Although the general consensus is that Canada is not experiencing a housing bubble – at least, not yet – there are still some concerns that the market will get overheated in the next few months.
Image: Kevin Spencer / Flickr
There are the standard concerns, such as the various legislative changes that affect the real estate market in Canada. For instance, this includes the introduction of the HST in BC and Ontario and the changes to the mortgage lending rules across the country in April. Both of these will likely encourage some people to push up their home purchases before these changes come into effect.
There is also the ever-looming possibility that the Bank of Canada will begin raising interest rates in the third and fourth quarters.
But David Rosenberg, in the Globe, presents an even more worrying analysis of the current housing market in Canada. First of all, he points out that affordability of mortgages is declining: residential mortgages balances are worth 92% of consumers’ disposable income. This was the ratio just before the bubble started in the U.S. in 2005. As well, housing is becoming more and more unaffordable.
But his most penetrating insight, and one that possibly needs to be addressed in Canada too, is the demographics behind the buying and selling. As has been noted before, the biggest residential bubbles in the U.S. were largely in Sun Belt cities like Phoenix, Tampa and Las Vegas, all of which have large Baby Boom populations. Baby Boomers were looking at their homes as investments, so they were overbuying. They bought houses that were larger and more luxurious than they required because they thought the price of the houses were going to keep rising.
But the prices collapsed. Saddled with houses that are too large for their needs and unaffordable mortgages, these buyers now want to down grade and sell at any price. This has produced very strong selling pressure in the affected markets.
Canadian houses are almost as large as American ones, and the Baby Boom is just as important demographically. Will we experience a similar sell-off of over-sized homes?
Although David Rosenberg feels very confident that we will, it should be noted that outside of Victoria and possibly Vancouver, there are very few housing markets in Canada that are largely being driven by investments by retirees.
More importantly, the housing bubble picture in the U.S. is more complex than Rosenberg presents it. The markets that saw the biggest gains in prices were in the Sun Belt, but the cities that have seen the biggest foreclosures are in states that have been most distressed economically, particularly Michigan and Ohio. Paradoxically, these states didn’t even see much of a housing bubble before they collapsed.
In other words, over-buying by Baby Boomers may eventually depress some markets, but what is more important from a bubble point of view is whether people have jobs and can pay for their houses. Buyers of investment property in Phoenix can ride out the storm or sell at a lower price without hurting their net worth much. Without a job, like some people in Michigan, you have no choice but to give up.
No one can predict the future. But, for now, we likely shouldn’t worry about a Baby Boom-fuelled housing bubble.
Heleen Jacobsen
Broker of Record with InfoMarket Group GMAC Real Estate
www.infomarketgroup.com
