The phrase “housing bubble” is dangerously close to platitudinal territory. Something of a slogan used to characterize the cost of buying property in metro Toronto and Vancouver — often with the contiguous phrase “red hot” — it’s neither useful nor factual. There is no economic tsunami poised to replace over-leveraged homeowner optimism with anguish and destitution. Experts say we don’t even know if this is a bubble at all.
“People are really only able to identify that it was a bubble after the fact if there’s been some sort of a strong correction,” says Canada Mortgage and Housing Corporation chief economist Bob Dugan.
Although Toronto’s average home prices in May went up 14.9 per cent over 12 months, the rise is conservative when compared with 33 per cent in March from the previous year. According to the Toronto Real Estate Board (TREB), new listings in May increased by 48.9 per cent and sales dropped 20.3 per cent. So based on a month’s data — which responsible analysts are not comfortable using as the basis for broader claims — it seems as though the market is calming gradually, not at whiplash speed.
“Data from month to month can be volatile,” Dugan says. “We’ve certainly seen a cooling in April, but when we forecasted for the Greater Toronto Area, we did expect activity to cool. In the first quarter of 2017, existing home sales hit a record level and we have been forecasting those sales to decline through the rest of the year.”
That the market is more or less behaving as the CMHC predicted hasn’t given pause to the scaremongering of columnists. In Canada’s Housing Assessment Report (HMA) for the second quarter of 2017, overvaluation in the country’s housing overall has been downgraded to moderate from a previously strong assessment.
“House price growth at the national level has weakened to around 4 per cent year-over-year, while personal disposable income has grown at a steady pace and growth in young adult population has strengthened at the end of 2016,” the HMA finds.
However, there are still significant areas of concern, according to the HMA report, and not just in megalopolises. The report determines the health of a particular market by examining four factors: (1) overheating, where demand for existing homes leaps ahead of the supply of existing homes for sale; (2) continuous price acceleration, (3) overvaluation of house prices in comparison to what the market can support, (4) overbuilding, which is when the inventory of newly built housing units rises along with the number of available rental units. Of the 15 metropolitan areas analyzed, Toronto, Vancouver, Victoria, Saskatoon and Hamilton showed strong evidence of problematic housing conditions.
“It’s not just Toronto and Vancouver, we’ve also noticed some spreading to neighbouring communities,” Dugan says. “Hamilton is showing price acceleration and overvaluation and when you look at the B.C. market around Vancouver, we’re seeing that in Victoria as well.”
But the cavalcade of alarmist columns flowed uninterrupted in Financial Post, CBCNews and Huff Post (which will soon share a parent company with Yahoo) this year, calling for a repeat of the 1989 housing market crash, using marquee phrases such as “Big banks raise alarms,” “CEOs are concerned,” and “What if Canada’s real estate bubble bursts?”
Well, a “crash” is not likely to happen because the market today is notably different from that of the late 1980s. In 1985, the posted interest rate for a five-year fixed mortgage (the most popular in Canada) was 13.25 per cent. Today, it’s between 2.2 and 2.7 per cent, and won’t flicker too far off that mark.
“I think the cost of borrowing money will remain fairly low but I do expect it to go up,” Dugan says. “Interest rates are going to rise at the end of 2017, beginning of 2018, but it’ll be a gradual rise I don’t think it’s going to happen very quickly. That’s our forecast.”
What analysts really mean when they predict a crash is that the market’s problematic conditions make Canadians more vulnerable to external economic shocks, for example a shake-up in the U.S. economy.
Household debt in Canada is fairly high when you compare debt levels to income. In isolation, this is no cause for terror, but were something unexpected to happen, the market would correct sharply.
“If the unemployment rate goes up and people start losing their jobs in Toronto and Vancouver,” Dugan explains, “the high level of debt and overvaluation could make the correction worse.”
When economists went back and tested their HMA model with historical data from the period leading up to 1989, the model did identify overheating, price acceleration and overvaluation. But in the late 1980s, inflation was much higher. As the Bank of Canada grappled with this problem, inflation grew closer to five percent during the recession of 1990. Today, it’s well below two per cent.
“If there were a recession to happen in the near future, we would be going into it with very low inflation so there’s no need for the Bank of Canada to increase interest rates as the economy slows,” Dugan says. “So the circumstances are very different now. From 1989 to 1990, we saw a significant increase of interest rates that pushed mortgage rates higher. We don’t see that today. There’s no need for monetary policy to tighten the way it did back then.”
The CMHC also found that speculative demand in cities such as Toronto and Vancouver was pushing prices up. With the government’s new 15 per cent speculation tax on non-resident buyers, this should add to the slowing down of the market, particularly in 2018, Dugan says. There are good reasons speculative demand is particularly high in those two cities.
“A lot of the extra demand gets pushed into price increases because you have the green belt around Toronto that limits the expansion of the housing stock,” he says. “Around Vancouver, they have the ocean, the mountains and some agricultural land. There aren’t a lot of places to increase the supply of housing so when you get more demand, it could quickly translate to price increases. That’s an attractive thing to speculators.”
But this isn’t 1989 — the economy is strong today. The Bank of Canada reports that the consumer price index is currently at the two-per-cent target. If you need a house, keep looking for a house. But this isn’t the time to speculate, based on market indicators. Buyers should be aware of the risks, Dugan warns, but it’s far too soon to call for a crash in prices.
“What I would tell people buying in Toronto or Vancouver is that there could be some speculative demand driving prices higher, so make sure the home you buy is in line with your needs. We like to work with models — one month’s data isn’t enough to give you robust results.”