There is a lot of divergent opinion in Canada about the state of the housing market. Are we sitting inside a huge bubble just about to pop or are things just fine and dandy? Or something in between? The range of opinion was clearly on display at last week’s RealCapital conference in Toronto.
Two opening presentations at the CBRE breakfast, the much anticipated CB Market Outlook Report for 2012, and Warren Jestin, Chief Economist, Scotiabank Market Outlook both refuted in their own way the possibility of ‘a national housing bubble’.
As chance would have it, the day before the conference on February 28th, 2010, Maclean’s published a feature article – “Time to panic about the housing market” – that was underscored by a burning house on the cover of the magazine. While the presentations served as a backdrop for the conference, the Maclean’s story is what sparked the most colorful commentary.
Hot Market or Conflagration?
“I don’t know why Canada’s national magazine, who are totally uninformed, put on the front page of their you know weekly publication that we should all run for the hills from a housing crisis and it is time to panic” said Blake Hutcheson, CEO Oxford Properties. “I for one am going to find some time in the next few days to write a few of those folks,” he continued.
“But nobody reads them,” quipped Michael Cooper, CEO with Dundee REIT who was on the same panel as Hutcheson.
“That’s the good news, the best news is that nobody reads the bloody thing and so it will have a limited impact and I might put that in a letter to them. But anyway it is lamentable that when people without doing the homework actually kind of create that stuff,” said Hutcheson who substantiated his case by referencing positive market fundamentals.
At the first reasonable opportunity Hutcheson’s comments no doubt sent many of the 500 people in attendance to the nearest newsstand or their handhelds where they could pick over the details of Maclean’s story – certainly the case with this writer.
Maclean’s Tones it Down
On finding the article at Maclean’s website one immediately sees that the burning house image had been replaced with a young family entering a suburban home – takes some of the sting out of the headline.
The article provides a pre-amble description of the U.S. housing market and its demise, a now familiar story, then launches into a Canadian section by drawing comparisons between the two countries circumstances. It references the now old refrain by Canadian bankers and economists alike that we are not like them (U.S.) and not about to fall into the same trap. So far can’t see what Hutcheson is on about.
Delving further into the article it presents a perspective on the household debt based on an interview with Thornston Koeppl, a Queens University economist. The article talks about a bubble but in the context of household debt not housing. It describes various ways in which Canadians may be vulnerable because the current low interest environment leaves few options — rates can’t go lower. Again, there is not a lot of fresh information for a regular news hound.
In the later part of the article it describes how CMHC has gone from being a ‘lender of last resort’ until the early part of the last decade when it broadened its lending practices – policies that were subsequently reversed by the Conservative government. The debate it notes has now “morphed into one over whether the Canadian government should be in the mortgage insurance business at all.” Wouldn’t Hutcheson be sympathetic to those wanting to privatize CMHC’s mortgage portfolio?
Heavyweights or Well-Paid Hot Air?
The article quotes TD Economics chief economist Craig Alexander, University of Manitoba finance professor John McCallum, David Madani, a former Bank of Canada analyst now with Capital Economic, economist David Laidler, a professor emeritus at the University of Western Ontario and Ben Rabidoux, who runs The Economic Analyst website – a broad sampling of opinion. How uninformed can these people be?
The reality is that there is a mountain of information about the housing industry and it all should be read with a certain amount of scepticism. A case in point, John O’Bryan’s CBRE presentation on ‘Why there is no housing bubble,’ makes the argument that the wealthy are the ones that are investing heavily in their homes and regular people aren’t. Where is the source for that theory and how credible is that information?
The CB presentation goes on to say that rent controls and immigration act as a safety net for condo investors in Toronto. Nice theory about rent controls but who wrote the book on that one. Isn’t there enough to say about the commercial real estate markets in 2012 – a well-respected and beaten path for CBRE with out delving into the residential markets?
O’Bryan concludes that an implosion in the Toronto and Vancouver condo markets may be imminent and that the remainder of the housing market is about to experience a cyclical downturn.
Our pick for a recent report about why Canada’s housing market is different than in the U.S. – and there likely is no bubble – is Warren Jestin’s presentation from the RealCapital conference. Scotiabank’s research shows that mortgage delinquencies in Canada have barely budged from well below 1% since 2004. It describes how Canadians have significantly more home equity and more real estate assets than Americans. It shows how the number of unsold new homes is below the 1990 to 2010 average. It describes a strengthening employment picture with robust commodity prices.
What is our opinion?
Housing market predictions are becoming increasingly difficult to make. Canada is being buffeted by global economic conditions that year to year contribute to yet another unforeseen market condition. We have experienced how foreign investment has contributed to extremely high housing prices in Vancouver and an overbuilt condo market in Toronto, not a condition anyone anticipated a few years ago.
The U.S. housing collapse was not predicted and while Canada is not the same, we too have economic conditions that suggest a vulnerability – low interest rates and high household debt.
In 2012 the European economy, U.S. debt and the election, potential middle east conflict, terrorist attacks and an infinite potential for natural disasters are just a few situations that could impact the Canadian and World economy in innumerable ways.
An indicator of the poor nature of housing forecasts is the extent to which a wide range of experts on one of the most studied sectors of the economy can’t seem to agree on what is going to happen — “bubble or no bubble”. Individual prognosticators are limited by their data and perspective where global forces that are both complex and dynamic may render them meaningless.
As such we are not willing to weigh in very seriously in what we consider a murky world of housing forecasts except in the broadest sense of the word. The recent decline in home sales reported by the CREA and softening price increases suggest that the market has peaked and is in for a downward adjustment.
We agree that the condominium markets in Vancouver and Toronto are going to be in trouble. In Vancouver the high price of housing and in Toronto the number of new buildings and ones under construction are scenarios that are unsustainable – something is going to give in those markets.
On the question of bubble or no bubble — the sheer delicacy of the economy and the financial health of Canadian households suggests a vulnerability to change that is going to persist into the future. Any of a multitude of global circumstances could alter a fine economic balance in the World and Canada that would generate downward pressure on the housing market — then some might say the ‘bubble has burst’.
In our view it is more useful for Canadians to be prepared for unforeseen change that may be positive however we live in uncertain times and should remain vigilant for unexpected events with negative consequences. So, information that provides thoughtful consideration for why we should be concerned about household debt and its impact on the Canadian housing market is valuable.
Maclean’s magazine article, it’s a great read. Just don’t let the burning house get in the way of you making up your own mind.
There are few people more savy than David Allison, President of 
