Carl laments Victoria these days, since it’s being infected by Vancouveritis. It’s alarming. People are growing beards. Vespa sales are swelling. Gender parity is sweeping through the city. Weed fumes waft from new cafes. And real estate prices are levitating.
“It’s maybe not as frothy as the other side of the straight but not rational either,” he says. “However, I do wonder if there will ever be a significant correction to the market. Real estate in Canada doesn’t look like a free market with the huge influence government can have.”
Carl raises an interesting point. As we all know the old, hated, fossilized dino cabinet of Stephen Harper helped create a housing frenzy to help fight the recessionary pull of 2008-9. New buyer incentives and the home reno tax credit, combined with plunging mortgage rates, encouraged a real estate boom and spending spree that saved the economy from the correction which nailed the US middle class. Of course, we got record debt and record prices because of it. And Harper scored zero credit.
But what now, Carl asks? Could government ever allow the housing gasbag to deflate?
“So what do you think the odds are that in a significant Canadian correction our government would sit on the sidelines? Increase amortization to 40 years again and go back to zero down and they can keep this bubble going for many years (decades?) more. With Canada’s high home ownership I foresee the game being rigged to protect all the bad decisions owners have made, renters be damned. Could the government pull this stunt?”
Sure it could. But it’s doubtful. Everybody should be assuming that whatever a property costs today, it will be worth less in a few years. There are many good reasons for that.
First, housing already has far too much stimulus. Mortgage rates are at historic lows and tepid measures to dampen borrowing obviously haven’t worked. Politicians just can’t help themselves – tinkering with the system to constantly add more buyer incentives. Like BC’s transfer tax holiday and T2’s commitment to let people diddle with their RRSPs for a down payment during life events. All this has led to artificially high valuations unsupported by economic fundamentals. Do not count on any more.
Why? Because household debt’s outta control. It just keeps getting worse.
Friday we learned a heap of fresh mortgages has pushed borrowing to a new extreme – $1.923 trillion in debt of which $1.262 trillion are home loans (a trillion is a thousand billion, which is a thousand million). So the debt-to-income ratio is now over 165%, and cheap money is making it worse. “Canadian consumer borrowing interest rates fell once again through the start of the year, which may only encourage a further acceleration in borrowing,” says a TD economist. “While the increase in spending and borrowing will help support economic growth, households are increasingly becoming more vulnerable to a potential interest rate shock or slowdown in the housing market.”
You and your house-horny BIL may not believe a ‘shock’ is possible, but that’s what we pay leaders for – to fret about this eventuality. And they are worried.
Did you catch the latest job numbers? They sucked. Worst performance in three years. Our jobless rate has climbed to 7.3%, while the US rate has dropped below 5% amid a torrent of new hiring. Low commodity prices are to blame, but our economic growth – at around 1% – is sub-standard, while federal finances are about to deteriorate. The new federal government will crank spending and takes us deeply back into deficits on March 22nd.
Slack labour conditions mean workers have less bargaining power, so wage gains in Canada have been lackluster. They sure as hell haven’t kept pace with housing prices, which speculation and cheap money have catapulted higher. The average property increased in value last year at seven times the rate of inflation and almost ten times the rate of economic growth. This is utterly unsustainable, and yet buyers, owners and the media now take it as the new normal.
But back to Carl’s query. Would Ottawa intervene to prop up a real estate market that entered into a natural decline? After all, with jobs harder to find, debt bloating and the US set to raise rates once or twice in 2016, are we not getting closer to the inevitable blood-letting? Would T2 bring back zero-down payments or 40-year ams to prevent housing from sliding over the brink?
Not a chance.
To do so would push house lust even higher at the same time the economy weakened – further detaching the market from fundamentals. It would propel personal debt levels far beyond where Americans blew themselves up. It would increase risk for an entire generation of people who have over-reached to buy in the last five years. And it would turn a potential soft landing into a giant crater full of debris and heartache. So, won’t happen.
Unless I’m wrong. In which case, take cover.