The housing industry, which is so important for Canada’s economy, is on a kind of death watch.
While most observers claim that a “soft landing” is about all that will occur, a review of the background should dispel that illusion.
From January 2006 to June 2013 average home prices climbed from about $256,000 to $389,000, despite very low inflation rates. It is difficult to believe that this trend will continue.
Housing prices in the downtown sections of Vancouver, Calgary and Toronto have continued to sour. Inasmuch as houses have doubled in value over the past few years, prices must be in jeopardy.
Land purchases and building permits imply that trouble is brewing. Statistics Canada reported recently that building permits fell about 13 per cent, and for multiple dwelling they declined by approximately 19%. Residential land investments for future home building already have fallen precipitously.
On the other hand, the Canadian Real Estate Association was quoted as saying that home sales “are just doing dandy” with late reports stating home sales are rising, as is the average home price.
In Toronto, which has been the focal point for this boom, volume and prices continue to climb. Yet, new home sales along with ongoing construction remain buoyant. The most recent information points out that, after a decline last year triggered by the federal government’s decision to curtail mortgage lending, sales once again have picked up. The Bank of Montreal confirmed this, reporting that house sales in most urban areas are climbing. Recently too, that bank cut interest rates on mortgages. Still, CIBC’s housing experts predict there could be a major correction in house prices occurring soon.
Property bubbles are inclined to be self-reinforcing. Most properties are purchased with borrowed funds from banks. The greater availability of credit will entail even more buyers.
The breaking point could be imminent, all but forgotten as the number of people of marriageable age dwindles. Soon speculative enthusiasm should be curbed by this oncoming trend. That should be the focus for anyone trying to predict the end of this housing mania.
Before long there will be a reinforcing negative feed-back loop. One should ignore that at great peril. David Madani of Capital Economics predicted that the present situation is “the calm before the storm,” making this columnist more worried than usual.