By Melanie Epp
There are two sides to every story; the one about Canada’s housing bubble is no different.
According to Arizona-based accountant Ben Jones, Canadians should be worried about the housing market going bust. This isn’t the first time he’s made a prediction that others scoffed at. The first time was in December 2004, when he raised concerns about the vulnerability of the US housing market. If they were laughing then, they certainly aren’t now.
At that time, Jones continued to post reports about plummeting home prices from around the world – in China, Australia, the US, Canada, Japan and Europe – even though no one really believed his cries. Jones is still “uncovering signs that the real-estate mania is far from over,” says the Globe and Mail, but the focus seems to have shifted on to Canada.
“China has probably the largest bubble in the world,” says Jones, “and when it blows, it’s going to shake the globe. There have been housing bubbles before, but never all over the world. Every time I hear people talk about the housing bubble in the past tense, I cringe.”
In particular, Jones points to the real estate markets in major cities such as Vancouver and Toronto, where he says prices are completely out of control. Although it was projected that prices would stabilize and correct, they haven’t. Jones believes that we are headed on a dangerous path, one that’s remarkably similar to that of the US in 2008. He also thinks that Canadians who are investing in property south of the border might also be in for a big surprise as the risks are higher than they think.
“When I read things about Canadians using home-equity money to leverage up 100 per cent to buy homes in Arizona,” says Jones, “well, we’ve seen the damage that leverage can do. They’re not only putting the cash that they’re bringing here at risk, they’re borrowing money against their own houses in Canada. They’re actually contributing to the inevitable collapse of the bubble in Canada.”
Part of the problem in the US, Jones suggests, is the presence of shadow inventory, or millions of empty houses or houses in foreclosure that the government and banks don’t put on the market. They do this to keep the supply low, he says, so that they can price those on the market higher. Those who are buying homes are paying more than they are worth. Low interest rates and down payments are influencing investors to spend more than they’d like to just to make a quick buck.
Jones suggests that any objective economist should know that the situation in Toronto is a “disaster in the making.” The entire system, he says, is a “house of cards.” Referring to the Toronto house that sold for $400,000 over asking, he says, “China probably has the largest bubble in the world and the fact that they’re using their bubble wealth to drive up prices in Canada is the rolling-bubble phenomenon playing out on a massive scale.”
“Ask yourself, why are the Chinese buying all these properties in Toronto and Vancouver? To make money. Yes, they say they are really nice places, but they say that about every bubble market,” says Jones. “Florida is a really nice place. California has great weather. I don’t think that justifies paying $400,000 over asking. Toronto was a really nice place 20 years ago, but nobody was paying half-a-million dollars for a condo.”
Others, including some of Canada’s top economists don’t take the bubble talk seriously. The Canadian Mortgage and Housing Corporation says that Canadian housing starts have risen to their highest since September 2007.
“When we look at the overall marketplace, there might be pockets of vulnerability but we remain quite comfortable,” says Gordon Nixon, chief executive officer of RBC. “Frankly, I’d like to see the rhetoric come down a little bit.”
He’s not alone. Economist Paul Fenton says that while housing prices are currently about 10 percent overvalued, there doesn’t seem to be a sense that there’s been overbuilding. Housing doesn’t pose a systematic threat to the function of the nation’s financial system, he says.
While new condo sales in Toronto hit another high when they reached 6,070 units in the first three months of this year, Jim Ritchie, senior vice president of sales and marketing at Tridel and a Toronto-based real estate developer says that condo builders “tend to be risk adverse.” He says that some 70 percent of condos are presold to buyers who put down at least a 20 percent deposit.
“It’s all about managing risk,” he says. “There’s a market for condos because average house prices in Toronto’s 416 area code are about $830,000 compared with $400,000 for a new condo.”
While some reports say that foreign investors are responsible for rising home prices, Ritchie says that just isn’t so. He says that almost 60 percent of people buying condos in the area are either single or couples without children. Concerns about foreign investment are overdone, he says, “given that 95 percent of purchasers are locals who have social insurance numbers and local addresses.”
When asked if he thought the Canadian housing market was in a bubble, chief executive officer of the Canadian Association of Accredited Mortgage Professionals, Jim Murphy, said no. He says that mortgage credit growth is actually below normal.
Other reports predict that Canada’s housing prices will continue to rise over the next three years, but so will economic growth.
“I don’t agree with fears that record house process are signs of a price bubble that must soon burst,” says chief economist for Central Credit Union, Helmut Pastrick. “While price levels are high relative to incomes, low interest rates are keeping mortgage carrying costs manageable. I expect rising rates will dampen demand a bit, but economic growth and growing employment will offset that decline.”
CMHC officials agree. “Clear evidence of a bubble is lacking,” their annual report says. “CMHC continues to monitor very closely housing prices and underlying factors such as demographic and economic fundamentals and financial conditions across all major urban centres, including condominium markets.”
So who’s right? Only time will tell, but both sides present valid and compelling arguments. The best advice one can offer is to exercise caution – always.
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