Aston Lau

How the Canadian housing market might actually make sense

I’m bearish on real estate; I still think a bubble has formed in the Canadian housing market that’s prime for the popping. However, all too often I see other bears spew emotional and often illogical vitriol, echoing the same refrain: prices are too high, and that a crash is inevitable.

The US market went kaput a long time ago, so maybe we should start considering why the Canadian market hasn’t followed suit.

A correction is most likely coming, although I’m no longer so sure we’ll see it happen anytime soon, thanks to the flagging US economy, which effectively prevents Canadian policymakers from raising rates.  The Bank of Canada would love to raise interest rates, in part to stem the bubblicious housing market, but before that can happen, the U.S. has to do it first, lest the Canadian dollar soars even further.  In light of the weak U.S. dollar and strong loonie, it’s unlikely that BoC governor Mark Carney would make such a move.

Carney is navigating tricky waters right now.  The strong loonie has hurt Canadian exports, meaning hurt for our economy.  In response, Carney has been telling the world that rates won’t be raised anytime soon and has even managed to talk it down a few cents.  On the housing front, there are some who suspect that he’s possibly convinced mortgage lenders to raise fixed rates, hoping to put a stop to any burgeoning housing bubble.

In his best case scenario, as interest rates eventually go up, it will slow the market, but not cause it to crash; the economy will start moving again, and inflation will return to the target rate of 2% without much prodding of interest rates.  5% down/35-year amortization mortgages will be the new norm and housing will still be expensive, but a return to 6%-7% interest rates won’t cause a wave of mortgage defaults, take down the CMHC and the Canadian taxpayer, and precipitate a massive tumble in real estate values.

On the other hand, if you’re a doom-and-gloomer, hyperinflation will swamp us all. But this will mean that the BoC will be forced to raise rates to tame inflation… which might also mean that the eventual effects of inflation may simply keep the nominal housing dollar figures propped up (even though it would still cause a correction in real terms). In which case, now is as good a time as any to buy, because you’re going to have to pay $500,000 for a leaky SFH anyway (even if $500,000 isn’t worth as much then as it is now).

Mind you, I don’t think these best- or worst-case scenarios will unfold as cleanly as I’ve laid out. But maybe, just maybe we won’t see a nasty housing crash in Canada.  At any rate, if you’re like me and you’d like to wait until after the crash to buy, you may be waiting for a long time, especially if the economy takes much longer to recover and rates stay low for years to come.