Recently David Macdonald, (of the Canadian Centre for Policy Alternatives) published Canada’s Housing Bubble: An Accident Waiting to Happen. He examined trends in housing prices in Toronto, Vancouver, Calgary, Edmonton, Montreal and Ottawa between 1980 and 2010. The media recently started the debate about “Bubbles” in Canadian Real Estate. The basic discussion of the paper looks at the previous declines in the U.S. housing market and historic “bubble” trend in Canadian real estate markets (specifically Vancouver and Toronto) and to apply these scenarios to six Canada cities in the current economic climate. Macdonald presents the theory that these six Canadian cities (Vancouver, Toronto, Ottawa, Edmonton, Montreal and Calgary) are all over priced and suggests in his Scenarios, that there will be a dramatic decline in property value over a long period of time (3-10 years) because housing prices remain higher than historic price ranges.
Holes in the Bubble Plan….
As a Vancouver Realtor® I can only comment on my knowledge and experiences from the point of view of the Vancouver Market. I found the comparisons to the United State improper since his study compared the top 8 worst hit cities to some of the strongest Canadian cities. Clearly this is not an “apples to apples” comparison. If the comparisons were made to cities between the worst US cities and Canadian cities such as Windsor and Prince George these comparisons would hold more value. However, Macdonald does concede that Canada does have more safe guards in place such as: more conservative lending criteria (we actually check employment and income); and lenders have access to assets of the borrowers in the case of default (which is not always the case in the USA…); and in cases of default, CMHC insures loans which can not be simply passed off as minor factors. Furthermore, Macdonald indicates, “If several factors aligned against housing prices in Canada, a similar crisis could potentially occur.” In Canada we do have several intelligent organizations closely monitoring these “factors” to ensure that we do not follow the American path. For instance the Bank of Canada is slowly regulating interest rates and the government toughened lending rules on mortgage qualification earlier in April. Moreover, Canada is viewed as a relative “Safe Haven” (for countries such as China) due to the above mentioned lending practices and our resource based economy, allowing our GDP to experience slow growth over the next few years. For a local economic forecast for Vancouver check out Cameron Muir’s BCREA Housing Forecast Update – Third Quarter 2010.
While the market will always see ups and downs which will and should be expected, an extended precipitous drop in prices is not likely to occur, or a “bursting bubble” over the next several years. The Vancouver market is not currently approaching any triggers to burst a bubble such as wide spread job loss or a rapidly rising interest rates. Vancouver’s housing inventory is balanced. Interest rates are at historic lows (they will go up eventually just yesterday short term rates when up a quarter point) but at the moment they are remaining relatively flat (and fixed rate mortgages have recently dropped). We will likely see slow and moderate growth and we are currently experiencing high net migration of wealthy “high net worth” Asian immigrants creating demand that is currently being met with a somewhat balanced supply of housing stock.
In our view, Eastern based public policy analyst should walk around in West Coast Canadian Realtor® shoes before creating hyperbole of West Coast housing prices.