By Jim Reid
Canadian real estate continues to experience an exciting boom in some markets, caused by some powerful positive forces in our economy. But it could be destroyed by ignorance, false comparisons and superficial research and analyses.
Our media has been prone to publishing fallacious articles about what is happening here ever since The Economist magazine used some outrageous assumptions and misleading criteria in their 2012 global property value comparisons. Since then other (lazy) economists wrote their own articles that were based on this initial presumptuous article and recently more articles have popped up to inflate the hysteria of a real estate balloon in Canada.
Our real estate clients are becoming increasingly worried by these articles and if our industry doesn’t set the facts straight they could panic the market into plunging over an imaginary cliff and set our whole economy back at least 10 years. Even our government agencies and political leaders are starting to believe the “bubble myth”.
Many so-called experts try to explain bubbles as a direct companion of inflation. But inflation is really caused by the wage price spiral that hasn’t recurred since the late 1970s in Canada.
Others correctly identified the U.S. property price bubble as an artificially produced property demand (on steroids) caused by unscrupulous mortgage lending policies by the two giant lending organizations and the co-operating banks. That bubble exploded when the excessively risk leveraged mortgage derivatives were exposed as worthless financial instruments.
Canadian banks never eased their lending criteria that require substantial income and equity standards to obtain mortgages. Thus our property values stayed consistent with normal economic activities.
However, prices of Canadian real estate have indeed increased substantially and many people can not acquire property under our traditional financial contexts of a 20 per cent down payment for a first mortgage.
Following the 2008 global and American financial debacle, Canada Mortgage and Housing Corp. (CMHC) caught a bit of the greed bug and endorsed five per cent down payment schemes bearing ridiculously high interest penalties, but the number of deals that were actually approved was a very small percentage of the market. We did not come close to inflating a real estate price bubble from overly stimulated housing demand.
This year the CMHC backed down to a more traditional 10 per cent down payment for people with a secure cash flow and thus eliminated the likelihood of any bubble pressure within our housing markets.
The bottom line is that if anyone puts the term “real estate bubble” in the same sentence as “Canada”, they don’t have a clue what they are talking about.
But a real estate boom is a totally different kettle of fish. What we are experiencing is extraordinary high demand in desirable Canadian markets and sub-markets. Social migrations are at the core of these elevated prices and quite frankly our overly regulated housing infrastructure has impaired our market supply in these key markets where more and more people want to live.
The Hong Kong immigration event pushed up Toronto and Vancouver prices in 1987 for a few years, but the American recession of 1990 created huge downsizings in corporate Canada and this created many sales under duress. House prices in the Toronto area stepped down by 27 per cent during the next six years. This was not a bubble bursting but a market supply/ demand rebalancing in the near term.
Booms are driven by strong demand and constrained supply, whereas bubbles are driven by greed and extreme leverage. Canada has the former and not the latter.
To comprehend Canadian property values, one must look around the world to see that people are changing countries at a rate commonly produced by wars and other traumatic events. Few destinations are attractive as Canada, especially our three largest cities. Actual immigration at over 300,000 is at least 30 per cent above our new home construction rate in the large markets. Also, drift into cities continues. Projected population growth rates in cities during the next 10 years are very significant. Thus, current market prices are supported, especially in the longer term.
Labour and skill shortages are commonplace across Canada so actual earnings are quite good for those qualified to work. First-time home buyers from middle class families have used family help in raising down payments, but those who can’t obtain financial assistance from their families can’t afford to buy homes, even at these extremely low mortgage interest rates.
As the baby boomers downsize, they will continue to help their children buy a first home and with apparently quite a few years of cheap money ahead, the buyers will be able to build decent equity for several years ahead.
Another market attribute is that the high demand markets pull up average selling prices, yet other markets still offer reasonable values. Values are also supported across Canada by homeowners who have been able to reinvest some equity for maintenance, updates and upgrades (a $75 billion market) that improve property values.
Perhaps our most significant issue is political. With six levels of government interfering with free market activities in the housing industry the bureaucratic maze is intimidating to anyone without lawyers on retainer and corporate capital pools. Increasing housing supply for young families near industrial or commercial zones is barred from creative or innovative solutions. Infrastructure funding has been swallowed by the higher than average costs of our workers in the government and NGO sectors. Most of us also recognize a dozen or more other Canadian issues that restrain supply and affordability: excessive middle class taxation, monopolistic pricing of consumer goods and services, over-priced government services, under-productive government contracts, cronyism. . . .
A “housing bubble” is not one of them.