Most Canadians too complacent about housing prices
By John Calverley, guest blogger for Sympatico/MSN Finance
Most Canadians are far too complacent about the outlook for housing prices. U.S. prices continue to fall like a stone, down 29% from the peak so far on the Case-Shiller index. Industry voices in Canada insist we will not see anything like that here, but the reality is that housing prices are already falling fast, almost everywhere in Canada.
In my new book When Bubbles Burst: Surviving the Financial Fallout, I look at the world-wide housing boom and its consequences – a major world recession and a financial crisis. The book is a sequel to a book I published in 2004, which warned about the U.S. housing bubble. At that time I still hoped that a crisis could be avoided but what has unfolded is my worst case scenario.
The U.S. is in for a deep, long recession, the worst since WW2. Banks have too much bad debt and at least one-third of household mortgages will soon be larger than the value of the house. All this points to tight credit and slow spending for an extended period.
In Canada, we are reassured that there was less speculation in houses. True, but only up to a point. Some cities in the West, like Vancouver and Calgary saw rampant speculation. Or look at the surge in new condo developments in Toronto. The fact is that Canada participated in the world house price boom too. It was not as crazy as California (no surprise there), but prices went up a long way over a long period and are now overvalued compared with historical norms.
In my book, I forecast a 40-50% decline in housing prices in the U.S. from peak-to-trough and a 30% fall in Canada. The correction in the U.S. is already about two-thirds over, but Canada is running behind and the worst is yet to come. Stock markets are harder to forecast. The lesson from the bursting of past major bubbles, whether in Scandinavia in the 1980s, or Japan and East Asia in the 1990s, not to mention the U.S. in the 1930s, is that stocks can go down a long way and take a long time to come back. Maybe we already saw the bottom at the beginning of March when stocks were off more than 50%. But I would not bet on it. My guess is that, at the least, we will go back and take another look at that low.
John Calverley is Head of Research at Standard Chartered Bank, based in Toronto and is the author of When Bubbles Burst: Surviving the Financial Fallout, Nicholas Brealey, 2009.
Posted by: caniwi | Apr 22, 2021 8:57:15 AM
Too bad the article is so biased as to help sell a book. If house prices aren't falling as fast as you like, it is because Canadian houses are still worth what someone is willing to pay for them - and people are still buying houses. Certainly the prices have cooled - that's inevitable given the current situation, but media types and so-called experts/book authors need to be more responsible. Stop trying to scare everyone. There are actually people who read this sort of thing and will sell their house for whatever they can get because they are afraid of going broke.
Posted by: KATALIN | Apr 22, 2021 9:27:49 AM
I think everyone who is connected to real estate for their livelihood are always very
optimistic, and they alway tell you "it is a good time to buy".
Prices are high in the big cities in Canada, what happenned to the saying: "buy low, sell high"?
Prices are not low enough to buy. When Canada had it's last big recession, prices were
going down for 6 years. History just may repeat itself.
I know you say, oh, interest rates were so high that time, it's different now.
Time will tell....
Posted by: Larry Smyth | Apr 22, 2021 9:36:26 AM
Where did you get that data ? Marketing at it's best, huh ? The market is driven by supply and demand. Granted, in South Western Ontario we are experiencing a buyers market but our prices are NOT on a free- fall, as you would suggest in this article. There are isolated pockets of decline such as Windsor and St. Catherines where the auto and steel industries are the main employers, but in my view the rest of the provonce is rather vibrant right now.
There is a pent up demand from first time home buyers, interest rates are dirt cheap so quit with the scare tactics. If there are a few pessimists out there that want to read your book, I 'am sure they will find it.
Posted by: Ed | Apr 22, 2021 9:41:57 AM
It seems that the article is trying to convince canadians that the housing prices should go down to fit Mr. Calverley's predictions in his book. The world is full of experts, but the fact of the matter is that nobody knows what is going to happen with any degree of accuracy. This kind of irresponsible journalism is to blame for canadians wishing themselves in to a recession that did not need to be this severe and now we have this clown wanting a realestate disaster similar to the one in the U.S. for his own self prophesy. Mr. Calverley, you should be ashamed of yourself!
Posted by: jojo | Apr 22, 2021 9:44:19 AM
The only thing propping up Canadian house sales right now is the low rates, the same low rates that crreated the meltdown and will continue to do so..anyone buying a house now, expect it to be worth less by at least 20%+ in the nest 2-3 years..
Posted by: Surjit | Apr 22, 2021 10:13:27 AM
I cannot believe how blatantly Mr.Calverly is trying to trigger the market down by unashemedly drumming his book, as if that is sacred. Get Real Mr. Calverly.
Posted by: Jas | Apr 22, 2021 10:14:40 AM
My BC opinion is that we are returning to something I call "Basic Economics". This I compare to "Hyper economics" which is what weve been experiencing for the last 10 years. Hyper economics is when everyone believes things will only go up, up, up. Stocks or housing prices. People talk themselves into buying stocks at 25+ times their earnings. They buy houses that they can only afford if their salaries are at their all time peak, they are renting a basement suite at premium dollars, and interest rates are at all time lowes.
Canadians in the top 1/3 salaries can not afford homes in BC. Even if they rent a suite or sell a kidney. Basic economics suggest that we can only pay for what we can afford. This is the basic economics law that is crushing the U.S.. It is coming to Canada and it will hurt. Stocks will sell at 8-10 times their earnings( They will never return to 25x). Houses will be based off payments that people can make for a sustained period of time. Unfortunately I believe house prices will fall back about 8-10 years to before the period of "hyper inflation". To before we lined up for hours outside a trailer to buy a condo that would not be built for 2 years.
Imagine if house prices in Vancouver came off 20%. This 20% loss times the average value of a Vancouver home is around $150,000 loss. Who can sustain a $150,000 loss. When it happens many people will be mortgaged to the hilt and will need to sell their homes. This glut of pressure selling will cause prices to free fall. This will escalate the fall as more and more people will not want to stay in a negative equity home. Overall causing a collapse in perhaps the biggest hyper economic housing market in our history. Vancouvers fall will be reflected in all markets around BC. Just like it did when all markets went up.
Posted by: Denis | Apr 22, 2021 10:38:09 AM
How you get the data and how you compare? Stop trying to scare people, stop to do that so-called expert! Do not use this bad way to try to help your book sale.
Posted by: David | Apr 22, 2021 10:40:19 AM
This blog makes total sense to me. I've been scratching my head for the last 5-10 years wondering who in the world has the income to purchase these crazy priced homes. I'm prob in the top 1/3 of income groups and with my girlfriend added in then in the top 1/8 of the range and I was still too scared and unwilling to leverage myself for these homes. Now i see what was going on. I'm positive that these values will come down here in canada. Why would anyone think that canada is that much different than the USA? Look at how the BOC reacts to the Fed. Look how Harper was pressured into deficit spending by the other canadian parties and the USA. We are just a few months/years behind the big mess in the US. I just hope that our currency doesnt tank like the greenback is going to because then savers like me are going to get screwed the worst. Cash assets are only good when your countries leaders dont turn the currency into monopoly money...
Which brings up a good point. The values of houses, stock markets, oil, gold etc might continue to rise. This might not be because they are worth more. This probably will be because your dollar will be loosing its purchasing power through inflation. When its 100$ for a loaf of bread your house will be worth billions!!! Congrats!!!
Posted by: Dave | Apr 22, 2021 10:46:53 AM
jojo, low rates do not meen the banks are giving maortgages to people without jobs, credit history etc. That did not happen in Canada to the extent it did in the US. We only had "0" down mortgages for a short time and CMHC has closed that door. Low rates bring your payments down but you still have to qualfy and in a recession that is harder to do.
Posted by: SmyD | Apr 22, 2021 10:56:56 AM
So Larry "Secret Agent Man" Smyth believes "the rest of the provonce is vibrant" ?
Vibrant-adj-1-full of life and energy; exciting. 2-bright and striking. 3-thrilling, quivering.
Man, I wish i was in the same recession that you are in. I'd say the rest of the province is hanging in thanks to first time buyers and lower rates, among other incentives. I doubt the new home builder at the end of my street who is offering $100,000 off their inventory homes just to get them off the books would say their market is vibrant. We will not have the free-fall in prices the Americans are having but don't fool yourself unfortunatly jobs are being lost and the trend in the housing market is down, not up.
Posted by: SmyD | Apr 22, 2021 11:13:40 AM
Funny, nobody seemed to be accused of scare tactics when the housing market was rocketing up at an unsustainable 10% year over year increase.
Posted by: Mr. Ec | Apr 22, 2021 11:19:50 AM
WOW! First, it is amazing that MSN finds some of the worst articels written to post on their home page. Just like the news media, scare the %&*^&*^&* out of them. Then the author himself.What the huckster, I mean author does not really touch on, is the MBS or mortgage backed securities is a big reason for the free fall in the US. Sub -prime lenders lined up to help people into homes they could not afford at unusually high rates, the homes did not hold up to value, the loans defaulted, and the MBS investments made by all the big players flopped.
In Canada, banking and most reputable companies have always been fairly conservative in lending practice and there has not been a market in most centres to build the false value that helped drop out the bottom in the US. Of course we are following suit to some degree because the US is a huge part of the global economy, but take away Toronto, Vancouver, and a few Alberta cities from the picture, and real estate is currently priced at what it is worth.
I have a background in economics and have been involved in lending and financial services for over 20 years in Canada, as well as the US. This is my opinion, it does not have to be yours....but maybe it should?
Posted by: john puba | Apr 22, 2021 11:22:32 AM
just wondering did it not take our parents home at least 20 25 years to appreciate 20% so how come it only took us 3yrs to appreciate that much, something does not add up. big john
Posted by: Chuck | Apr 22, 2021 11:24:37 AM
My wife and I have a small home construstion business located in the central part of Vancouver Island. It is true that house prices are high, but it is not the actual price of the house that makes it so. Municipal development costs for services, obligations placed upon the builders by these municipalities and Regional Districts, and coupled with the need for water have driven the price of property skyward. In 2004 we were paying 63,000 for 2.5 acres: now that same size of property is 180,000. One cannot totally blame the developers for rising costs. Ashphalt has tripled, hydro and phone service is increasing, and land regulations are becoming more legislated. At one time we could put 2 houses on 2.5 acres. Now it is over 5 acres for 2 houses, and now the regional districts are trying to impose that we have a minimum of 5 acres for 1 rural dwelling.
Development costs to a builder in towns have gone from 7,000 to over 18,000 just to have the lot approved for sale. This does not entail the further obligations to the builder for seizmic surveys, curbs, gutters, water drainage and more. At the same time labour rates to the trades have gone up. I applaude that, for the trades were not making a livable wage for a good many years. To this date, fully qualified tradespeople do not make any where near what is being demanded by the CAW.
One can always stand on the sidelines and say that houses and autos are too expensive. The dollars, not just in local ecomomies, but in tax dollars generated by these two industries, are far greater than anyone can imagine. Retail outlets (with millions at stake), their employees, the local support retail outlets all depend on cash flow. Your job depends on cash flow. Think in terms of forestry, mining, electrical: glass: fabric: rubber: ashphalt: fuel: plumbing: furniture: appliances: electronics: plastics: the list goes on. We depend on ourselves for that flow, and when it stops because someone says that the prices are too high, the economy comes to a grinding halt. True, checks and balances for opportunists have to come into play from time to time, but it is our standard of living that has put us in this position.
The person who states that prices are too high, should open his eyes. Every day, small business owners are losing their dream: they have all on the line, as well as the fortunes of their employees.
The majority don't live lavishly: they work very hard, just as most do, trying to put enough aside for their retirement. Realize that they do not have pensions, get stat pay, get holiday pay, but are expected to lower their prices in order for the secure worker and professional to get a great deal.
I don't relish the thought of paying out dollars for my monthly overhead, but it is a fact of life right now. I have no lifelines, such as some in Canada feel they are entitled to.
But for a last thought I will leave you with this. Everytime we start a new house, all across Canada, we employ thousands of people. It could be yourself or someone you know.
Posted by: pierre | Apr 22, 2021 11:47:47 AM
I sold my house a few years ago , which I believe was a high point, and then bought Gold which was much lower than now. I could not agree with the article more. Did well actually still am.
Housing is over priced in all of Canada and it is the greed of the Real Estate gurus who keep telling you otherwise.Houses are investments that is what people forget , prices move up and down and during rough times when job losses accelerate house prices drop and since we are just figuring out that job losses are acclerating faster than thought, watch for those prices to drop a LOT further.
Did you say the Liberals could save us from all this terrible mess, well you guessed wrong we are all part of this global recession no matter who is running the country!!
Posted by: Al | Apr 22, 2021 11:57:47 AM
For those of you who think this is fear mongering, please consider the down side when your mortgage renews at 6% from 3.5% in five years, especially when you barely qualify at today's rate. Also, we are in a global recession so don't expect your cost of living wage increases to cover the the cost of your doubling mortgae payment.
"If house prices aren't falling as fast as you like, it is because Canadian houses are still worth what someone is willing to pay for them - and people are still buying houses." I like this statement...just shows you how complacent we really are.
The fact taht the US hasn't felt the full brunt of bankruptcies and forclosures has to be the leading indicator that the americans will not be spending their way out of the recession any time soon. And unless canadians buy more canadian goods and services to make up the difference we will not fair any better for some time to come.
Anyone who thinks this article lacks substance or evidence, I invite you to provide evidence that our real estate prices are fundamentally sound. Wake up...prices are falling. If there is so much pent up demand, as someone stated, our prices would not be falling.
Posted by: danny G | Apr 22, 2021 12:04:08 PM
i too am releasing a new hardcover. it's called "Buy my Book" . In it I forecast that the revenue typically derived from publications pened by self proclaimed blog experts will decline dramatically over the next several quarters
Posted by: karra | Apr 22, 2021 12:41:19 PM
You live in a home. If the price goes up and you sell, you still need to buy another home.
If the price plummets and you have to sell to move away, then you can get another house cheaply too. (And property taxes go down which is nice too).
What's the big problem, unless you're speculating?
Mortgage rates are a separate issue altogether. They are very low, and will stay low for a while yet. If you really can't afford to risk an increase, sell and trade down. Otherwise use mortgage doubleups (extra payments of any value up to double) and annual paydown options as much as you can to reduce the principal, so it won't hurt as much when the rates finally do increase.
Posted by: Larry Smyth | Apr 22, 2021 12:54:46 PM
Relax SmyD !
It's too easy to be a downer with an attitude. I 'am in the same recession you are, albeit with a somewhat better outlook. Keep in mind, there is still roughly 92% of the Canadian population employed. These families still have active jobs and income and unlike you, try to get up each morning with a positive attitude.
Sure, there are regional pockets trending lower due to the auto industry but on the whole Canada is holding it's own quite well. It will get better soon - and likely without the Armageddon that you predict. Have a positive day!