Canada's Housing Bubble

Jan 27, 2010 Garth Turner greaterfool.ca

Well, that was interesting.

“This entry really shakes your credibility,” said one critic, while another cited my crushing yesterday of  “your sick pack of rabid antisocial bubble watchers.”

“You are doing some serious backpedalling on your predictions about a RE correction,” a guy warned ominously, while a twentysomething moaned, “you just told an entire new generation of first time home buyers that they’ll be renting til they die.”

The catalyst for despair and derision was my comment that we should expect a real estate correction, not a crash. A decline of 15% in average prices, not a 40% US-style meltdown. That negative equity would be the disease here, not foreclosures. That places like Toronto would decline more slowly, and Vancouver faster. That Canada would see a long, slow and relentless real estate melt, not a housing implosion.

The words were chosen with as much care as they were misread with carelessness. So let me try again.

First, why the market will not blow up overnight:

• The federal government is terrified of this happening. They will endure a bubble, even with its destructive long-term consequences, over allowing market forces to be unleashed. This is called ‘politics.’

• In the light of the cabinet shuffle and the looming budget, the feds are signalling that the pain will come in the form of less spending, then higher taxes.

• The latest statements by the Bank of Canada suggest strongly that CHMC’s 5% down disaster will not now be amended to 10%.

• I’m betting the interest rate increase later this summer will be tame to start – maybe a couple of quarter points. The real misery is being held back for 2011 and 2012.

• Looks like we should expect a wave of new listings in the next couple of months, seriously diluting the supply-demand equation, quickly knocking price increases back to 0% and giving Ottawa a way to back off its recent mortgage threat.

Why the market will melt down, instead:

• Interest rates will be returning to their historic norm. That means mortgage renewals in 2014 or 2015 will shock people who borrowed in 2009 and 2010.

• Housing affordability will crash due to rising rates, stagnant incomes and higher income and consumption taxes.

• The Boomers hit the 65 mark starting in 2011, on their way to Freedom 85 – but only if they ditch the big house. Another tidal wave of listings.

• Economic growth will suck for at least half a decade, perhaps much longer. Government stimulus drugs will be cut off, our biggest trading partner is in decline, and China still has all our jobs.

• Rapidly rising energy costs over the next few years along with more taxes will help stoke inflation and rob Canadians of disposable income. This is hardly the climate for bidding wars, or $900,000 unrenovated bungs.

• A housing correction will become self-reinforcing, as recent buyers taste negative equity and the news spreads that real estate is now eating the young.

What this means:

• As I said yesterday, 2010 will be see the start of a correcting market, with a likely decline in average prices nation-wide of 15% by the end of the year.

• This will be the start, not the end.

• Between now and the time a five-year mortgage renews, I can see residential real estate declining another 20% to 40%, depending on the market, GDP growth, rates and taxes.

• This will bring a return to 2007 or 2008 prices and some extraordinary buying opportunities for those with cash.

Real estate is not a tech stock. It won’t crash in value in the space of a few months. Those who believe this don’t understand how the market works. This Spring a ton of owners – afraid they missed the peak – will list their homes and, being the greedy people they are, try for top dollar. That happens in March. If they have not sold in 90 days, they might reduce the price by 10%. That takes us to July, just when the BoC raises rates for the first time. If no offers materialize, they might drop prices again after another three months, and now it’s October.

At that point – nine months distant – sale prices will drop below list prices as inventory accumulates and buyers melt away.

See what I mean?

There’s a reason I’ve not said on this blog real estate will crash. It won’t. Get a grip.

But this is the top.  The road ahead belongs to the realistic.