Canada's 'housing bubble' deemed close to bursting

[Truenorth00]

Originally Posted by WarrenC12

Don't forget unemployment is still at record low levels. I don't know where this goes, but there's lots of reasons that housing won't tank super-hard.

Housing can tank with low unemployment. You're about to see it happen. Guess what Tiff Macklem is thinking when he sees these unemployment numbers? "I got room to raise."

What kind of mortgage do you think the average buyer will qualify for, when the stress test is at 8% in April?

I think there's a lot of recency bias in these discussions. All from people who have never seen rates go up this fast and have never seen a real hard stop in real estate. Precisely why the education is needed I guess....

Will add that it's entirely possible we get a soft landing where it's only real estate that is f'd and the rest of the economy is firing strong. That's not out of the question. And that is definitely Tiffy's goal.

[lio45]

Originally Posted by travis3000

In the GTA the inventory is still very low. Like exceptionally low. Thats the final straw which is stubbornly holding prices IMO. If we reach a point where inventory rises, prices will retreat another 10% from current prices. That would take them down about 30-32% from the highs of Feb/March 2022.

So a 1.2 million dollar house a year ago would end up at 830K. Seems steep, but that same house in 2017 (another market high at the time) would have sold for 630K. Go back to 2015, and it would have gone for 420K.

So it really all is perspective. Even once this bubble "pops" , anyone who purchased before mid 2020 will not lose any money. Effectively the majority of the COVID gains will be eliminated.

Your last paragraph will likely prove true in the GTA and Lower Mainland, which were the craziest and bubbliest, but in other markets (Quebec, and probably Halifax from what I can tell), the boom seems here to stay; post-Covid prices will likely remain significantly higher than pre-Covid ones.

[GreaterMontréal]

Originally Posted by Coldrsx

Stats Canada's labour force survey provides estimates of the working age population.

Edmonton, Alberta Jan 2022:1,213.6 December 2022: 1,249.3 = gain of 35,700 people

Calgary, Alberta Jan 2022: 1,277.9 December 2022: 1,314.3 = gain of 36,400 people

Statscan

That's good growth.

Montreal was one of the best in Canada in 2022. December YOY
Labor force : +42,9k
Employment : +68,7k

Labord force from January 2022 to December 2022, Montreal was +75,3k.
Employment : +91,3k


Toronto and Vancouver did poorly.

Toronto was one of the worst performer in 2022, if not the worse. Something like, labor force YOY of -86k

[Truenorth00]

Originally Posted by travis3000

In the GTA the inventory is still very low. Like exceptionally low. Thats the final straw which is stubbornly holding prices IMO. If we reach a point where inventory rises, prices will retreat another 10% from current prices. That would take them down about 30-32% from the highs of Feb/March 2022.

So a 1.2 million dollar house a year ago would end up at 830K. Seems steep, but that same house in 2017 (another market high at the time) would have sold for 630K. Go back to 2015, and it would have gone for 420K.

So it really all is perspective. Even once this bubble "pops" , anyone who purchased before mid 2020 will not lose any money. Effectively the majority of the COVID gains will be eliminated.

Originally Posted by lio45

Your last paragraph will likely prove true in the GTA and Lower Mainland, which were the craziest and bubbliest, but in other markets (Quebec, and probably Halifax from what I can tell), the boom seems here to stay; post-Covid prices will likely remain significantly higher than pre-Covid ones.

On a long enough timeline nobody loses money. The problem is that you have to hold that long. That 89/90 crash didn't bottom out till 1996. And it took till 2002/2003 to get back to 1990 prices when adjusted for inflation. So yes, somebody who bought at peak in Feb 2022 may turn out okay. If they can hold on for a decade or more....

[Innsertnamehere]

I don't think anyone is saying people who bought in Feb 2022 are going to do great.. just that we won't be returning to 2016.

I've been saying since prices started to drop that I figured prices would decline to around what Travis just described over the rate hike period. I do think there is still room to drop more, and that it likely will still happen.

I also have a sneaking suspicion that rates will drop a bit by the end of this year again. I don't see the current rate environment sticking around in the long term, even if we don't return to near-0 rates again.

All these things, to me, indicate median detached prices in the GTA declining from the Feb 2022 peak of $1.65 million to the current $1.25 million, and I suspect will likely settle around $1 million by summer time. This is still a massive decrease overall, but you will not see the $750k median detached price that existed in 2016. It's just too far to drop. I suspect prices will bottom out in the summer with them starting to creep up again come fall as the BoC likely approaches a small rate cut.

That, or prices just remain flat from here. Honestly, this seems to be the trend right now in prices, I just don't see it being sustained with current rates being so sky high.

Lots of moving parts of course that could change things, but as of today, that's my 2 cents.

[goodgrowth]

With the amount population growth I am skeptical of a housing crash. Maybe a slight correction.

Homebuying dropping off doesn't mean the demand for housing will drop off. If anything rental demand will most likely be crazy over the next few years.

Rental demand will create a pretty solid floor for the housing market imo.

[Innsertnamehere]

Originally Posted by goodgrowth

With the amount population growth I am skeptical of a housing crash. Maybe a slight correction.

Homebuying dropping off doesn't mean the demand for housing will drop off. If anything rental demand will most likely be crazy over the next few years.

Rental demand will create a pretty solid floor for the housing market imo.

we are already seeing rent demand skyrocket in the GTA as a result of the rate hikes pricing people out of the ownership market. Rent is up 20% YoY in the GTA. It's nuts.

[goodgrowth]

Originally Posted by Innsertnamehere

we are already seeing rent demand skyrocket in the GTA as a result of the rate hikes pricing people out of the ownership market. Rent is up 20% YoY in the GTA. It's nuts.

Right and most landlords facing escalating mortgage/loan payments will probably be able to meet that with escalating rental income. aka not a crash...or less of a crash.

[Truenorth00]

Originally Posted by Innsertnamehere

I don't think anyone is saying people who bought in Feb 2022 are going to do great.. just that we won't be returning to 2016.

We didn't have rates like this in 2016.



I don't understand where people think the money will come from when buyers just don't qualify for mortgages that high.

I'll concede that some of this is a function of how long rates are held this high. Maybe if banks are back to 3% mortgages by year end, we'll drift down to 2019/2020 prices. But if mortgages are close to 5% for another 2 years, I don't get where the headroom to bid 2020 prices will come from. I'm genuinely curious on how you see the math here.

Also, with this kind of lending costs, there will be some inventory freed up. The short term rental crowd isn't going to be able to hold on at these rates. A lot of that inventory will be back on the long term rental market or on the resale market.

[lio45]

Originally Posted by goodgrowth

With the amount population growth I am skeptical of a housing crash. Maybe a slight correction.

Homebuying dropping off doesn't mean the demand for housing will drop off. If anything rental demand will most likely be crazy over the next few years.

Rental demand will create a pretty solid floor for the housing market imo.

Exactly my view as well.

However, let’s keep in mind the cap-rates-driven (therefore solid) “floor” is, in the specific case of Toronto/Vancouver SFHs, quite a bit lower than the levels we saw at peak speculation.

If the US government had an unbreakable commitment/guarantee to pay $1,000 per year to every bitcoin owner forever, then that’s a super solid floor, except it wouldn’t have prevented it from falling substantially from its high of ~$65k. At $10k-$12k levels though, I’d be perfectly comfortable holding a bunch of them, knowing that level of value is backed by that income.

[whatnext]

What nobody is pointing out is that no matter how big the price corrections have been, the declines don't come close to matching the run-up in prices since early 2020.

....Canada’s single-family real estate markets have seen a sharp correction, but not far enough. At the national level, despite prices falling nearly a fifth of a million dollars, they’re only back to August 2021 levels. That should be an indication of just how out of whack the country’s real estate has been over the past few years. (bold mine)

https://betterdwelling.com/canadian-deta...meting-here-are-the-hardest-hit-markets/

[GreaterMontréal]

In Quebec there was a 7.3% inflation rate in July, for an 8.1% increase in the average hourly wage, in annual variation. Quebec is also leading the country in projected salary growth at 4.1% for 2023.

https://www.ledevoir.com/economie/759787...extraordinaires-pour-contrer-l-inflation

[someone123]

When it comes to Vancouver there was quite a bit of high end investor style condo construction, so there's probably some room to drop (mean condo unit more than median probably) costs by reconfiguring the projects and developers can switch from condo (formerly instantly pre-sold) to rental. Bonus density can make the rentals cheaper too. And I would guess that land prices will tank, but that might take a long time.

Aside from purchase prices dropping financing for the developers themselves has become more expensive.

In Halifax there was a "mania" period of a few months when housing went up by ~25% then down by a similar amount. But I am pretty sure it remains far above the 2019 baseline. A lot of construction there is already rental, and rents have shot way up. It's possible the rate of construction won't go down much there, but it's also hard to see it keeping up with population growth.

[WarrenC12]

Originally Posted by Truenorth00

I don't understand where people think the money will come from when buyers just don't qualify for mortgages that high.

Rents will be the ultimate floor when it comes to home prices. Capital will flow if there is money to be made.

[WarrenC12]

Originally Posted by whatnext

What nobody is pointing out is that no matter how big the price corrections have been, the declines don't come close to matching the run-up in prices since early 2020.

....Canada’s single-family real estate markets have seen a sharp correction, but not far enough. At the national level, despite prices falling nearly a fifth of a million dollars, they’re only back to August 2021 levels. That should be an indication of just how out of whack the country’s real estate has been over the past few years. (bold mine)

https://betterdwelling.com/canadian-deta...meting-here-are-the-hardest-hit-markets/

Are those numbers corrected for inflation?

[Truenorth00]

Originally Posted by WarrenC12

Rents will be the ultimate floor when it comes to home prices. Capital will flow if there is money to be made.

Nobody is suggesting that investment in housing will go to zero. That seems to be the strawman implied in these discussions. But there's a different amount of capital going in at 5% than at 2%.

Also, "rents will be the ultimate floor" is kind of a throwaway statement. There's nothing saying that we can't get declining rates of home ownership and higher rates of renting because people can't qualify for high enough mortgages. That's pretty much what's happening right now. There's also nothing saying that prices can't decline and meet rents halfway. That's what a declining price-rent ratio suggests. We're probably going see prices drift down and meet rising rents at a pre-Covid PR ratio ~130.

Price to Rent Ratio in Canada averaged 62.15 from 1970 until 2022, reaching an all time high of 160.36 in the second quarter of 2022 and a record low of 19.69 in the first quarter of 1970.

https://tradingeconomics.com/canada/price-to-rent-ratio

[Innsertnamehere]

Originally Posted by Truenorth00

We didn't have rates like this in 2016.



I don't understand where people think the money will come from when buyers just don't qualify for mortgages that high.

I'll concede that some of this is a function of how long rates are held this high. Maybe if banks are back to 3% mortgages by year end, we'll drift down to 2019/2020 prices. But if mortgages are close to 5% for another 2 years, I don't get where the headroom to bid 2020 prices will come from. I'm genuinely curious on how you see the math here.

Also, with this kind of lending costs, there will be some inventory freed up. The short term rental crowd isn't going to be able to hold on at these rates. A lot of that inventory will be back on the long term rental market or on the resale market.

I'm not saying housing will stay affordable - just that we will see a huge affordability crunch were most new homebuyers are pushed out of the market entirely. Population growth, a lack of new inventory as a result of reduced completions, and rapidly increasing salaries will fill the gaps.

My entire theory hinges on population growth back-stopping price drops as housing affordability seriously erodes. It's not a fun thing, but until construction costs can equalize with what people can actually afford, it's what will happen. Either construction costs drop, or demand runs up pricing until new supply pencils again.

It's this massive housing affordability crunch causing me to believe that rates won't stay elevated for long. Consumer demand will plummet as people shift to spending insane amounts of their income on housing, quickly dropping inflation back to expectations. We'll have to see though of course, my guess is as good as anyones.

[someone123]

Another angle is whether developers will accept that this is the new normal or try to wait out this newly developing market and interest rate environment.

The Bank of Canada has not helped much with this as back during covid they wanted to promote investment and said explicitly that interest rates would remain low for a long time.

[WarrenC12]

Originally Posted by Truenorth00

Nobody is suggesting that investment in housing will go to zero. That seems to be the strawman implied in these discussions. But there's a different amount of capital going in at 5% than at 2%.

Also, "rents will be the ultimate floor" is kind of a throwaway statement. There's nothing saying that we can't get declining rates of home ownership and higher rates of renting because people can't qualify for high enough mortgages. That's pretty much what's happening right now. There's also nothing saying that prices can't decline and meet rents halfway. That's what a declining price-rent ratio suggests. We're probably going see prices drift down and meet rising rents at a pre-Covid PR ratio ~130.

https://tradingeconomics.com/canada/price-to-rent-ratio

I didn't suggest housing would go to zero or that anybody else did. You're making up your own arguments and trying to pin them on me using strawmen.

The second bold is basically what I predicted and what I mean about there being a floor based on rents. Rents are at nosebleed levels and will justify some housing prices that are still too high for many who seem to wish for a total collapse.

[Truenorth00]

Originally Posted by WarrenC12

The second bold is basically what I predicted and what I mean about there being a floor based on rents. Rents are at nosebleed levels and will justify some housing prices that are still too high for many who seem to wish for a total collapse.

And rents have a practical ceiling: income. Stagnant wage growth limits how much rents can go up too. As a practical matter, I think it's a stretch to believe they these rates of immigration can be sustained for long. I find it hard to imagine that rents going up 20% per year won't result in a substantial backlash at the polls in 2025, that sees massive cuts to immigration thereafter. I suspect the Liberals overshot their targets and will be moderating over the next 1-2 years. Growing the population over 860k in one year is probably more than even they had planned. I wouldn't bet on this becoming the new normal.