Mandy Coz needs a lead. She isn't the first sales rep from a nearby real estate brokerage to cold call my parents' home in the suburbs on behalf of a family that badly wants to become our neighbours. But she's the most recent and she's on the hunt for a new seller. Her clients "lost out" on another property on our street.
Canadians' homes are getting less affordable, but we still keep buying2
Home ownership has become less affordable for the average Canadian, but that hasn't stopped many from jumping into what may already be an overpriced market, suggests a new report from the Royal Bank. Keep reading.3
"This summer has been a bit unusual," says the RE/MAX Premier Inc. sales representative, who's located north of Toronto in Vaughan. When warmer weather hits and people start flocking to family barbecues, restaurant patios and cottage docks instead of open houses and showrooms, listings often languish. Not this year, though. More residential homes in Vaughan have been listed and sold in June and July compared to the same two-month period in 2012, according to data compiled by the Toronto Real Estate Board. The homes have sold for more too, with the median sale price up 6.1% year-over-year, translating into better business for local sales reps such as Coz. "Buyers are out in full swing. We've been busy during the last two months," she says. "The market has been quite steady. It's healthy."
Her cheery descriptors and sunny outlook are a far contrast to the ever-growing list of bearish economists, industry analysts and even journalists who have issued grim warnings about Canada's dangerously bloated household debt levels and the potential ramifications of a real estate bust on consumer spending, jobs and growth. But with forecasts ranging from smooth sailing to a soft landing to a U.S.-style crash, the future is foggy at best. For many, even those inside industry players, it's confusing. "The more you cover the housing market," says Robert McLister, editor of Canadian Mortgage Trends and a mortgage planner at intelliMortgage, "the more you realize it's unpredictable."
Instead of toppling after Finance Minister Jim Flaherty tightened mortgage-lending standards last year for the fourth time since 2008, Canada's housing market appears to have stabilized and it continues to flex its resilient muscles as shown in the national housing statistics released monthly by the Canadian Real Estate Association (CREA). Existing home sales rose for the fourth consecutive month in June, up 3.3% over the previous month and nearly matching May's gain, which was the highest monthly growth figure since January 2011. Likewise, the average sale price was up 4.8% on a year-over-year basis, with 80% of the surveyed major markets reporting gains.
BMO Capital Markets senior economist Robert Kavcic noted the figures prove the market is both "balanced and well-behaved" and another blow to the naysayers. Similarly, his colleague and BMO's chief economist Douglas Porter called the market "incredibly calm, cool, and collected" in a May release. But Kavcic and Porter haven't always thought this way. When the ratio of new listings to sales was driven to a nine-year high on Apr. 17, 2008, Porter declared the housing boom "officially over." Two months later, a CREA monthly report that showed both prices and volume slipped in May helped Kavcic confirm that the boom had "fizzled." Except it wasn't over then and the boom still hasn't fizzled.
Frequently quoted housing bear Ben Rabidoux, president of North Cove Advisors, contests BMO's optimism. "We are seeing a correction in certain metros," he says, citing Toronto's overbuilt condominium market, Ottawa, Quebec, eastern Canada and B.C. as markets that are cooling down. "If you're looking for leading signs of weakness, it's not hard to find them."
Evidence of the turning tide may be visible, but a decline has yet to happen when and to the extent many alarmists said it would. They might be right eventually - after all, even a broken clock is right twice a day - but they've been wrong every time they said we'd finally reached the top and didn't during the past five years.
Nevertheless, many still wonder whether Canadian housing is strong or weak. Even the Bank of Canada's new governor isn't so sure. "As I read the situation right now, the new data we have from the housing sector are just as consistent with the soft landing as they might be with a rebound," Stephen Poloz said during a July 17 press conference, which can be viewed on the central bank's YouTube video channel4. "It's in that sort of grey zone." Between the polarization of a housing boom or bust is Poloz's "grey zone." Perhaps it's the safest place. Admitting the things we don't know, including assertions and hypotheticals, might be the best place to start. If the chief banker can do it, everyone can.When global forecasting company Capital Economics Ltd. deemed the bubble was "now close to bursting" in June 2011 and called for a 25% drop in prices, the firm set off a ticking time bomb with a three-year clock strapped to it. Capital Economics economist David Madani has been loudly sounding the doomsday horn in the media ever since. Nobel Prize-winning economist Paul Krugman, the International Monetary Fund, the Organisation for Economic Co-operation and Development, The Economist, and U.S. hedge fund manager Steve Eisman are some of the more famous names to hit the panic button.
Their main concern: the country's good times have been fuelled by ultra-cheap and widely accessible credit and lacked underlying financial fundamentals. They've pointed to telling statistics such as the run-up in price-to-rent and price-to-income ratios, ballooning ownership rates and persistent overbuilding. A credit crunch, rate hike or a string of unexpectedly negative housing reports, they say, could reverse the relentless upward march in home prices, lay a devastating smackdown on consumer confidence and send the entire economy into free fall.
The media has chimed in too by publishing daily articles centred on real estate, including a Maclean's cover-page story with an arrowed line graph smashing a hole into a suburban home's roof, lower floors of condo towers ravished by flames and sweeping statements that we will all soon be mere rubble. But based on the recent sizzling sales statistics, people haven't been scared out of the market.
Fear, says an industry watcher, has helped deter people from doing stupid things
"I don't think there's going to be blocks of houses on fire," says Vancouver, B.C.-based McLister. "Nothing's really convinced people that a crash is imminent." He cites growing employment and wage stability, near-rock-bottom lending rates and consistent demand from immigrants and first-time buyers as key reasons why the market hasn't wavered. Affordability, which is heavily dependent on low interest rates and lending flexibility, is almost the same or better than 20 years ago, according to the Bank of Canada's Housing Affordability Index. Fear, he says, has helped deter people from "doing stupid things."
But McLister warns that while we may not be facing "catastrophic risk," the market is far from risk-free: A significant rate hike, widespread job losses and mortgage-lending restrictions are game-changers that could all come to pass. The best-case scenario in the eventuality one of them does is that things go sideways for a "very, very long time." But neither he nor other market watchers have a crystal ball to predict long-term movements.
"Anyone that purports to tell people where prices are going to be in two, three, fours years down the road is a fraud," he says. "Housing is stable at this point and there's nothing on the horizon that we can say with certainty is coming that would derail the market." Not even Canada Mortgage and Housing Corp.'s latest attempt to limit banks and other mortgage lenders to $350-million worth of new mortgage-backed securities per month. McLister told the Financial Post that CMHC's stricter cap would amount to roughly 20 basis points or 0.2% percentage points on a five-year mortgage and "won't have a real dampening effect on credit."
In any case, trying to time the housing market is difficult. "You can't pinpoint the month when it's going to turn, especially when it's around a sector like housing where policymakers have a lot of ingrained interest in keeping the status quo and where they have a lot of policy levers to pull," Rabidoux says. Based on a balance of probability, he believes it's unlikely the next decade will be as good as the last one. "The risk of a correction is still high," he says. He calculates that a nominal decline in home prices exceeding 10%, or a hard landing, is 75% plausible. "I've never said with 100% certainty that we're going to have a correction," he says, but he has made past predictions that Canada is in store for something between a U.S.-style crash and a soft landing. Of course, "something" can mean many things.
Housing permabear, blogger and former MP Garth Turner thinks "those people that are waiting for a U.S.-style cataclysmic dump are never going to see it." He admits he was unsure in 2008 "because the world was pretty wonky." But Turner sounded awfully sure when he told Ottawa Citizen readers on Mar. 27, 2008, to look closely at the "real estate disaster now in full flower to our south" because "it's coming here." What about all those readers who think he mistimed the market? "Well, too bad," he says, then chuckles. "My job is to look at the data and to point at the obvious so people engage their brains and try to come to their own conclusion."
James McKellar, academic director of the Program in Real Property at York University's Schulich School of Business, predicts smooth waters ahead. His response to an admittedly leading question about a Canadian real estate bubble was met with, "There is no bubble so I don't know how it can burst. Each time I share this view with the media, the story dies. So many journalists embark to prove an assumption that is false." Later during a telephone conversation, he had more to say about journalism's role. "The media has gone out of their way to tell people that the market is going to collapse," McKellar says. "The good news is that the readers aren't listening and people are still buying."
He acknowledges that business has slowed in Toronto, but says we haven't seen a dip in prices because the population is growing and "they have to live somewhere." Other reasons include a growing affection for condo living, no proof of speculation and a "very disciplined market" created by the structure of our banks. McKellar's glass may be half-full but the professor brings up a fair point: "Everyone across the country is assuming that the exuberance of housing markets cannot continue, but there's a difference between house prices beginning to moderate versus the bottom falling out."
It's a statement echoed by BMO's chief economist Porter, who in a recent note wrote "underperformance does not equal catastrophe." BMO isn't the only firm with optimistic economists. In the July "Monthly Housing Market Update," RBC Economics Research senior economist Robert Hogue said June's CREA numbers "should be seen as confirmation that Canada's housing market is not currently headed for a crash landing." Ed Devlin, executive vice-president and head of Canadian portfolio management at PIMCO, said the investment firm isn't positioning "for a prolonged Canadian downturn."
Back in Vaughan where realtor Mandy Coz is still looking for a seller, there are other industry professionals who can't see signs of a slowdown. "I've seen many forecasts pointing in opposite directions," says David Ursino, a sales representative at Royal LePage Real Estate Services Ltd. "I don't read into them too much. I look at what's happening in my community and respond accordingly."
We really expected a huge slowdown . . . and in some pockets of Toronto, you're still seeing multiple offers and bidding wars
In Toronto, the market has been "unusually hot," says Aleksandra Oleksak, a sales representative at Sage Real Estate Ltd. This past July was the third-best July on record for home sales. "We really expected a huge slowdown," Oleksak adds, "and in some pockets of Toronto, you're still seeing multiple offers and bidding wars." It's much of the same in Carbonear, Nfld., says the owner of Dream Realty Ltd., Victoria Harnum, whose annual income is set to exceed what she earned last year mid-way through this year. In Calgary, First Place Realty Ltd. associate Bob Truman can't get to listings fast enough. "If you are taking a buyer out to look at properties, chances are half of them will be sold before you get there to look at them," he says.
Real estate sales aren't sizzling in every neighbourhood, of course. Since the job market stalled on Vancouver Island in 2008, anything listed for more than $400,000 can sit on the market for at least two years, says broker Debbie Simmonds of Fast Forward Real Estate. "The industry has been hit very hard here."
The thing to remember is that economics can explain why something happened, but it can't tell or time the future. People buy and sell homes and they behave in ways models can't predict. Canada's housing market continues to defy the odds because the odds might just be wrong. The problem with bubbles is that we know one existed with certainty only after it pops. But by then, the damage is done.