Larry Mac­Don­ald – The Globe and Mail

Lit­tle was heard of hous­ing bub­bles in Canada up to about a year ago. Now, pre­dic­tions of crashes are on the front cover of Maclean’s and other pub­li­ca­tions. One might won­der if we are talk­ing our­selves into a hous­ing miasma, even though the fun­da­men­tals don’t point to one.

Com­ment: Thank you. About time some­one pointed out that there is no rea­son what­so­ever for a 25% price crash.

Con­sider afford­abil­ity. The Bank of Canada’s hous­ing afford­abil­ity index shows that newly built stan­dard houses are as afford­able as 10 years ago. And the Royal Bank of Canada’s afford­abil­ity indexes for exist­ing hous­ing only “exceed their long-term aver­ages mod­estly, although the national fig­ures are exag­ger­ated by extremely poor afford­abil­ity in Vancouver.”

Com­ment: In Toronto, houses are more afford­able than they were 30 years ago. Prices may have risen, but mort­gage rates of 3% as opposed to 20% much a MUCH larger difference.

More­over, cred­i­ble ana­lysts don’t see a U.S.-style crash. Pro­fes­sor Robert Shiller told CBC News in Sep­tem­ber that Canada should be spared because its banks have low sub­prime expo­sure. And Gluskin Sheff econ­o­mist David Rosen­berg wrote in a Novem­ber note “that the U.S. plunge five years ago fol­lowed years of credit-tightening moves… any­one think that [the Bank of Canada] is going to raise inter­est rates 450 basis points with infla­tion barely above 1%?”

Com­ment: They have come right out and said they are not going to. Sim­ple as that. Never mind the sub-prime issue (where the US had up to 30% sub-prime mort­gages and Canada has some­thing like 2.4%), we do not have the preda­tory lend­ing where any­one could get a house, all to fuel the asset-backed secu­ri­ties scam.

Yet, some media sources are now paint­ing a dire prog­no­sis for Cana­dian hous­ing. It brings to mind the 2012 paper, “What Have They Been Think­ing? Home Buyer Behav­ior in Hot and Cold Mar­kets,” writ­ten by Mr. Shiller and co-authors, Karl E. Case and Anne Thompson.

The paper looks at press cov­er­age lead­ing up to the U.S. hous­ing col­lapse and doc­u­ments the increas­ing fre­quency of arti­cles depict­ing U.S. hous­ing as a bub­ble. June of 2005 was par­tic­u­larly busy, with cover sto­ries in the Econ­o­mist, Barron’s, and Time Magazine.

Com­ment: But Cana­dian media has been call­ing for a crash on and off since 2003, with the hype dialed up to 11 since about 2007. Thank­fully, it has not helped. Peo­ple love to think it, to say, to write about. Peo­ple think I am an idiot when I point out that it will not hap­pen. I have 10 dif­fer­ent rea­sons why it won’t, they don’t have any­thing. Maybe some­thing weak to do with income and prices. Funny how it is not crash­ing… talk is one thing, but when there is no mech­a­nism to make it hap­pen, it does not happen.

Mr. Shiller and co-authors argue the promi­nence of the bub­ble theme pro­duced “a turn­ing point in pub­lic think­ing” that led to prices turn­ing down, begin­ning in 2006. A sim­i­lar point was made by Mr. Shiller in a 2006 paper, in which he wrote: “there are rea­sons to sus­pect that the price changes … are related to pub­lic swings in opin­ions rather than fundamentals.”

Com­ment: That and prices had been run up, banks were run­ning out of suck­ers to lend to, some of the first adjustable rate mort­gages were com­ing due and peo­ple were default­ing and walk­ing away from their homes. It was not just media.

Could Canada sim­i­larly be talk­ing itself into a hous­ing crash (pos­si­bly fol­lowed by a finan­cial cri­sis and years of stag­na­tion)? Or will the fun­da­men­tals usher in the soft land­ing that the fed­eral gov­ern­ment is try­ing to achieve through tighter mort­gage rules? Messrs. Shiller and Rosen­berg believe the fun­da­men­tals will win because the Cana­dian set­ting is more sup­port­ive. Let’s hope so, if only so that Cana­di­ans are spared the trauma Amer­i­cans have experienced.

Com­ment: None of the above. Depends on the region. Van­cou­ver has been qui­etly crashging for years now, they will bot­tom out even­tu­ally. Toronto is still ris­ing, albeit slower. We may flat­ten, or just slow to a 1–2% rate of increase. Other regions will see dif­fer­ent results. You can­not aver­age out Canada – what is the same between Van­cou­ver, Cal­gary, Win­nipeg, Toronto, Mon­treal and Hal­i­fax? Very little.

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Con­tact the Jef­frey Team for more infor­ma­tion – 416−388−1960

Lau­rin & Natalie Jef­frey are Toronto Real­tors with Cen­tury 21 Regal Realty.
They did not write these arti­cles, they just repro­duce them here for peo­ple
who are inter­ested in Toronto real estate. They do not work for any builders.
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canada preda­tory lend­ing mort­gage rate

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