The Housing Bubble

The Globe and Mail reports from Canada. “Emma Co has been a real estate agent for several years in Vancouver, but she’s never seen the market so fired up, particularly on the city’s east side. ‘I can’t believe this market,” she said. ‘I was talking to one realtor, and she said, ‘where is this going?’ Local buyers are either panicking to get into the market to settle down, or they’re investors looking for a deal, Ms. Co says. ‘They want to buy because the interest rates are very low, and they are panicking because the market keeps going up.’”

“As agent Keith Roy says: ‘Every month this year, the value of the detached home has gone up. The attitude of sellers right now is, ‘Why sell now when my house is going to be worth more next month?’”

“Perhaps a sign of an already cooling market is the recent sale of a Kitsilano house for well below asking. The two-storey renovated house on a 40-by-105-foot lot at 2765 W. 8th Ave. was listed at $1.799-million and sold for $1.580-million after 34 days on the market. ‘It’s still active, no question, but I don’t think you see the same activity we experienced about six weeks ago,’ says agent Christopher Rivers, who sold a house down the street for $1.569-million.”

“As to whether the frenzy will continue, Mr. Roy, the agent, believes the market has plateaued and could go either way. ‘Expectations keep going up, but at some point, that changes. Over the long term, your house will be worth more than it is today. But there’s going to be one day when your home is worth less than it was the day before.’”

The Vancouver Sun. “‘Data!’ cry Vancouver’s beleaguered house poor. ‘Give us data!’ Their shouting has yet to pierce the stone-deaf resolve of our senior governments’ refusal to do so. In the meantime, the debate on the effect of offshore investment on the Metro Vancouver house prices festers in a stew of anecdote and urban folklore. As their excuses pile up about the difficulty of gathering data, or that the effect of offshore investment is negligible, or that rising house prices are the fault of municipal governments, they have begun to look not just feckless but complicit.”

“A team of Credit Suisse research analysts published reports on Chinese investment into Australian residential property last year and this. This year’s report ‘bemoaned the poor data quality in Australia,’ they still believed it to be ‘the best in the world’ of its type. ‘For example,’ the report stated, ‘in New Zealand, where Chinese demand for housing is reputed to be strong, there isn’t a body even attempting to record these flows.’ (Nor for that matter, they could have added, is there such a body in Canada.)”

From CanIndia. “A Manulife Bank of Canada survey reveals that 15 per cent of mortgage holders would face a financial crisis if rates rose or they got downsized. Most analysts now believe interest rates will rise this year. Nearly half said they couldn’t manage a 10 per cent increase in their mortgage payment. Faced with loss of employment by the major breadwinner, most respondents to the survey said they had a very limited financial cushion. About 16 per cent said they’d be in trouble within a month and a total of 43 per cent said they’d have difficulty within three months if someone in the household lost a job.”

“An interest rate hike would prompt thousands of investors to put their investment properties on the market or move into a cheaper living unit. This would result in a housing glut which would cause what many expect- a correction in the real estate market.”

The Calgary Herald. “Calgary region home prices declined for a second consecutive month in April. Statistics Canada’s New Housing Price Index for the Calgary census metropolitan area fell by 0.4 per cent from March, it said. ‘Some builders reduced their prices to stimulate sales, while others reported lower negotiated selling prices in April,’ said the federal agency.”

“Wayne Copeland, president of the Canadian Home Builders’ Association-Calgary region, said local builders are adding incentives trying to entice people to buy new homes. ‘They’re starting to offer some sort of a discount and we’ve got buyers out there that are responding to that. A lot of builders are offering incentives rather than lowering prices; adding extras and upgrades,’ he said. ‘The cost of land is too valuable to be taking a hit on it. Labour costs are coming in a little bit lower now. Builders have gone out and asked for discounts on that type of thing.’”

Fort McMurray Today. “A weak labour market caused by low oil prices is causing a sharp increase of rental vacancy rates in the region. According to the Canada Mortgage and Housing Corporation’s rental market survey, the vacancy rate in Wood Buffalo in April stood at 22.3%, up from 7% at the same time last year. CMHC market analyst Braden Batch said that the labour market is affecting rents.”

“‘The sources of demand in the rental market have certainly pulled back in the last survey period,’ Batch said. ‘I would largely attribute that to the labour market in Wood Buffalo being quite a bit weaker than what we saw in April last year.’”

“Batch cited Statistics Canada’s newest Labour Market Survey, released June 5 as showing a 2% decline in full-time employment in the Wood Buffalo region. The survey also said that the unemployment rate in the region had risen to 8.6% in a three-month period ending May, compared to 4.2% at the same time last year. ‘Nobody’s surprised by saying anymore that the price of oil has declined considerably,’ he said. ‘Some people in that market are there solely for work … and if the work is dried up they may be leaving the town.’”

“The high vacancy rates and rent were similar in the Cold Lake area, which showed a vacancy rate of 29.3% and average two-bedroom rent of $1,433. The average two-bedroom rent in the province is $1,249.”

From Macleans. “You have to give Bank of Canada governor Stephen Poloz credit. On the question of Canada’s frothy housing market and sky-high household debt levels, he’s been nothing if not consistent. Pretty much from his first statements as governor in 2013—that’s about $100,000 ago in real estate appreciation terms—through to last week when the bank released its latest financial system review, Poloz has walked a tightrope between admitting that elevated house prices and debt levels pose a risk to the economy, and assuring Canadians that the likelihood of a crash is actually pretty low.”

“In early 2004, as American house prices roared higher and there came dire warnings from some quarters about the existence of a bubble—accompanied, of course, by strident denials from banks, most economists and the mortgage and real estate industries—Ben Bernanke (then still a governor before he became Fed chairman) addressed the problem of what to tell the American people. ‘One’s inclination is to answer by painting a benign picture so as not to cause unnecessary public concern,’ he said during one March meeting. ‘On the other hand, financial conditions do change, and it’s our collective responsibility both to monitor those changes and to communicate truthfully to the public what we see.’”

“To paraphrase, don’t freak people out, but be honest if the situation turns bad. It was a moot point, however, because as the transcripts from 2004 to when housing prices started to drop in 2006 show, it was unfathomable to those in the room that a deep and long-lasting housing crash could actually occur.”

“Last year the economist Paul Krugman offered one of the best explanations I’ve seen yet as to why bubbles are so hard to spot, until they pop. A thoroughly inflated bubble, he offered, is ‘a natural big lie—that is, a lie so audacious nobody will believe that anyone would dare to invent it.’ Like, for instance, the notion that bungalows in Toronto and Vancouver can regularly and briskly sell for well over $1 million in a nation where the inflation-adjusted median incomes for individuals are more or less where they were at four decades ago.”

“Poloz may truly believe that, but you’ll probably never know either way.”