A Wile E. Coyote moment in Canada’s housing market

Will the market crash or simply coast? When it does, what next?


OTTAWA – Canada’s much-watched housing market is sending out mixed signals these days — even for analysts.

A spate of fresh data and yet one more market-cooling tweak from Ottawa last week has put one of the most important sectors in the Canadian economy, and the most important asset-source for most Canadians, on a kind of death watch.

That’s because while some of the data, such as home prices and starts, is pointing to the soothing “soft landing” that homeowners, economists, banks and politicians are fingers-crossed hoping for, others, like land purchases and building permits suggest the real message is: the crash is coming.

Last week, Statistics Canada reported that building permits in the residential sector fell 12.9 per cent in June, and permits for multi-unit dwellings — mostly condos — sank even further by 18.8 per cent.

Even more frightening, research conducted by RealNet Canada found than in some of the bigger markets — Toronto, Vancouver and Calgary — residential land investments for future home building has already crashed through the floor, plunging 51, 52 and 30 per cent respectively.

Muddying the picture is that a new temperature reading of the housing market from the Canadian Real Estate Association (CREA) being released on Thursday is likely to show that home sales are doing just dandy and likely rose significantly in July, along with average home prices.

But David Madani of Capital Economics says it is the calm before the storm.

Or as he put it in a note to clients — “homebuilders are having a Wile E. Coyote moment” as when the perpetually ill-starred cartoon character realizes he has overshot the cliff and looks down to see nothing but air under his feet.

“It’s astonishing to me that people are not picking up on this. If you see volumes crash and prices still rising, you shouldn’t be thinking everything is fine, you should see that as a warning sign,” he says.

“Here in Toronto, if you look at new home sales, we’re at near-record lows. If you think about the implication this has for home building, new construction and all the jobs that go along with that, this is quite startling.”

Some of that is yesterday’s news.

Housing sales have recently begun trending upwards again — even in Toronto and Vancouver — after almost a year’s slump brought on by Ottawa’s decision to apply the brakes on mortgages last July.

Bank of Montreal chief economist Doug Porter predicts next week’s report from CREA will show a 10 per cent surge in home sales from a year ago. He bases that on already reported data from big centres such as Toronto, Vancouver, Calgary and Edmonton, which all had boffo months, although there was a drawdown in Montreal and Ottawa.

Depending on whether you are an optimist or pessimist, this is either evidence of a soft or no landing, or a red flashing light.

The government’s decision last week to put a limit on the issuing of mortgaged-backed securities is an indication that Ottawa views this development as anything but reassuring.

“Arguably this is the second last thing anyone wanted to see in the housing sector, a re-acceleration,” Porter said. “That last thing people wanted to see was a hard landing.”

Good news like strong home sales is potentially bad, says Porter, on the theory that Canadians are already drunk on housing, so imbibing more means the inevitable hangover will be all that much worse.

Benjamin Tal, CIBC’s housing expert and deputy chief economist, wouldn’t go as far as Madani in predicting a price correction of as much as 25 per cent, but he agrees the time has come for caution.

“If I was a speculator, I would not be buying,” he says. “The days of flipping houses and speculating on increasing prices are clearly coming to a close. We are in the ninth inning of this boom.”

It’s been quite a ride. From January 2006 to June 2013, average home prices have risen from about $256,000 to almost $389,000, despite very low inflation and a little hiccup called the Great Recession. And, household debt from buying mortgages has ballooned to record levels above 160 per cent of disposable income.

The ride must end, agrees Tal, the only issue being is will it crash or simply coast.

So far, the consensus is on a slow coast, although the very real possibility of a hard crash has caused the Bank of Canada to put housing at the top of the list of domestic risks for the economy.

While housing constitutes only about seven per cent of the economy, the number underscores its impact.

Like a domino, if it topples, it triggers a chain reaction. Construction jobs are lost, household net worth diminishes, confidence drops and consumers start cutting back on other spending. On top of that, with families already highly indebted, defaults will almost certainly increase and lenders, such as banks, could find themselves taking enormous losses, dropping equity values, leading to tighter credit and slower growth. And on it goes in what economists call a re-inforcing negative feed-back loop.

“If we were indeed to have a serious setback in housing it would have pretty wide implications on the economy,” says BMO’s Porter.

The consensus view is s2till that the market will slowly decelerate rather than brake hard, if only because the economy continues to grow, employment is holding up and most critically with interest rates at super-low levels, borrowing is cheap.

But even Tal, who is in the soft-landing camp, acknowledges the danger. The housing market could stand to take a breather, he says.

That may be a good thing, given the exposure young people face in trying to buy even a starter home in cities like Toronto and Vancouver.

“I think the rental market will be stronger (going forward),” he predicts.

“We in Canada, especially in big cities, are fixated on buying a house the moment you graduate from university or get married. That’s not the case in many other cities in the world, there young people don’t think it a crime to rent for a time.”

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A Wile E. Coyote moment in Canada’s housing market

  1. We’re patiently waiting for pricing to cool to a level that is normal and sustainable before buying and are happy renters. Best thing I did was to really read and understand what was happening, and not to believe the spin put on housing by CMHC, “news” outlets and realtors. I am very afraid for those who have bought recently and those who have borrowed to the limits – there will likely be a painful correction ahead.

    This insight in this blog has served me well – worth a read!!


  2. Some advice to prospective young home buyers from an old(er) dude. Take it for what it is worth.

    At present, the real estate market is highly distorted in Canada with respect to long term fundamentals, such as price to rent and income ratios. Prices WILL return to the mean, and most likely drop below the mean initially (potentially quite severely).

    Despite what your local realtor may try to make you believe, there is been NO dramatic increase in Canadian immigration or any other such factors that would account for the current run-up in home prices. Seek out this widely available information for yourself. The ONLY thing that can be correlated to the drastic increase in house prices is a drastic increase in personal debt – which is NOT sustainable and currently at very dangerous levels.

    There is no shame in saving, renting, keeping your flexibility and waiting for this scenario to play out.

    I’ve already seen all this nonsense in the Toronto area in 1989, and again in Florida in 2006. Canada will follow the path of every other country that has experienced this cycle, and people who have made foolish decisions with unfortunately suffer for it.

    Do yourself a favour – be smart, and don’t take advice from people who have a vested interest in your purchasing decision.

    • The only problem with that EK,and what your missing, is that Canadians will expect the government to bail them out when things go sour. So the prudent home buyers and renters will pick up the tab for their gambling ways!

  3. I hope it crashes, just so that I can afford to buy a home. I couldn’t care less is some jerk who is siting on a 3 million dollar property loses half if it means that Canadians earning less than 60K a year can buy a descent house at a descent price and finish a mortgage in less than a life time.

  4. Does this apply to Saskatchewan too? It seems our housing market is worse than everywhere else at the moment. Extremely frustrating for first time home buyers.

  5. MacLeans has been promoting the idea of a housing crash for a few years now. It must be frustrating that markets aren’t cooperating – or perhaps it doesn’t matter because every headline about a crash probably delivers readers.
    Why do these articles never talk about the basics of supply and demand? If housing starts are reducing, then there will be a reduction in supply at some point. Wouldn’t that increase prices? If home sales are down right now, why is that? Is it a reduction in demand or supply? (If prices are going up, then probably supply – which makes it odd that new starts are plunging. Shouldn’t they be increasing to meet demand?) I understand these dynamics may differ regionally and locally, but generally S&D drive most pricing, so it’s odd they’re never discussed.
    Instead, the message always seems to be that we haven’t had a crash in a long time, so one must be coming – and from that data selection is biased towards that view. We’ve been hearing this from the media since the 90s.

  6. Very astute. Quite simply, the Canadian housing market isn’t in a midst of an affordability crisis (à la the U.S.), but it’s oversupplied. This imbalance should provide downward pressure on prices going forward.

    This site does a lot of great coverage of the housing market and offers perspective on the matter: