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: realist | Apr 22, 2021 1:05:58 PM
Our problems are not yet all here, but are certainly in the mail. We ain't seen nothin yet. It will be worse than anyone can imagine, and the morons in Ottawa still don't get it. I blame the fools that voted conservative. Only a couple of months ago we were told that we would have a surplus.I mean, really? Either they are liars or they really haven't a clue as to how to manage things. Bring on an election and lets throw out these fools.
Posted by: Ry-guy | Apr 22, 2021 1:06:19 PM
In response to Karra's comment if you purchased your home two years ago for $250,000 and the price drops to $200,000 now and you have to sell, you are responsible for the difference. You cannot just walk away and the bank absorbes the difference. Their are alot of people out there that purchased over the last 2-3 years when prices were up and now that they are dropping the house they are in will be worth less than what they purchased it for. If you look at the home value as a long term investment then some day you may again have your house worth what you paid for it but if you are planning on having to sell and move in the next while you are going to have a problem. The housing boom was not totaly built up by speculators.
Posted by: pierre | Apr 22, 2021 1:33:28 PM
Dear realist and anyone for that matter. Politics included , is not going to solve this problem. The reality is poiticians want you to believe they can solve this. Wrong. the only ones who can solve this is YOU. Get back to community based economies for a start.
The situation as it presently stands as the IMF points out yesterday , " this is unprecedented times."
All the hype about I can fix this and we can do better is nothing but Egomanics for power. The last thing we need now is an election. What we need to do is pull together. Political posturing never works.
Having said all of this, I have a personal friend who in fact is a Liberal MP, believe me or not. In a candid personal moment, they indicated they where not really anymore sure than anyone else.
Reason for this not being a so surprising statement is , all the politicos in Ottawa look at what all the Economists are saying , particularily now. Listen to Sherry Cowper at BMO and you might get a feel of what is happening, as she says, things are shifting so quickly it is very hard to get a handle on it. Don Drummond Senior Economist with TD further states that even with all this increased stimulus we will pay huge down the road even though it is what is needed he states.
So hopefully you realize that we are all in this NDP , LIBERAL communist , conservative, Green Party , whatever. Things unfortunately will get worse before better and although that is a little scary , there are still opportunities out there. We can not ask Governement to fix any of this, WE caused the problem by inflating our own economy with over spending Period.
Posted by: Mike | Apr 22, 2021 1:53:14 PM
Economics is based on the study of the past and the assumption of rational actors. In cases of unprecendented change, both are invalidated very quickly. It is also pretty easy to spot the confirmation bias in these posts. The bankers, real estate agents, and people that have recently invested oppose the contrarian view of this post. But I am also pretty sure that when the upswing first started, specific groups all thought it 'wasn't real' then either. Its pretty pathetic, but it is very normal. Knowing that we tend to justify our current views is very important in realizing when they no longer serve us.
Last time I checked, running at high speed with your eyes closed was not smart, especially when the territory is unknown like it is today. There are a lot of unknowns today, more than I have seen in my 40 years....
Posted by: JM | Apr 22, 2021 1:55:22 PM
The smart money left the Toronto/GTA housing market in midway of 2007. I'm not referring to the individual home buyer who buys a second income property. I'm referring to the 20% of developers/large investors who are always ahead of the curve (competition). I divested all my properties by the spring of 2008 - with the exception of my principal residence which is quite modest relative to my net worth so I don't care how the market influences it's value.
As a real estate agent with half a brain, I could see this coming a mile away. My business has slowed but I have more than made up for my loss of sales income through a preservation of my capital. Using my smart money contacts as my guide, I won't begin my buying phase again until my market indicators start lining up in the right direction. I'm quite competitive so I'm not going to spill my own beans in this forum and tell people when things may turn around....but I promise you this...market trends are the grand rulers of commerce and the Toronto/GTA housing trend is moving solidly in the downward direction for the next long while. There will be short-term seasonal upward trends but the grand-daddy trend down and anyone who got caught with their pants down would may want to sell into that short-term strength. This is just my anonymous-person opinion and you should do your own damn homework so you can come to your own damn conclusions. Good luck!
Posted by: AD | Apr 22, 2021 3:25:57 PM
Prices in Toronto are still too high. Check out the prices in Yorkville for a condo the size of a shoe box. Prices (real estate)depend on the economy & we are just bleeding jobs so the worst is yet to come ie GM. Have you seen what happned in Miami, Las Vegas & Dubai to name a few. Vancouver is just feeling what is happened in Maimi that is panic due to greed even the 2010 games cannot help them.
Its coming full circle now. So I think wait if you plan to buy in Toronto, a lot of folks are going to be on their knees in Toronto (flipper's) due to the same greed that made them line up 2 weeks in the cold & snow to book a condo that is not yet built at Yonge & Bloor. It goes like this greed, fear then panic. Wait for the panic phase to buy at a rock bottom price.
Good luck!
Posted by: Jon | Apr 22, 2021 3:51:30 PM
Our housing prices are still over inflated by at least 20-30%. With the average house in Vancouver being over 400,000, who can afford to pay the mortgages on these places. We as a society are living outside of our means and are now paying the price for "speculation"!
I don't know about you but I haven't seen my salary increase 40-60% the same way that housing has increased in Canada in the last 7 years.
Posted by: jojo | Apr 22, 2021 4:16:51 PM
Ok Dave, keep drinking the koo-aid friend..we'll see what happens in the next couple of years, it wont be good...people today are still buying with '0' down ..figure that? I know someone just 2 weeks ago who bought and used his credit card for downpayment..smart way of spending eh..forget what the media sells you and wake up.
Posted by: harry | Apr 22, 2021 4:29:12 PM
Its mouthpiece prognosticators like this clown that cause people to start second guessing and subsequently the market will follow. If this moron stated that he predicted a rise in the value of housing then prices would invariably go up. Instead of doom and gloom try spinning things to the positive and see what good can come out of that.
Take your biased black outlook and stick your head up there.
Posted by: JS | Apr 22, 2021 4:34:11 PM
Well the bank of Canada rate is lowered....RBC has sent out letters stating there is a rise in credit lines dated back to last year..so they are taking the rate last year cause they are loosing money. Mine is at 4.25 and is going to 8%. This is really fair in a recession!!!!!!!!!!
Posted by: Andy | Apr 22, 2021 4:44:13 PM
Your mans right the markets out of wack! The feds gave $125 BILLION to buy bad mortages or they would be the compition that would help bring down prices. The little secret NO Power of sales no compitioin do price drop no lost revenue from taxes!!!!!!!!!!!!!
Posted by: gary jolly | Apr 22, 2021 4:45:02 PM
Enough Gloom and Doom allready.
First of all Canadians are not Americans...our banking system has done a great job in mortgage management.
Most Canadians have substantial equity within their himes as in over 45 to 50 % and even with a net decline of 30% the majority of mortgage to value ratios will be up 15 to 20%. This is again the function of our sound allbeit tight fisted banking system.
The west for all the boom will come off but the job losses out west are nowhere even close to those out east. I can assure most Canadians the oil patch is still going and profits are being made they are just normal profits not 50% per quarter.
The cost of retail goods has generally declined out west thanks to energy costs coming off... however there has been a slight rise in food.
Finally a bubble did happen but it burst last year prices for homes have since stabalized out to form an smaller efficient market.
The only people affected out here are those who took 5% down and used their hame as an ATM for cars and purchases...these people would have gone under with any economic contraction or inflation.
To be sure mortgage rates will rise as the economy picks up gusto but Inflationary talking interest rates will not help anyone manage a home.
At the end of the day.... this is not the dirty thirties out west. The great depression had 10%+ unemployment, no jobs and finally a dustbowl farm system that could not produce enough to feed people.
Globalization of trade and commodities has removed that paradigm frome this downturn. To be sure the U.S. has its issues but Canadians have Not been wearing gold bricks for bling around their necks. As for the Canadian stock market Since January of 09 The rate of return has been about 19% this tells us that the canadian economy is actually growing to recouver the losses of 2008.
We may have little bubbles but we do not live in a Bubble. Facts and Numbers taken out of context can show alot of things Net worth does not lie. If all you own is worth more than what you owe do not fear the short term losses. Companing this to nay other economic contraction or expandsion is a waste of Math skills.
Daily statistics equal whats in the bank at the end of the day. Raising the fear of something that may not occur is a waste of time and Money. I happen to place high Value on both and unlike naysayers my money shows the cold hard facts... Know what you invest in and watch it daily or keep it in cash.
Posted by: Lori | Apr 22, 2021 5:01:18 PM
Well...I don't believe one needs to be a rocket scientist to see what is going on 'Globally'. Face it..people are living way..way beyond their income...which is a no brainer...the bank owns it/ or rather they owe the bank..Credit to pay off credit....O% down for 40-50 years???? And yes..this is in Canada...not isolated to the USA. Personally...I make quite decent money..and cannot afford to live like most people I see..can't quite figure out what I'm not doing right....Oh...I know...I buy what I can pay for.The bank doesn't own me. The best is yet to come...
Posted by: Mike | Apr 22, 2021 5:19:56 PM
We live in a World of FEAR, all you ever hear on the news is bad, media has allways thrown fuel to the fire and once the fire starts growning and catches peoples attention, the media just keeps pouring the Doom and Gloom on cause poeple to react in FEAR and this Fear reaction just causes a bigger problem, maybe the stock market wouldn't be where it is today if people didn't react out of so much Fear that was brought on by the Media, i'm not saying there wasen't a problem, all i'm saying is it didn't have to get this bad and the Media is a big part of how people react.
Posted by: Rich | Apr 22, 2021 5:40:45 PM
i think that everyone is forgetting the real reason we buy a home; to live. Whether the market goes up or down if you live in your home for 25 years you will be all right. Isn't that what history says?
Posted by: Andy T | Apr 22, 2021 5:42:16 PM
If our future is bright, Bank of Canada will not decrease the rate to 0.25%.
So, I will believe that house price go down. How many percentage ? Who knows? Everybody is guessing! As long as, you still have job. You can pay your mortgage. You will be fine.
Why bother the price of your house?
Anyway, You still need a place to live!
Posted by: Andre Corkum | Apr 22, 2021 5:48:49 PM
The book has too mcuh emphasis on large cities in central canada and the west! Here in Nova Scotia we have only seen a 1% price decline and peninsula Halifax has seen a 1% increase in prices in the last year. Where we are seeing the most declines are in high end which is influenced more by out of province and out of country buyers which are more effected by the Global recession and banking challenges. As we tend not to have the large swings in prices we tend not to get the short term speculators that you get in many markets elsewhere. Real Estate has been by far my best investments and I have stong confidence that it will remain so. My mutual funds on the other hand have seen declines in the 40% range in the past year, enough said!
Posted by: Ray | Apr 22, 2021 6:39:00 PM
The world’s coming to an end – burry your food and hide your money!!!!! Give me a break! What the author failed to point out is that there were 13 recessionary periods last century; in each situation with the exception of 1, a return to positive growth was seen in 5 quarters or less. If anything, there are going to be a lot of opportunities created as valuations recede to more realistic levels.
Posted by: Hillbillby | Apr 22, 2021 6:57:15 PM
The best time to buy a house is when interest rates are at there highest. It is the principle owing the part you actuallly have to pay on for 30 or so years that really matters. I'm tired of hearing all the BS from realestate spin doctors commonly called agents telling people to buy when rates are low. Here's how it works...... House prrices go down when interest rates are high because people can only afford so much a month for a mortgage ieei $2,000. It doesn't really matter how much of the $2,000 is interest or principle people can only afford so much. Therefore to sell a house at low rates you can get the best price (Not much monthly interest out of the $2,000/month). When interest rates rise sellers have to drop prices to attract buyers because monthly cost of boprrowing goes up yet people can only afford th$2,000/ month. So we now have a situation where interest rates are at the lowest levels in decades - Rates can't get any lower....... It is they absolute worst time to buy. Don't be tricked by the realestate people - Interest rates average out over time but the principle (the actual amount you owe is constant) Do yourself a favour buy when your principle will be the lowest ie Higher Interest rates. If you can't understand this principle then don't buy - If you don't want to understand this principle happy Foreclosure!
Posted by: Olive N | Apr 22, 2021 7:26:13 PM
When it come to housing market in this city of Toronto, dont trust what you hear from the real estate board. It happened in the 1980s when, despite the spiral decline in the housing market , the board was telling us that that was the best time to buy !! I want to look at economic trends rather than be deceived by voodoo housing market experts.
Any one with sense of history knows that untill that equilibrium is reached , current interventions will only provide a temporary respite . We will have to settle with the fact that just as much as the economy was induced artificially, thus creating overblown prices and consumption , so will the fall untill excess baloon in the economy is adjusted with real productivity.
We must not forget the old adage: when the U.S sneeze, Canada coughs . I think it is morally wrong for the real estate board to continue with the same old game taking advantage of segment the community with little concept of economic theory.