This question seems to keep popping up at my billionaires’ club meetings over scotch and top hats (k fine at my strippers club…. meetings over pints of vodka…. still with top hats though). Is the Canadian housing market in for a crash? After all it skated through the 2008 crisis in pretty damn fine form and has kept chugging away since, while the rest of the world was saying “sup” to the cast of Operation Repo and preparing their respective buttholes for insertion.
So let’s fux with some facts. Canada now has the highest home ownership rate of the US, Australia, and the U.K. at 70%, up from 62% back in 1991, and one of the only countries still up from 2006. Home ownership rate is calculated by taking the total number people who own their house divided by the total number of people who live in a house.
Also telling is this chart showing the massive deviation over the past three years in housing prices between Canada and the US. From 1980 to 2007, housing prices between the two countries had never been more than roughly 35% apart (ie. in their local currency, an average house in one country never cost more than 35% more than in the other country). As of February 2011, the average Canadian house sold for CAD 365.2K, while the average US house sold for USD 203K. For those of you too slow to whip out your abacus and do ze math, that’s roughly an 80% premium, or over 2X the historical high over the past 30+ years.
Note: This one too
Now I’m sure some of you are saying “yea but the US started it with their sub-prime and their NINJA (No Income No Job No Assets) loans and Canada survived because they had old white folks with jowels and conservative credit practices runnin’ things”. I’m not sure how you speak a parentheses, but you managed it you go getter.
You are right to a certain extent, but when things got crazy in 2008, the Canadian government turned to its fiscal bag of tricks and looked for ways to stimulate the housing market too. They resorted to such familiar beasts as reducing the amount of downpayment required to 0 and allowing repayment periods (ISBA: “Amortization periods”) to stretch wellllll beyond the usual 25 year up to 40 years (even with 0 down). They also increased the amount of RRSPs that a person could cash out tax free to put towards a house and allowed “teaser” rates with variable payments in the future (yes the ominous subprime stuff happened here too, though not on nearly as large a scale).
So the bad:
- Things like what the govn’t did have the effect of taking normal demand (ie. a regular person saving a regular amount of money to buy a regular house at regular terms) and short circuiting it forward (ie. “holy shit balls I can buy this McMansion meow?”). But if that demand is rushed forward to fill the gap when times are bad….. it’s no longer there in the future right? Like 3+ years down the road? (It’s now. I’m talking about now.)
- Mortgage rules have been tightening again in an effort to put a bit of a damper on the market (max repayment period is down to 30 years, 5% down payment is the minimum acceptable amount and mortgage lenders need to obtain insurance on anything less than 20% down).
- Interest rates are already at rock bottom and it will be a rude awakening when they rise (estimated late 2011) and people who had attractive variable rate mortgages suddenly need to scrounge up another 5K a year.
- If there are any signs of a decrease in the market from anything above then the industry faces a slippery slope. All the demand that was shifted forward above can hastily shift much farther back if a consumer knows that they can wait a few months and buy houses cheaper right?
The good? Sort of?
- People from all over the globe are looking desperately for something, ANYTHING safe to do with their hard earned Rupees and Yuan. Canadian real estate is one of the huge beneficiaries of this. This is particularly prevalent in Vancouver as wealthy Asian businesspeople hop over with big sacks of cash, say “yes pwrease” to 3 or 4 houses, hire property managers, and peace out back to Asia. To them it is strictly an investment, same as you’d make in corn futures or vintage fetish porn. As world turmoil heats up this flight to safety is unlikely to be reined in.
- Housing increases have been uneven across the country, so there are pockets where the run up has not been as severe (downtown Toronto believe it or not and Ottawa are two places), so there are still some pockets of reasonable prices. Saskatchewan leads the way with the wildest run up in the last few years (39% above historic norms) and seems to be the likeliest place for a significant pricing decrease.
- MOST IMPORTANTLY, this housing run up was based primarily on fundamentals like foreign investment, a drastic increase in commodity prices bringing a lot of demand to Canada, and general strength in the Canadian economy. It was less caused by predatory lending, an abundance of excessively cheap credit, and practices like flipping houses for a living, as in the US. The market overshoots in both ways, but the downside here is significantly less drastic than what the US and the world faced in 2008.
So to tie all this stuff together, do I think the Canadian housing market is going to straight up crash? Hellz no, the country is too solid and there is too much turmoil in the rest of the world for it to collapse utterly. Do I think it is primed for a country wide 10-15% drop in average price by mid 2012? Yes. It will be lead by a drop in prices in the Saskatchewan real estate market, but it will also be felt significantly in Manitoba and the suburbs of the GTA. Vancouver will suffer somewhat, but it will remain one of the most expensive cities in Canada and government insulated Ottawa residents won’t notice anything other than the Senators missing the playoffs again (2013! Butler, Lehner, Karlsson, and 2011 draft pick X!).
Those are the views of the man riding the fish that is riding the angry mammal, what are yours?
Stay classy friends,