Okay, I may have added a word to the title of the newest Canadian Real Estate Association’s report on the state of Canada’s real estate market. See if you can guess which one? Answer to come… never.
Obviously, there’s several issues I have with the report.
First of all, it claims that prices will not go down, rather they will stay stagnant for a few years and wait for incomes to catch up. This is, of course, a most ridiculous argument. With interest rates going up, incomes are going to have to go up even more to make up for the increased interest costs. The report goes on to claim that 66% of Canadians have mortgages with a term of at least 5 years. All these mortgages aren’t coming due at the same time however. In 2-3 years, people will be forced to renew at higher rates than they have now.
Isn’t the whole stagnant prices argument a little ridiculous? The housing market doesn’t work like that. The market gets unaffordable, people stop buying, the media reports on this, prices start to decline, then the media reports on that, and the cycle worsens. (at least for a little while) When a commodity gets overvalued, does it just stay at record high levels until it becomes worth it? How about a stock? Then why would the housing market perform any differently?
The report also tries to make the argument that inter-provincial migration (0f seniors) from other provinces to B.C. is part of what is driving up prices there. Great theory, except the report states that only 2 or 3 thousand people are doing this a year. 3000 people are causing the values to go up so high in B.C? Color me skeptical.
I can go on. Rather than giving us the raw data for price/income ratios, the charts use standard deviations to show us that the price/income ratio isn’t that bad. At least I think that’s what the purpose is, since I admit I don’t really understand standard deviations. I do understand that chart 2 of the report is showing us the widest split of price versus income since the early 90s, and that period wasn’t very good for home prices.
The last page of the report presents us with the findings that Canadians can (for the most part) afford their mortgages. This is 100% correct. What the report misses is the crippling effect of negative equity. If you’re a homeowner who recently put 5% down on a purchased house, then all that house has to do is go down 5% before all the equity is gone. Now imagine that same homeowner gets a terrific job offer out of town, or starts a family, or something else comes up that offers a compelling reason to more. If an owners has negative equity, they can’t sell. If they can’t sell, they can’t move up to a new place, nor will someone come and buy their place.
The report also states that most mortgage holders (77%) have an equity position of at least 25%. This has little to do with great management on their part and much to do with values going up so quickly. How many Americans could say the same in 2006?
I shouldn’t be surprised. What sort of incentive does CREA have to call a housing bubble? Absolutely zero. They represent their members, unapologetically, as well they should. I just hope nobody takes this seriously. Frankly, the most damning evidence that we’re in a real estate bubble is that CREA felt the need to tell us we aren’t.