Editor’s note: Canadian Business ran a front-page story predicting that the housing market would crash in 2012. You can read that article here.
The media and blogosphere is full of predictions that the housing market in Canada is going to crash. My hunch is that it won’t. It could level off or stagnate for a while, but Canadians aren’t going to wake up one morning a year or two from now and discover their houses are worth 15% to 25% less. Here are five reasons why:
No. 1: Housing doomsayers argue that when interest rates rise from their currently low levels, it’ll take away the credit punch bowl and cause house prices to tumble. However, the Bank of Canada will likely only allow its rates to climb as long as the economy is growing vigorously—which, in turn, means that employment and income levels are trending upward. Historically, job increases and wage gains have contributed to housing demand. These macroeconomic factors might not keep the mania in full flight, but they can serve as an offset to rising mortgage rates and help prevent the market from cratering.
No. 2: Real estate is a local market and differences exist between regions. Vancouver, with average house prices above $800,000, may be a bubble about to burst. But many other places, like New Brunswick and Prince Edward Island—where average house prices are under $200,000—don’t appear to be overly frothy.
No. 3: The doomsayers may be afflicted with “recency bias,” which says that people’s view of the future tends to be shaped by what recently occurred. The U.S. and some other countries experienced housing busts over the last several years, so that scenario tends to get a lot of weight in people’s minds when they reflect on the Canadian housing market. But, historically, such busts have been “fat tail” events that rarely occur.
No. 4: There are structural differences between the U.S. and Canadian housing markets. Lenders in Canada have greater recourse rights, meaning they can go after people who walk away from their mortgages (Alberta might be an exception). Also, the subprime mortgage market was less advanced in Canada.
No. 5: Price-to-rent and price-to-income ratios show over-valuation in the Canadian market, but valuation levels are not usually good indicators of turning points. Over- and under-valuation can persist for years in currency and financial markets. Indeed, the U.S stock market has been over-valued for more than a decade going by several yardsticks—yet it’s still holding up.