empty houses in montreal, or else where in regions. How can we absorb so many new houses? Immigrants.
There must be a correction. Idiots keep buying monster houses they can’t afford. One day they will learn their lessons. But it won’t be a crash. Specially here in quebec prices were so behind compared to Ontario, USA or else where.
Nice research! I think Canada’s real estate market will be split if we do see a correction. Toronto and Vancouver prices may drop a bit but the rest of Canada should remain pretty flat. But nothing will likely happen until interest rate starts rising anyway.
@Millionaire, good point! Immigrants will definitely be of a great help!
Gotta love living in Quebec, hein? 😉 I’m very happy with my house in the eastern township!
Interesting to see an RE post here.
It’s definitely due for a serious correction.
How is 95% financing not high ratio? Anything under 20% is considered high ratio and most new mortgages are 5% down (which can be zero down with cash back incentives).
Banks are trying to put as many loans as possible at 20% and under so they qualify for CMHC. They know it’s coming so they want as much of liability off their books and on the Canadian government. CMHC takes all these high ratio loans and packages them and sells them as securities (sound familiar?).
-Families have record high debt levels
-Regular folks playing the speculator game
It’s all there if you looks for it.
If you’re interested in more details, I follow these regularly:
greaterfool.ca
theeconomicanalyst.com
vancouvercondo.info
vreaa.wordpress.com
Meanwhile, I’m renting for half the carrying cost price. I have my popcorn ready for a first hand view in Vancouver.
Another reason the market is going down is our aging homeowners are DYING and dead people are horrible negotiators and don’t care about getting top dollar. You would think that they would wait and sit out a down market. But No. They let their probate lawyers and inheritors talk them into selling cheap and lowering the price of the whole neighbourhood.
good research on fundamentals/parameters – however, the predominant factors are regional supply (oversupply exists) vs demand, fraud or misrepresentation factors (none/little evidence), and employment (unemployment rate lowering). CMCH indicates a price correction of 15-20%. this should have moderate effect in Toronto.
in Vancouver, the situation is improving, but not jobs.
in Halifax, the improvement is slight despite projected overbuilding which will keep prices and rental rates low.
however, Canada has a very good social and unemployment and healthcare network so this should buffer from the pains of socio-economic change, moving (whether upgrading or downgrading). The education system is solid and there is less hostility/combativeness in government politics/policy.
Based on these factors, any bubble should have less impact in terms of social fabric, culture if you are in the right geography (or can unplug) before 2013.