“The risk comes.. What if those home price increases aren’t permanent? And I think we have every reason to expect there may be a problem with home prices. We’ve seen transaction volumes slow, and, in some neighbourhoods, we’ve even seen price declines. So, should prices fall 20, 30%, and people increase their borrowing 20, 30%, those two forces can have a very negative outcome, both on an individual’s wealth, and also on the financial situation of banks. We saw a terrible consequence of that in the US, where there was more leverage amongst households, and more leverage on banks. So there are danger signs here. …
If I had to rank the risks: Number 1. Large decline in home prices, Number 2. A decline in the macro economy, rising unemployment… Number 3. Rising interest rates.
If you ask Mark Carney, we should be worried. They spend a lot of time at the BOC thinking about ways they can creatively cut back on consumer debt, without popping asset bubbles.
So, yes, the BOC is worried, I think they’re right to be worried. I don’t think we’ll see a US style catastrophe, but a world in which people are over-leveraged, and prices fall, and a lot of people owe more than their house is worth, that is something that I would put 20, 30% probability on.”
– Tom Davidoff, Economist, Sauder School of Business, UBC, excerpts from CBC website video interview, 14 Nov 2012
Agree completely with the substance of what Tom Davidoff says here, but I’d weight the risk of large house price drops at far higher than 20%-30% probability. Especially if by ‘large’ drops one means something in the region of 30%-off. We’d say the chances of that size price fall are over 90%, actually. We’re already about 10%-off and the unwinding has hardly begun. Can’t see any other ‘creative’ way in which the bubble can resolve itself. – vreaa