‘Canadian Business’ Headline – “Prediction: The Canadian housing market will crash”


(graphic used by ‘Canadian Business’ to illustrate this story)

“The average price for Canadian homes sold in November stood at $360,396, according to the Canadian Real Estate Association. Meaning that in just 10 years, prices have doubled.” …
“Optimists may find comfort in the market’s resilience. In fact, a December press release from Re/Max boasts of a residential real estate market that “defied conventional logic and exceeded expectations in 2011.” But why should we take comfort in a market that defies logic? That is one of the key elements of a financial bubble.” …
“There is little argument among economists that houses in most major Canadian markets are, at the very least, overvalued. By some metrics, houses are less affordable now than at any point over the past 30 years. Rising prices draw people to the market in part because they’re afraid they will eventually be shut out. But what many fail to consider is that when ordinary Canadians are unable to afford real estate—even when borrowing at unusually low interest rates—the market will adjust. Unless our incomes go up, house prices have to come down. And there is a very good chance this will happen in 2012.” …
“Both the U.S. and the U.K. have already suffered crashes north of 20%. While different factors underlie their real estate markets, it nevertheless stretches credibility to believe that Canada will remain an anomaly.” …
“The heads of three of the country’s major banks (CIBC, RBC and BMO) expressed concern about the housing market at an investor conference this month. All agreed that increasing housing supply and growing debt means the market is reaching its peak. While they don’t foresee a crash, they acknowledged prices are likely to drift downward. Bank of America Merrill Lynch, meanwhile, predicts prices could fall between 5% and 10% this year. There is also a possibility prices will drop much farther over the next few years, perhaps as far as 25%. The scary part is that the direction of the economy ultimately might not even matter. If interest rates rise and the monthly cost of carrying a mortgage edges up, there’s little doubt that prices will fall, as rising rates make homes less affordable. But interest rates don’t have to rise for the boom to come to an end.”

“David Madani, an economist with Capital Economics, says that the reason prices keep rising, despite fundamentals that indicate they should be moderating, is because a bubble mentality is driving the Canadian market. “It’s this belief that prices are going to continue to go up, which becomes a self-perpetuating force,” he says. He explains that in good times, rising prices create a sense of urgency among home buyers who don’t want to miss out on the chance to benefit from soaring prices. So people pile in, pushing prices higher. This creates the appearance that housing is an asset that can only rise in value, and even more pile in.
But this line of thinking can reverse, and people can overreact to a declining market too. The greed that previously drove buying behaviour turns into fear that prices will fall indefinitely. This can be a self-perpetuating force. The result is that prices can dip farther than where economic fundamentals suggest they should be.”

“An argument sometimes used to defend the strength of the housing market is that foreign investors, predominantly wealthy Chinese citizens, are buying property here because Canada is a safe haven in a turbulent global economy. There are no actual data to support this claim, however. Even assuming it’s true, the presence of financially motivated buyers helping to prop up the market doesn’t inspire confidence. “They’ll just liquidate their positions,” Madani says. “They’re a much greater flight risk.” Any listings they dump on the market will only serve to drive prices down further.”
“When prices do start to fall, don’t expect a quick rebound like we saw three years ago. The average home price fell by 8.5% between August 2008 and March 2009, according to the Teranet-National Bank House Price Index, in a decline sparked by the financial crisis. By November, the market had already recovered. Part of the reason for the quick rebound was massive government intervention.” …
“That doesn’t mean that those considering buying a house today should necessarily let the prospect of a correction deter them. A house is firstly a place to live, not an investment. Bubbles occur, in part, because we forget that distinction. So buyers need to be comfortable knowing their houses might not increase in value over the next few years—and also that they could be worth much less.”
– excerpts from ‘Prediction: The Canadian housing market will crash’, Canadian Business, 12 Jan 2012

Exactly what the bears have been saying for years now; it is noteworthy that this argument is now being laid out by the MSM. All of these mainstream articles ‘prime the psyche pumps’, in that all market participants likely now know of the bubble ‘theory’. Once price action confirms their fears, buyers will freeze and sellers will rush to market. Just watch.
We agree with pretty much every word in the article, except for:
1. “That doesn’t mean that those considering buying a house today should necessarily let the prospect of a correction deter them.” [Of course it should deter them, unless they enjoy giving away money and hobbling their own financial future well-being. They can simply wait, and then later buy the same house for less money, or a lot more house for the same money.]
2. “There is also a possibility prices will drop much farther over the next few years, perhaps as far as 25%.” [For parts of Canada, perhaps, but these predictions are way too optimistic for the Vancouver market. Prices here will drop 50%-66%, and in some BC recreation areas as much as 80%, peak to trough.]
- vreaa

45 responses to “‘Canadian Business’ Headline – “Prediction: The Canadian housing market will crash”

  1. Why would the possibility of being underwater within months of buying deter them? :)

    HAHAHAHA. This is the new reality for RE pumpers. We should make up some new sales pitches for realtors once it becomes widely accepted that the market is in a downturn.

    “Well sure markets go up and down, but….. I mean, you want a house don’t you?”

    “So your just going to rent forever?”

    “You need to look at a time horizon of at least 20 years.”

    “In the really really really really really long term, real estate always goes up.”

    “Look, the market might tank for the next decade. Do you really want to finance your landlord’s retirement for that long?”

    “Don’t try to time the market. The right time to buy a house is the first time it crosses your mind.”

    “As long as you can afford the mortgage payment, who cares what the house is worth?”

    • “new” sales pitches? I hear/read most of these regularly

    • “So you’re just going to rent forever?”

      We are all renters. That’s what I said to the nice bank lady when she gawked at my account balance. I explained, five years ago my buddy teamed with an investor to make the down payment and bought a house in Maple Ridge @ $335,000. The payment was $2000/m and he had a mortgage helper for $500/m. Since, he has reno’d the deck for $10000 and payed five years of tax totaling $10000. He also bought a water heater and paint for $1000. At the time, he bugged me to buy, but I rented and banked the difference between our two payments. I paid $700/m. and banked $800/m

      Five years later, he wants out and intends to rent again. He can get $400,000 for the property. Principal owed is 310,000. The gross profit is $90,000

      Deduct, 3% agent fee going in and out.
      Deduct the interest portion of mortgage payments he covered
      Deduct operating expense and property tax
      Deduct 50% of the mortgage helper as taxable income
      Pay back the downie investor principal plus 5%.

      Gross profit on the house experiment $90,000
      less expenses
      balance =
      $29,000 for five years rent isn’t too shabby, I told him, however expenses ate up any additional savings. And if he does not buy another place in a year, deduct tax on the capital gains for this year. An accountant might dispute my calculations but I think it’s pretty close. I did not include credit card interest, though my friend has been cash poor throughout the experiment.

      In the same five year time period, I banked $48,000 rather than pay mortgage interest, with no fear of capital gains tax and no operating expenses, which I also banked. I may not be a millionaire, but I am happy with my lifestyle and enjoy west coast amenities without worry.

      I wanted to share this experience, because I have been reading the VREAA blog and comments rent-free for some time and felt the need to pony up. Thanks.

  2. it is just so plainly, ridiculously obvious to any neutral observer. the denial is an amazing display of some aspect of human nature. the divisions are so sharp now, i don’t think there can be many left undecided. that should mean the pool of willing participants is exhausted. it’s sort of turned into like weird little non-violent civil thought war dividing friends, neighbors, family. aside: as vreaa sometimes alludes to but is perhaps too polite or outwardly neutral to say, i don’t think believe ham are the savvy buyers many of you believe them to be. the original ham were the hk flight migrants of the early 90s. mostly, these were very savvy market participants, typically fading the crowded trades and refusing to participate in what they did not understand. this recent edition from mainland seem nouveau-riche and generally inexperienced with market phenomena. this economic reversal they are now having in china will be quite the heavy duty capitalist baptism. they’ll endure it, learn and move on. they’ve been through much, much worse in 50s-60s.

    [Thanks for the comment, chubster. To clarify, we have never felt too polite to point out that almost all buyers (including 'HAM') in the last 5 years or so are dumb momentum speculators. The really smart money has been avoiding this market for years. -vreaa]

    • I guess if you compare recent speculative excesses to mass famine, executions, and destruction of the traditional family and cultural mores, it isn’t so bad.

      To be clear, a lot of “savvy” investors of the early-90s got creamed through the Asian financial crisis in the latter half of the decade. Greed transcends tribal lines, however they are drawn.

      • re:apparently creamed savvy. not so much flight migrants who were fwd-thinking, risk-averse to establish a foothold outside, just in case. there wasn’t a lot for them to do in bc; so they mostly did nothing and then went back east as the fog cleared.

      • Jesse, I respect your knowledge, but i’d still respectfully contend it’s not and wasn’t all always about greed. Many HK families really did fear the end of life as they knew it as the HK takeover by China approached.

      • I don’t know the figures on HK repatriation but these days China offers similar favourable terms for its expats. FWIW I don’t think the Canadian government is willfully blind to reverse-migratory patterns of naturalized citizens. The talk is always about Canada becoming a global interconnected economy but the truth is Canada needs growth that generates jobs on home soil, and significant monies are spent investing in new immigrants. At some point the numbers showing benefits over costs are going to matter. At least I like to think they will.

      • “i’d still respectfully contend it’s not and wasn’t all always about greed”

        Of course it’s not “always about” greed, however one can state the same thing about many (if not most) immigrants to Canada, where their fortunes are more precarious than we enjoy in North America. Family of mine emigrated from the reasonably stable nation of Malaysia, not because the country was politically unstable but because the rule of law was not strong enough to offer their family a good chance of a prosperous future.

        In the case of China I think that’s true, where those who have made money through various means will want to cement them; inside China that’s no sure thing and if I were a Chinese national I’d want to protect what I earned before someone else takes it away. Moving it offshore and having an “out” to flee in case of whatever is a prudent move, and no not all those immigrating to Canada from China stole their money, they made it fair-and-square (by our standards) but know enough that many will try to take it away from them in not-so-pleasant ways.

  3. Renters Revenge

    When you see headlines like this you know it’s over. So much of this bubble is psychological and the “coming” correction talk just cements the inevitable.

    • But why do some (e.g., in the stock market) say that capitulation is needed, i.e., everyone giving up and piling in, to finally get a top? Those contrarians say we’ll keep climbing a wall of worry as long as folks like us are around thinking it is a bubble. I guess one rule doesn’t fit all bubbles?

      [The correct way to think about this is the following: The market tops when everybody who is destined to capitulate, does so. Then the market collapses; no more buyers. Every bubble (stocks, RE, whatever) has it's (very) small minority of smart money bystanders who understand the mania for what it is and watch from the sidelines. It's not necessary for everybody to be 'in' before we collapse. In the case of stocks, many bearish bystanders would be short, and that adds a whole other dimension to that market (the short squeeze effect near the tops and the short covering effects near the bottom). In an RE market plunge, there are no shorts needing to cover near the bottom, thus there may be even less support for prices than in stock market collapses. - vreaa]

      • Basement Suite

        Thank you VREAA for helping me reconcile these two points of view. Makes perfect sense, and it’s good news because I had no intention of ever capitulating to this absurdly priced tulip market :P.

      • VREAA, with all due respect, you have to quit calling yourself, and other bystanders, “smart money”. The smart money are the West side flippers who, even if they stay too long, hang on to at least some of their profits (in many cases, 1000s of percent).

        “The prevailing wisdom is that markets are always right. I take the opposition position. I assume that markets are always wrong. Even if my assumption is occasionally wrong, I use it as a working hypothesis. It does not follow that one should always go against the prevailing trend. On the contrary, most of the time the trend prevails; only occasionally are the errors corrected. It is only on those occasions that one should go against the trend. This line of reasoning leads me to look for the flaw in every investment thesis. … I am ahead of the curve. I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different investment thesis. Or, if I think the trend has been carried to excess, I may probe going against it. Most of the time we are punished if we go against the trend. Only at an inflection point are we rewarded.”

        – George Soros

      • blammo -> However you want to slice it, smart money does not buy into the latter days of a speculative mania, even more so in an illiquid asset class.

        In retrospect, sure, as is the case in all manias, some latter day ‘flippers’ will have made money.
        Are they smart? No. Lucky, perhaps, but smart, no.
        They bought a very overvalued asset and then sold it higher when it became very very overvalued.
        This is not the recipe for successful investing.

  4. Scariest statistic:

    Maximum median price-income ratio in US before the crash:

    3.7 to 1

    Ratio in Canada right now:

    4.6 to 1

    Ouch.

    [Ratio in Vancouver right now:
    10.6 to 1
    Über-Ouch.
    - ed.
    ]

  5. Canada does I think have a more regulated monetary system than the US…and so the bubble is allowed to grow in a less windy environment. But when it does pop, I would think that it will hurt much more and then the gains will have been privatized and the losses socialized.

    It is interesting to me this kind of economic reversal that is happening where the munipalities are using RE tax dollars to finance social programs through speculative capitalism. But when capitalism collapses in on itself, the social programs will have to be cut as well, and thus people will blame speculative capitalism.

    • …. which is exactly why the UK now has the highest level of personal debt and the second-highest level of national debt in the world. God – I hope this isn’t coming to Canada….

  6. michael, where’s fredo?

    • Is that where prices are headed at last?

      • seems ominous but dunno. recent posts – the fishing, the hail marys, etc. free associatives got the better of me

      • Basement Suite

        Ominous indeed, reminds me I got those on DVD as a gift years ago and never had time to watch them again. Well lets hope the market swims with the fishes.

  7. gretchen with moyers, tells it like it is and gives preview of post-bubble canada

    http://tinyurl.com/7yp2rz4

  8. The poll seems to indicate that 80% think that RE will crash in Canada…public sentiment is shifting, oooh boy !
    Although it could be skewed by voters coming from this blog ;)

  9. “If interest rates rise and the monthly cost of carrying a mortgage edges up, there’s little doubt that prices will fall, as rising rates make homes less affordable.”

    That’s the scary thing. What if the market corrects 25% or even 50%, but rates stay super low. Do you jump in? The market is overvalued now by more than that. Assuming rates eventually do rise (which I’m not convinced of), that can be the other shoe to drop, and the market can take another big leg down. So, when to get in.

    The good news in a sense is that recovery in a burst bubble market is very slow, per the US anyway, so I guess the smart approach is take your sweet time getting in rather than catch a falling knife. Wait for signs of a long term bottom maybe, realizing that one housing bubble is unlikely to be followed immediately by another.

    • ” So, when to get in.”

      My take on that would be: if you plan to stay in the same city for at least 5 years and you find a place that suits your needs well and doesn’t cost you more than renting, then go for it, buy your place and don’t worry about the value of your home… it’s just a shelter.

      One thing to keep in mind is that, while it’s great to downgrade when the market is high (if I was about to retire, that’s what I would do now), it costs you a lot less to upgrade when the market is really low…

      So to summarize: buy the place when you can afford it, regardless of what you think of it’s future value will be.

      • Basement Suite

        Sage advice. Unfortunately, even though I make decent money, the Vancouver tulip bulb market needs to fall a very long way for that.

      • Don’t despair, the market might crash much faster than you think… You may see 30% down within one year (we’re already about -15% from last may…). The longer you wait for this craziness to end, the bigger your downpayment will be (in absolute and relative term)

      • Basement Suite

        That would be sweet and true that, I am accumulating money even though money itself is increasingly worthless. Let it pop.

  10. It’s nice to see the bubble is finally being called out in the open.
    It’s even nicer that the article states it won’t take a castrsophic rise in interest rates to pop it, but instead it can pop at any moment as it’s based on nothing but expectations of future increases. I can finally look forward to this city turning around, even if it’s a little poorer and a lot more humble I would take it a million times over the current greedy, entitled, money chasing city I call home.

  11. “So buyers need to be comfortable knowing their houses might not increase in value over the next few years—and also that they could be worth much less.”

    I can’t imagine this will go over very well with some folks who bought in Vancouver in the last 5 years!

  12. Greetings everyone,

    I have to admit I’m fascinated by all of this, mainly because once again it looks like I’m going to have to shift cities.

    For those of you who haven’t followed my little saga, I’m an IT consultant who specializes in cloud based solutions. I lived in Vancouver for around 4 years, and I currently live in Halifax. I also lived in Toronto for about 10 years. I have a pretty good idea of the housing market in the east, central Canada and on the West Coast.

    I’ve spent the last 8 months cultivating a number of opportunities. I’ve been looking at positions in Halifax and Toronto mainly because frankly in my line of work, there’s nothing going on in Vancouver. Next week I fly from Halifax to Toronto to complete a round of negotiations and to sign a contract. It’s looking like a move is once again in the cards. Frankly I’m very sad to leave Halifax, but I long ago learned you have to go where the work is.

    And this is the lesson I have learned in the last 6 years, when I’ve moved from Toronto, to Vancouver, to Halifax and back to Toronto : You go where the work is. The idea that being a “grownup” means buying a property is a Boomer fallacy. I have learned that to be mobile is to retain a competitive advantage. Through the process of investigating opportunities, I was free to look to any city I chose. I was also free to pick the opportunity that best suited my needs, which is why I’m off to Toronto again. I don’ t have to worry about selling a home in Halifax. Unfortunately my sister, who would like to move to Alberta, is stuck… her beautiful home in Roethsay, N.B. has been on the market for a year.

    I will never again own property. In exchange for “paying my landlord’s mortgage”, I retain the freedom to relocate as I choose, which means I can take my hard won skills and qualifications to wherever there is work, whether that’s Toronto, Halifax, NYC or San Francisco. If I knew then what I know now, I wouldn’t have bought a condo in Toronto in the first place, back in the day. Lesson learned, I suppose.

    I note a lot of you are still trying to time the market, you’re talking about catching falling knives. In my opinion even if you’ve passed the top you’re looking at more then 5 years before you get anywhere near the bottom and even if you do time the market right, you’re locking yourself into a city when the world is changing and you need to be flexible to change with it. It’s not up to me to tell anyone how to live, but “putting down roots” is an illusion in these times.

    Anyway best of luck to you all, I continue to be fascinated by the Vancouver lifestyle, and all that it means. :)

    • Actually what I said was “I guess the smart approach is take your sweet time getting in rather than catch a falling knife” meaning jumping in on the way down is not smart. I agree on that. You’re lucky to be so mobile, enjoy it.

  13. OT, and maybe mentioned elsewhere, but CBC are running a series across web, TV, and radio about retiring boomers, plenty of mentions of RE and debt.

    http://www.cbc.ca/news/canada/british-columbia/story/2012/01/24/bc-silver-ceiling-live-chat.html

    Caught a story on radio one yesterday morning about some boomers that sold their East Van house, retired early, travelled for three years, downsized into a White Rock condo, and then wrote a book: http://laughingboomer.com/

  14. This will save Vancouver real estate market – just charge $100 for hot dogs and the money will flow: http://bit.ly/z5quW4

    • If you love your children, you’ll buy them $100 hot-dogs.
      1. You can afford them. (Speak to your banker.)
      2. What could be more important than feeding your child?
      3. Next week they’ll be $150.
      4. Tourists could scoop them all up, then you’ll never have access to food, ever again.
      5. They’re not making any more cows, and sawdust doesn’t grow on trees.

      So, stop all your hot-dog-hating whining, be a responsible adult and a loving parent: buy your children some food, already. Don’t you care?
      Hey, they’re now $105. Hurry.

      • you forgot that there is a limited amount of lobsters and we’re running out of them…

      • But does the analogy with housing work? Hot dogs are junk food. Housing near good schools? Considered priceless, in some quarters I’ve seen.

        I’ve seen the desperation of parents — of various races — about getting their children into neighbourhoods with good schools. Indeed, that’s the source of a lot of frustration when people feel priced out.

        NB, I’m definitely not saying being reckless with your finances in buying a house is a sound idea for anybody’s family.

      • Vesta -> You’re right, it’s not a good analogy.
        Just a bit of fun.

  15. Pingback: Maple Ridge – Renter Comes Out Ahead Of Buyer/Seller Over 5 Years | Vancouver Real Estate Anecdote Archive

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