What lies ahead for Canada's housing market?
Chat with Ben Rabidoux
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Just because this latest up cycle has lasted longer than most of the previous ones, does not mean it will last forever. A down cycle will surely follow but, just like previous down cycles, that won't last forever either. I don't understand why everyone is making such a fuss about what is a normal and inevitable economic cycle. -
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Couple this with a demographic imbalance that we've never seen before, record debt levels, and near record low interest rates and it should be pretty clear that the potential risks to the housing market and broader economy are more significant than before previous downturns.
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Ben,
With overvalued homes in Vancouver, Toronto, Montreal, etc. is there any expectation that housing returns in smaller communities will exceed, expected returns given the glut of retirees slated in the next 10-15 years? Generating something of a ‘transfer of housing wealth mechanism’ from urban centres to less-populated communities? -
Yes I could see that scenario playing out. There is a pretty strong case that can be made that increasing density coupled with constraints to land availability actually exacerbates boom-bust cycles. We may see larger Canadian cities experience a longer downturn than smaller cities where prices simply haven't run up relative to fundamentals in the same way.
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Ben, you've said that cheap credit is behind the soaring house prices, especially in Vancouver and Toronto. Do you think that foreign investors might also be behind this? It seems quite coincidental that a slowdown in Chinese economic growth corresponds with a slowdown in the price run-up.
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What I think is more likely is that many locals, concerned about being "priced out forever" have taken on significant mortgage debt to get into the market. So in a round-about way, foreign investors are no doubt a significant contributor to bubble psychology, though their impact on actual prices is far less clear...
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Well I think "fast" and "slow" are relative terms. Let's say that doubt that the sort of year-over-year declines we saw in some US markets during the financial crisis will likely not be seen in Canada. In some markets in the US you had prices falling over 25% year/year...
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Ben, why are people continuing to invest in condos? In 10 years, when these condos are not new and trendy, and when maintenance fees creep up, isn't a sign that these condos will no longer be worth the same? People talk about location, location, but condos never seem to be a good investment especially in this market whether it being an investment or principal residence.
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As far as why would "investors" be buying them, I would again point to bubble psychology. The only reason you would buy an investment that does not cash flow using conventional financing (as is the case with many new Toronto condos), and tie up a good chunk of capital in the process is because you are banking on sustained capital gains. This is speculation, plain and simple. And I don't expect it to end well.
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Thanks. We have two questions from our Vancouver blogger Kristin who has been blogging about her house-hunting experience. http://tgam.ca/DcuI
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Here's Kristin's first question: Assuming the "bubble bursts" and prices drop, won't all the people who have been waiting in the wings then swarm in to buy, thus driving the prices back up again? Should we expect a drop, then a new spike, and then another drop to an eventual bottom? How long do we wait?
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WRT that condo question, I should also point out that I recently wrote a piece for the Globe detailing why I'm concerned about this market: www.theglobeandmail.com
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People waiting to buy need to weigh out the financial benefits of renting and saving the difference (which is quite significant in Canada's larger cities) against the intangible lifestyle benefits of ownership, which can be a major consideration for some....particularly young families..
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I don't think that there will be a rush to buy if prices begin to decline significantly. Buyers tend to be spooked by falling asset prices. The major difference in the short-lived housing correction of 2008-2009 is that interest rates were cratered while massive liquidity measures were undertaken to keep credit flowing. This very likely won't be the case again...
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I know the Globe has gotten insight from some very knowledgeable mortgage professionals on this topic. I can give my personal perspective but would recommend you also read insights from guys like Rob McLister, David Larock, Greg Williamson, and the other great mortgage pros out there. I personally believe that rates will stay low for several years, both the fixed and variable. Nevertheless, I think the "insurance premium" to lock in for 10 years right now is ridiculously low and I would give it a lot of thought if I was a new buyer.
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The bottom line is that a supply/demand imbalance is the first sign of market trouble. I believe we're already seeing that in the condo segment where resale prices are essentially flat year/year and new prices are declining. The market as a whole is very much tipped towards sellers at present, with listings very low and sales very strong. I would expect at least one or two more quarters of strong price gains in the detached segment...
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I closely monitor sales, inventory, and most importantly, credit trends. The supply/demand balance can be skewed by a rise in listings or a decline in demand, which can be caused by changing psychology, worsening economic conditions, or credit tightening which can cut off demand. On that last front, I'm watching the trends towards mortgage credit tightening VERY closely.
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Well I think the macro factors that will weigh on housing in larger cities will also be at play in smaller centres, so I want to be clear that I don't think these cities are off the hook. I think a lot of these cities are priced "relative" to larger cities. I've looked at data for many smaller cities in Ontario, for example, and when the last bubble of the late 80s burst, house prices were affected in these cities even though it was primarily a Toronto bubble.
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Yes it's possible. I think being discerning and looking for screaming deals where the cap rates are well above what you could get on diversified, liquid, high quality REITs is a must. At present I don't believe many investors are being compensated adequately for the risk they are taking on
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That question is a bit too general to give meaningful advice. I'd say if you are living in Vancouver or Toronto and would have to stretch your budget extremely thin and forgo saving for other life necessities, wait and rent. That said, I recognize that the stability aspect of ownership can be very important for young families...
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I guess I'd say to make sure whatever you do you are doing it because you have crunched the numbers and found it to be affordable, have a good sized down payment saved, and it ultimately makes the most sense for your family. The flip side of that is don't do it because you feel pressured because "renting is throwing money away" or any of the other nonsense memes that pass for wisdom today.
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This question gets into more technical aspects of what sets interest rates. Suffice to say that if inflation expectations continue to fall, there are major implications for wage growth and the growth in assets. I won't chase this one too far, but I have addressed it on my website. Here's one article:
theeconomicanalyst.com -
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Well I want to thank the Globe again for having me on to do this discussion. I think it is a very timely and important topic.
I would again urge readers, particularly potential first-time buyers, to think rationally about this topic. Don’t be swayed by conventional “wisdom” (house prices only go up…..renting is throwing money away….buy now or be priced out forever…) or pressure from well-meaning friends and family. Take the time to get educated on this topic, but also recognize the potential biases on both sides of the argument. Crunch the numbers for yourself, taking into account both the financial and the lifestyle implications. There is no “one-size fits all” approach.
All that said, it ought to be clear that house prices will not outpace income growth by 2-4X indefinitely, as they have in most Canadian cities in the past decade. Fundamentals in most cities are very stretched relative to historic norms, and despite what some would have you believe, it probably isn’t different this time. Coupled with the fact that the Canadian economy and labour market is VERY reliant on the direct and indirect benefits of this current housing boom, the reality is that the chance of a substantial housing correction is far from negligible. Now is the time to be particularly prudent. -
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Check out Ben's columns on our Home Buying site for more information. http://www.theglobeandmail.com/globe-investor/personal-finance/mortgages/home-buying/
