Debunking the Bubble

Bubble 1

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….

bubble burst 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.image

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.

10 thoughts on “Debunking the Bubble

  1. since you make money off the sales of real estate , this makes you
    someone who is not one bit biased…….right??!
    Vancouver will be one of the last cities to have its bubble burst but its only a matter of months before it happens.
    This is going to be a huge financial disaster for anyone who bought in the last 2 years..and anyone buying in the next 2.

    From a Vancouverite…..who works in one of the big 4 banks ( and trust me banks such as BMO and RBC are TERRIFIED of the coming bubble. Plans are already being drawn to foreclose any properties with large equity drops rather than provide more $$

    1. While I do make my living from helping people buy and sell real estate let’s be realistic I am not going to affect my bottom line by writing a blog. I am simply sharing the facts as I see them. So draw whatever conclusion you would like. I find your opinion interesting and appreciate your point of view as I find it always helps to have more information than less. In fact, I am glad to hear that banks are considering all option because I would rather know that the banks are evaluating economic forecasts than sticking their head in the sand like some banks in the United States did. Foreclosing on a person is not just a simple matter of the bank choosing to do so. (It is a long process and for people that would like to know a bit more about it you can read my recent artile Are Foreclosures a good deal for a first time home buyers? It talks about the risks of buying a forcloser and our Canadian legal system which is differnt from the one used in the United States.)

      PB, we do need a bit of context to your statement regarding how many foreclosure happen in Canada. In Canada the number of mortgages in arrears in Canada as of June 2010 was .35% that is less than half a %. In the United States according to a report from Bloomberg “4.6% of U.S. mortgages were in foreclosure in the first three months of 2010.” So, as I stated previously Canada does have much more conservative lending criteria. Markets do go up and down they can not always continue up. So if you are feeling that you are over extended or you feel that you will be in a place where you can’t afford your home talk to professionals and get advice don’t just listen to what the media has to say do your own research.

  2. What housing-bullish Canadians don’t seem to understand is that over-leveraging in the US caused the housing crash which then caused high unemployment, the economic crash, ect.

    Canada won’t experience a economic catastrophe like the States because CMHC is a built-in bank bail-out. However, I fully expect a massive housing correction between 10%-40% in those named cities. Canadians are quite over-leveraged with home loans, mortgages and personal debt. In addition to this, the price run-up in those named Canadian cities has been much worse then many, many US cities. (see Phoenix for example.) Or compare the boom price increases of Seattle or Portland to Vancouver.

    That said – I really hope I’m wrong; if it happens it’ll mean all sorts of pain for lots of families.

  3. “In Canada the number of mortgages in arrears in Canada as of June 2010 was .35%…”

    Correct me if I’m wrong, but it looks like it was .42% in June 2010, and seems on the high end for having historically low interest rates.

    B.C’s foreclosure rate is also climbing upward with these low rates. As rates rise, it can only get worse I fear.
    The American economy has been knocked to it’s knees, and that is having a drag down effect on us.
    Our CMHC has done us a great disservice by making it too easy for people who shouldn’t be able to qualify for a mortgage because they don’t save money for a down payment, and it’ll be us taxpayers who get left holding the bag.

    But hey, there’s never a better time to buy!! :P

    1. Thank you for the correction you are right it is .42% (I somehow managed to review the Quebec number… sorry I wrote the response at 1:30am). At any rate, as I said that is less than half a percent. CMCH did change their guide lines April 19th and I did just write another blog on the topic Learn about the new mortgage rules in Canada as a First Time Home Buyer or Investor. I like your point and this is something to keep in mind, that this argument is also a matter of perspective. If home prices do decline that is not a good scenario for people looking to sell. It is a good thing for people looking to enter the market and may provide the long illusive affordability that has been long sought after in the Vancouver market.

  4. I just recently started renting a downtown condo that was vacant for the past 3 months, on the market since Feb and has had zero offers. In my opinion, there’s a glut of condos out there and if inventory ain’t moving there’s only one thing wrong: the price.

    I would say this condo is worth $330K, and with a standard 25% down, 5 year term/25 year amortization it would cost me somewhere around $400 more per month to own it than what I am paying in rent. But I’m building equity, right? Only if the market is going up. And I’m not out of pocket $80K for a down payment neither.

    Interestingly enough, I know of someone who bought a unit in this building back in Jan/Feb for $360K. So if my numbers are correct, he has already lost $30K on this illiquid “investment”. Even though this person makes $200K+ per year, it sucks losing money. It’s gonna suck even more if we experience a 30%-40% correction.

    Don’t say it can’t happen: we had a rapid and vicious dip in late 2008 only to have the market recover in dramatic fashion due to government intervention. Real estate owners won’t be so lucky the next time around.

    1. Thanks for your comment Oh Yah. We do need to be careful with some of your assumptions. You are referring to a property that did not sell but there are many factors that are involved in a buyer’s decision than price. True, price point is a big factor in the decision making process but there are other factors such as noise, how bright the unit is, layout, it could have been a building that had problems in the past giving it a bad reputation, or there may have been a pending assessment looming which could impede a sale. So, it is hard to make a blanket assumption just on price.

      As far as inventory on the market it has been fairly balanced market you also need to keep in mind all of the Macro factors on the market. The looming HST, threat of increasing interest rates acted as a pull factor to bring “on the fence buyers” into our spring market making things slower for our summer market. As well, we have seasonal factors in the market. Spring and fall are two busier times of year and summer and winter are the slower times of year. So I would expect more action this fall than we saw over the summer.
      When talking about an investment in real estate (which is everyone buying real estate) I would suggest holding the property for at least 5 years to make a profit in real estate because there are closing costs on both the purchase side and selling side of the transaction that add to the cost of the transaction beyond just the price of the reale state.

      When you pay rent you will never see that money again. I did write a blog post called The Cost of Renting which takes a look at the numbers. When you own the property you are paying down a dept that is building equity whether the market goes up or down. You could be correct in some cases where you sell for less that you bought. In the short run you could taking a loss. (In some markets there is not a lot of growth in value and you could own a property for many years without an increase or even a decrease in value and still sell with money in your pocket because you have build equity ranther than give your money to a landlord.) Keep in mind it is not a loss until you sell… so technically the buyer in your scenario has not lost $30,000 dollars because they have not sold yet. The property does not have to only go up to make money. Again, in your scenario if they sell five years from now for $360,000 (while they would not have made money on the sale of the real estate) they will still be ahead because they will have built equity in their place instead of losing it to a landlord.

      You do need to keep in mind what your time horizon is and if you plan on only owning the property for short period it may not be your best investment because as you stated it is an illiquid investment. Please keep in mind any investment has risk. As I have stated before, there are always ups and down to any market in any field of investment and they should be expected. Any time you want to make a move you should talk to qualified professionals to discuss the pros and cons of any transaction including large amounts of money.

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