The interviewers ask one or two excellent questions, but the end result is a strange fudging of the issues. Spot the fallacies and misconceptions in the following dialogue. [We list the ones we spotted at the end of the transcript.] -vreaa
Interviewer 1: Last week the Bank of Canada said there was a prospect of a more pronounced correction in the housing market and this week The Economist magazine’s latest survey claims that Canadian Real Estate is overvalued by something like 24%.
So, is the Canadian Housing Party finally over?
Here to give us some perspective is Don Campbell, he is president of the Real Estate Investment Network.
Well let’s start with that right away is the bubble over here in Canada, is this the end?
Don Campbell: It’s that magic word bubble, right? You can feel it doing THIS…
…with that word… There isn’t a bubble in Canada… let’s get really clear, there is no national real estate market… it’s very regional… and you’re going to see cities like Hamilton and cities like Edmonton and cities like Maple Ridge BC do incredibly well, for the next, you know, three to five years… and other areas, that are going to be overpriced, like the Vancouver market is overpriced… and will have a tendency to be flat.
And, when they talk about this bubble in their analysis, what it is really, is a big pendulum, and a pendulum has swung so far into the buyers market right now, that you are going to see that the economic fundamentals are going to sit… and they’re going to have to grow to support that… where the pendulum is sitting… And that pendulum will swing down… let’s be very clear. [Let's try, to be clear, yes, please, very clear. Please. -ed.]
Interviewer 1: What the government, what the BOC keeps saying, and I think they have a valid point, is that the debt people are taking on to buy their houses is really getting out of control… The house prices are running way ahead of income levels… Isn’t that going to be a problem? isn’t that really the bubble that they may be more worried about… the debt bubble.. as opposed to the housing price bubble?
DC: They are, until you look at the housing affordability index… You know the RBC puts out a housing affordability index every quarter… And I keep seeing that it’s less affordable to buy, until you look at a ten year average of our affordability issue… hugely out of whack in Vancouver… slightly out of whack in Toronto… but every city across the country, housing affordability is trading right on ten year average… it’s very interesting.
Interviewer 2: So you don’t see if interest rates start to rise that there is going to be a significant amount of people that are going to be underwater here?
DC: No, I don’t see that at all, because I’m seeing that… Interest rates are going to go up, they’re not going to go up right away, because of everything else that’s going on in the world… but you’re going to see it tick up slowly… a lot of people are still in variable rate mortgages which is a great thing to be by the way… you can win, in that game… but right now, because of that trading range, because of the ten year trading range, I’m not seeing a big bubble anywhere, except maybe in the condo market in downtown Toronto and for sure in Vancouver.
DC: [Discussing CREA changes] As the listings are growing across the country, therefore softening the price increases, these changes, come the spring, probably Jan Feb 2011, you’re going to see the listings start to escalate, over and above what would normally happen, therefore keeping a cap on prices, and therefore keeping it in that ‘buyers market’ arena… Now it’s funny, a lot of people…during that ‘seller’s market’, it was frothing, people going “I just can’t find a property to buy… I can’t”, now you have that exact market you’re looking for is the property you want to buy, and there’s lots of them, and everybody’s going… “Oh my goodness, I wish it was like the olden days, when it was all full, and prices were going up fast fast fast…”
Interviewer 2: I just question that because, having spent two years looking for a house in Toronto, the product though, isn’t great, so it seems to me that if you get a good product you’re still going to have that kind of froth there.
DC: Absolutely, and …
Interviewer 2: I guess people are putting junk out all the time…
DC: Constantly… You’re going to see a lot more junk come on …
Interviewer 2: Is that going to keep prices down, because it’s still (junk)…?
DC: It’s going to keep prices down, especially in that mid-range, the lower range will always sell, because it’s inexpensive, and you look at rent… you might as well buy, in that lower range. The luxury market is actually doing very well as well… It’s that middle market… in Vancouver and Toronto, and even in Montreal, is going to be the one that’s going to be expanding in the number of listings… There’s going to be some GREAT product that comes on board during that period of time…
Interviewer 2: Okay, if we look at potentially what kind of retracing we may be seeing here, let’s take Vancouver which you’ve mentioned several times, we saw sales plummet there in the summer by, I think, 45%, what kind of impact do you think that this could all have on prices in Vancouver?
DC: Well, one thing I think we have to be very, very clear of is average price is just an indicator that doesn’t mean ANYTHING, really, at the end of the day, because those condo, like you said, in certain areas, are continuing to go up while others are going down. You’re going to see the ground oriented units in Vancouver, that prices are going to plateau, which means houses and townhouses… anything with dirt involved in them… because they’re just getting unaffordable… and we’re moving to the boxes in the sky… What you’re going to see is that because of the HST, a lot more sales of the RESALES side of it… and um in the resale side, right now, there are a lot of brand spanking new condos, probably like we’re seeing here in Toronto, … a lot of people bought those properties, they’ve now bought it, paid the HST, and nobodies lived in it, and they’re going to sell it into the market place so there’s going to be a lot of brand new condos coming onto the market which you’re not going to have to pay HST on and that’s where the gold is going to be.
Interviewer 1: So where’s the market headed five years from now?
DC: If we take a national average, it gives a 3-5% average, you’re going to see 2011… not a very good year… but 2012, 2013, 2014, all of our economic analysis is showing that you’re going to see a 3-5% increase which, if you put 25% down on a property… it means you’re getting 20% return on your money… that’s a pretty good place to be…
Interviewer 2: Okay, so none of this/… we’re not looking at anything apocalyptic here, none of these declines of 10% that some of the banks are predicting for example?…
Interviewer 1: 25% though (laughs)…
DC: … The Economist magazine puts that out every month, right, that rating… The apocalypse is not coming…. I think you have to buy regionally… the number one fundamental that you have to look at if you’re buying an investment property is buy where there’s jobs… don’t buy where the jobs used to be, buy where the jobs are going to be.
You can not analyze a housing market by looking at the housing numbers, you can only analyze the future of the housing market looking at the economic fundamentals, which is jobs and in-migration.
Fallacies and misconceptions in the above dialogue:
1. That “there isn’t a bubble in Canada”.
2. That areas that are overpriced will “be flat”; will “plateau”.
3. That we are in a “buyer’s market right now”.
4. That housing affordability at ten year average is reason for complacency. [hint: emergency low rates]
5. That there is no risk of “a significant amount of people that are going to be underwater here”.
6. That certain areas (Hamilton; Edmonton; Maple Ridge) and certain property types (the very low end; luxury) are immune from price drops, in fact will do “incredibly well”.
7. That there are going to be some GREAT opportunities in the spring … Including the ‘middle [mid-range] market’ in Vancouver; and the new resale [flip] condos where HST has been paid (“that’s where the gold is going to be”).
8. That “average prices don’t mean ANYTHING, really.”
9. That anybody knows what’s going to happen in the economy 2 years from now: “2012, 2013, 2014, all of our economic analysis is showing that you’re going to see a 3-5% increase.”
10. That leverage is to be embraced: “You’re going to see a 3-5% increase which, if you put 25% down on a property… it means you’re getting 20% return on your money.”
11. That a decline of 10% could be conceived to be ‘apocalyptic’. (“We’re not looking at anything apocalyptic here, none of these declines of 10% that some of the banks are predicting for example?”)
12. That the thought of a 25% price drop is laughable: “25% though (laughs)…”
13. That “you cannot analyze a housing market by looking at the housing numbers, you can only analyze the future of the housing market looking at the economic fundamentals, which is jobs and in-migration.”
14. That the possibility of a bubble existing is to be made light of.
15. That “the apocalypse is not coming.”