Sunday, November 28, 2010

Canada's housing bubble - When will it pop?

For those who think Canada's housing market is stable and no where near a bubble allow me to offer up this analysis. Bubble markets are rarely predicted ahead of time, certainly not by so called experts or politicians. Witness our most recent recession. and the lead up to it in October of 2008. Our economicist Prime Minister campaigned on a platform of balanced budgets and continued economic growth. That's not to blame Harper for a lack of foresight, history shows that he was simply following the recession play book.

Step one is to deny deny deny. Step two is to admit that there is stress but that IF there is a recession it will only be technical in nature, the so called "soft bounce". Finally comes the admission that we're in a recession and tough decisions are needed.

Its no different with the housing market right now. Pick up any publication that centres on finance and the denials of a housing bubble are everywhere. That in of itself should send off huge alarm bells for anyone contemplating the purchase of a home in this market. Who are the deniers? Government spokespeople, financial institutions which provide mortgage financing, the Real Estate industry itself, and anyone who recently jumped into the market.

Think of Nortel when it was $120 a share in the heady days of the tech bubble. Obviously people were buying at that price, while smart investors were bailing and taking their profits. The buyers were buoyed by forecasts of continuing share appreciation and spurred on by an industry that told them "now is the time to buy or you'll miss the boat".

Sound familiar? Its the same basic song that Real Estate bulls are singing now. Let's just consider the facts.

Interest rates are at all time historical lows, which has made home ownership cheaper and more affordable than at any other time in Canada's history. Increased buyers has meant increased demand which equals price appreciation.

Right now there's only one direction for interests rates to move. Interestingly every time rates nudge up a tenth or two the housing market starts waving a white flag and institutions have so far responded by easing rates back down again. But how long can this continue when borrowing costs for banks and the like are on the rise?

Demographics and our aging population. How many boomers need a huge 4 bedroom empty nest?

HST and bringing demand forward. With the increased cost of purchasing a home in Ontario and BC brought about by the Harmonized Sales Tax, how many buyers are still standing on the sidelines?

There are many other factors to consider of course. Our fragile economic recovery and the end government stimulus to spur the economy. Add to that the number of people who are leveraged to the hilt, paying $1,000 or $2,000 and in some cases even more just to service their mortgages each month. Just think what a jump of just 2 points in mortgage rates would do, taking a $1,000 payment and jacking it up to around $1,500 a month.

As to the question in the title to this entry: "When will it pop"?

That's the million dollar question and one to which I have no answer. My opinion is that it will pop, but trying to guess the timing is next to impossible. Too many variables to predict. Governements and exposed industry have many tools at their disposal, but my ultimate fear is that the more they do to artificially inflate an already dangerously overpriced commodity....the more damage they'll do when the inevitable correction takes place.

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