Housing Bubble Still Expected to Burst...Some Day

It’s been seven years since the housing bubble in the United States burst and we’re still looking at the Canadian market with trepidation and expectations that the same is going to happen here. It’s just not in sight, right now.

Analysts have been predicting the “someday” doomsday scenario for Canada since 2008 and a recent study into the condominium market segment is still alluding to an impending bubble burst, but it adds that “nowhere do we see a bubble about to burst.”

The Conference Board of Canada has just released the winter edition of its biannual report, Insights Into the Apartment Condominium Market in Eight Large Canadian Metropolitan Areas, with the conclusion that the bubble will likely burst eventually but the short-term forecast is not when that might happen but rather what might speed up its arrival.

The study, commissioned by Genworth Canada (Canada’s largest private residential mortgage insurer), looks at eight major markets in Canada — from east to west, Quebec City, Montreal, Ottawa, Toronto, Calgary, Edmonton, Vancouver, and Victoria. As the largest and fastest developing market of the eight, Toronto naturally plays a prominent role in the production.

For comparison, let’s look a little at the mortgage crisis that led to the worldwide recession in 2008. In the United States, potential homeowners were able to borrow money for their first home purchases at below prime interest rates (some even at zero percent) and were therefore able to purchase homes they really couldn’t afford. They then ended up losing their homes as foreclosures drove home prices down and forced rates up, leaving their payments unaffordable in relation to their income but also forcing them to take a huge financial hit if they were to sell.

Canada at the time had better borrowing regulations in place. Banks weren’t allowed to lend money to people whose income didn’t qualify them; however, we were still affected (and continue to be affected) by the slow recovery from the crisis both south of the border and across the Atlantic.

As a result, Canadians are still probably carrying too much debt and low interest rates only contribute to their willingness to carry that debt or even take on more. And, that leads analysts to predict that sooner or later, things are going to go sour here as well, though probably not with the same catastrophic results.

But what does all that mean for the eight Canadian markets highlighted in the study? The Canadian condo market as a whole is expected to maintain a balance through 2015. Downturns are expected from the worsening economic outlook in the oil-sector communities (Calgary and Edmonton). This will be offset by upticks in empty-nester purchases on the west coast and employment-driven occupancies in Toronto. Slow plodding-along economies of Ottawa, Montreal and Quebec City will continue.

According to the study, Toronto will continue to see increases in population due to immigration, people following their jobs (also predicted to increase over the coming year or two), and empty-nesters moving away from the suburbs. This leads to more housing requirements and, therefore, increased condominium development to meet them.

The study predicts that there will be certain bumps and dips along the road, particularly price drops expected from inflation adjustments, but there is still predicted to be an overall increase (though not as high as in previous years).

I’ll take that. A slow increase and/or levelling out is still better than a drop, right?

I believe you can come up with a doomsday conclusion for any scenario once you factor in all the external influences into any line of reasoning, but the study acknowledges that the big burst is not about to happen any time soon.

The fact is that employment potential remains a key motivator in the Toronto market, causing more development in the urban centre in order to accommodate would be residents, and the study acknowledges this to be the case in what it perceives as a “high-risk” market.

We’re looking forward to the summer 2015 study to see how we’re progressing.