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.