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Why are so many people saying nasty things about Canada's housing market?

Posted on Feb 7, 2014 in Mortgage Market Updates and News

Michael Babad
The Globe and Mail
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Home sales climb

There are two distinct camps where Canada’s housing market is concerned: The doom-and-gloomers and the I’m-alright-Jack folks.

It’s interesting to note, too, that those in the first camp are largely observing from afar, while the latter group lives here.

There’s no doubt that sales are cooling somewhat – indeed, it had been expected. The question remains whether there’s a bubble yet to burst or a soft landing.

As The Globe and Mail’s Tara Perkins reports, the latest figures from the Canadian Real Estate Association show sales up almost 13 per cent in December from a year earlier, though down on a monthly basis for the third consecutive month, the latest a drop of 1.8 per cent from November.

The average house price climbed 10.4 per cent from a year earlier, while the MLS home price index, which is deemed a preferred measure, rose by 4.3 per cent.

Given the many observations, it can be difficult to judge just where things stand and where they’re headed. But here are a range of views, some after today’s report from CREA, others from earlier.

(We start off with the happy campers, and let things deteriorate from there.)

“For the year as a whole, existing home sales rose by 0.8 per cent, a pace that is neither too hot, nor too cold, but largely in line with our view of a soft landing in the Canadian housing market. While price gains are slightly too hot for comfort, an expected increase in homes for sale over the next two years will help provide homebuyers with more choice and hopefully bargaining power … Over all, we expect the level of sales to stabilize in 2014 and prices to grow by a more moderate 2 per cent in the year.”
Diana Petramala, economist, Toronto-Dominion Bank, today

"Sales volumes are running almost bang on the 10-year average; the sales-to-new listings ratio sat a sturdy 55 per cent in December, very close to long-run norms; the inventory of homes for sale finished the year at 6.2 months’ worth, right in the range seen over the past three years; and while price growth has accelerated in the past 6 months (particularly in Vancouver and Toronto), upward drifting interest rates and balanced conditions should contain the gains this year … It’s hard to find evidence to suggest anything but a soft landing for the Canadian housing market in 2013. Look for current balanced conditions and somewhat higher interest rates to lead to steady sales this year, with price growth tucked below the rate of income growth.”
Robert Kavcic, senior economist, BMO Nesbitt Burns, today

“Market conditions remain fairly well balanced, though slightly favour sellers at the margin, putting continued modest upward pressure on prices. The national average new-listings-to-sales ratio was 1.82 last month, while the average number of months of inventory was 6.2. For 2013 as a whole, the national average home price rose 5 per cent, with the increase skewed to the upside by the strong sales rebound in a number of high-priced markets, including Vancouver and Calgary. Constant quality home price indices, including the MLS Home Price Index (HPI) and the Teranet-National Bank House Price Index, put the average annual gain in 2013 at 2-3 per cent, slightly outpacing broader inflation.”
Adrienne Warren, senior economist, Bank of Nova Scotia, today

“As the rate of property appreciation accelerates further above personal income growth (which averaged a little more than 4 per cent in the past two years), the risk of deterioration in housing affordability will rise. We expect, however, that upward pressure on prices will ease in the period ahead as the earlier strength in homebuyer demand continues to partly unwind and supply of homes (consisting increasingly of condos) available for sale resumes an upward trajectory.”
Robert Hogue, senior economist, Royal Bank of Canada, today

“Even a modest uptick in mortgage rates will translate into much higher homeownership costs, easily outpacing any expected increase in household incomes. This will price out some prospective home buyers, reinforcing the drop back in existing home sales that is already under way … As a result, the downward pressure on house price inflation will intensify, translating into outright price declines in due course. Renovation spending may also fall as homeowners feel less need to add value to an asset that's declining in value.”
Amna Asaf, economist, Capital Economics, today

“By one estimate Canada’s house price to rent ratio–an important metric–is the furthest from historic trends than any country in the world right now. Various estimates have Canadian house prices at between a third and two-thirds over-valued. Canadian property has hit the sort of extremes that run the risk of spontaneous implosion … All of these numbers point to the economy’s deeply unhealthy dependence on property. And anyone who still doubts only needs to count cranes and condo towers across Toronto’s skyline.”
Commentary, The Wall Street Journal, January 2014

“Now, five years later, signs of frothiness, if not outright bubbles, are reappearing in housing markets in Switzerland, Sweden, Norway, Finland, France, Germany, Canada, Australia, New Zealand, and, back for an encore, the U.K. (well, London).”
Nouriel Roubini, New York University professor and chairman of Roubini Global Economics, December 2013

“Perhaps scariest of all, if Roubini is right, is that if these are bubbles that eventually pop, policy makers will not have the tools they had in 2008 to cushion the blow. The world's central banks, in particular, don't have much (arguably any) room to lower interest rates further. Which means that if these regulatory tools aren't up to the job, when the next global financial crisis comes, we can all take a lesson from the creators of ‘South Park.’ It will be time to Blame Canada.”
The Washington Post, December 2013

“But as home prices rally and construction projects proliferate – particularly in Toronto, Montreal and Vancouver – industry analysts say the country’s property sector is perched precariously at its peak … Although Canada has so far defied a U.S.-style property crash, recent surveys have raised alarm about parts of the market.”
Financial Times, November 2013

“There is also a risk of a disorderly correction in the housing market, in the context of a high level of household debt. Such a correction would depress consumption and residential construction and in an extreme case could threaten financial stability.” OECD, November 2013 “On this basis, Canada’s house prices are bubbly whereas Japan’s are undeservedly flat.”
The Economist, referring to the measures used to gauge prices, August, 2013

“The housing market has been building very steadily over a period based on growth, jobs, good income, and a Canadian economy that’s been in good shape. Frankly, it’s not a bubble in the sense of great big speculation in the property. I think there will be a cull in some investment in the sector, which will see prices stabilize over time.”

Angel Gurria, secretary-general of the OECD, June 2013

“This is the case in Canada, Norway, New Zealand and, to a lesser extent, Sweden. Economies in this category [where property appears overvalued but prices continue to climb] are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow.”
OECD, June 2013

Then there’s Deutsche Bank, which said in a recent study that Canada’s housing market is the most overvalued in the world, by 60 per cent, and ahead of Belgium, New Zealand, Norway, Australia, France, Britain, Sweden, Finland and Spain.


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