What Would Bubbles Do?

Many blog readers are no doubt aware that, late last month, the Canadian Centre for Policy Alternatives released a paper by David Macdonald entitled “Canada’s Housing Bubble:  An Accident Waiting to Happen.” As the title suggests, Macdonald argues:

Canada is experiencing, for the first time in the last 30 years, a synchronized housing bubble across the six largest residential real estate markets in Canada.

On the whole, I found the paper to be very informative.  And, for the policy wonks out there, the paper does simulate three possible scenarios going forward.  Nevertheless, I’m left wondering how things are in fact going to unfold in Canada’s housing markets over the next several decades, and which groups will be hit the hardest if and when the bubble bursts.

Macdonald argues:

A housing bubble emerges when housing prices increase more rapidly than inflation, household incomes, and economic growth.  Several factors tend to contribute to the growth of a housing bubble: low mortgage rates, access to easy credit, net immigration and the stock of available housing.
 

He explains that there have been a total of three “housing bubble bursts” in Canada in the past three decades, and that they have been confined to just two cities, namely Vancouver (1981 and 1994) and Toronto (1989).  Notwitstanding those bursts, “inflation-adjusted housing prices in all major Canadian cities remained remarkably stable from 1980 until 2001.”
 
In considering Canada’s six largest housing markets (Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal), Macdonald delivers the following ominous news:
 

Housing prices for 20 years, prior to 2000, stayed in a narrow range of between 3 and 4 times provincial annual median income.  Today, however, housing prices adjusted for income are out of their historical range, costing 4.7 to 11.3 times Canadians’ annual income.
 

For me, this brings to mind a May 2006 policy paper written by Michael Mendelson in which Mendelson assesses (among other things) whether home ownership is a reasonable financial strategy for low-income households to increase their savings.  In the paper, he argues that owning a house “is wonderful when things go well, but it can result in huge losses when things go bad.”
 
I’m therefore concerned about the impact of a “housing bubble burst” on low-income households who own their homes.

5 comments

  • I Ford gets his way the immigrant pressure on housing prices will be dinted thus tanking the property values of all those that voted for him. Go Ford Go!

  • regarding the future of mortgages in Canada- here is what I say-

    Will you make our bankers eat mortgages with a fork. If so then we should be fine. But if we let them instead slice millions of the more risky mortgages up into thousands of pieces and send them special delivery to the global financial markets with the label triple ‘A’ all you can eat pizza and are eaten that way! Then we could be in trouble.

    This may help ensure that everybody has a house- for a couple of years, and the mortgage brokers get fairly rich- and home owner equity keeps inflating and are allowed access to this equity- then everything will be just fine.

    I know my culinary guide to mortgage theory sounds good but will it work! Of course it will and of course Nick- at long last all your housing advocacy will finally almost come to an end.

    This is all in theory but the question remains would anybody be stupid enough to put that into practice- couched in some form of economic grow model- well if your greedy enough and you had enough power to pull the wool over the eyes of the international financial community- well maybe it would- but you would need a few of the Goldman Sachs boys on your payroll and you would also need white collar crime laws to be quite lax.

    Wanna give it a go? 737-1111

  • As a layman, though avid reader, in matters economic, the similarities between the media’s treatment of the Canada and US housing bubbles have been striking. The key one–and something I wish one of the bloggers here would comment on–is the media’s reliance on a narrow range of experts when reporting on the housing market. Particularly in the Toronto Star and Globe and Mail, readers are regularly treated to the wisdom of economists from CREA, or housing analysts tied to one bank or another, but rarely are provided with any independent analysis. Considering that spin provided by biased commentators was a major factor in the bubble’s unhindered growth in the US, I’m wondering what people think of the situation here.

    On a related note, I have a couple of research questions:
    (1) Is there a Canadian equivalent to the mortgage applications index produced by the Mortgage Bankers Association?
    (2) In Canada, in terms of monthly sales figures, is a house considered sold when the purchase agreement is signed, or when the sale closes a couple of months (or weeks) later?

    -Anthony Banks

  • Thanks for bringing this up on the blog Nick. I didn’t really get into what effect declining house prices might have on low income households.

    I think my major concern would be that more lax lending standards since 2006 have lured Canadians of high, low and middle incomes into buying more house than they might be able to afford if mortgage rates start to increase.

    Home ownership is seen as a right of passage for middle class Canada. Outside of Toronto and Vancouver, since the 1980s it was indeed an investment that who’s price has always gone up over time, although at about the rate of inflation. Given the recent ramp up in prices, this is not likely to be the state of affairs over the next say 3-5 years, although your guess is as good as mine as to the unique effects on low income households.

    David Macdonald

  • Tom Walkom’s 25 April 2012 column provides a bit of insight into what might happen if our housing bubble bursts.

    Here’s an excerpt from the column:

    “Spain has already returned to the territory of what economists call negative growth. This is particularly tragic in that, until the crisis first hit four years ago, Spain was doing everything right.

    Its government finances were in order; its productivity was high.

    But then real estate prices crashed, creating a massive bank debt problem and savaging the construction industry.

    That, in turn, sent unemployment to levels unseen since the 1930s, starving government of tax money, turning fiscal surpluses into deficits and ultimately creating a crisis over public debt.”

    Here’s the link to the full column: http://www.thestar.com/news/canada/politics/article/1167926–walkom-europe-s-restraint-agenda-rekindling-fascism

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