By Wolf Richter, a San Francisco based executive, entrepreneur, start up specialist, and author, with extensive international work experience. Originally published at Wolf Street.
Canadians have been gung-ho about their magnificent housing bubble, feeding it with an endless willingness to pay every higher prices, even as regulators and international institutions issued warnings, as short sellers began circling, as subprime liar-loan scandals made their reappearance, and as a generation was getting priced out of the hottest housing markets in Canada, the metros of Toronto and Vancouver, and as locals came up with an acronym to describe what has fired up the market: HAM – Hot Asian Money.
But the Vancouver housing bubble, the hottest even in Canada, hit rough waters in early summer. By July the first serious troubles appeared. Even as apartment prices soared 27% year-over-year and detached house prices 38%, overall sales plunged 19%, while sales of detached homes plummeted 31% [Vancouver Housing Bubble, Meet Pin].
Then on August 2, British Columbia’s notorious 15% transfer tax on home purchases involving foreign investors took effect. Preliminary data indicate that sales over the first two weeks in August plunged 51% year-over-year, with sales of detached homes down 66%.
And this flood of news on the Canadian housing bubble and speculations about a Canadian housing crash have now begun to slice into the previously imperturbable confidence of regular Canadians in their housing miracle.
The housing related part of the Bloomberg Nanos Canadian Confidence Index just had its worst spill in the history of the monthly data series, going back to May 2013: The percentage of the respondents who expected a decline in local home prices jumped from 12% to 20.5% in one fell swoop.
The percentage of those who expected home prices to rise dropped 2.3 percentage points to 41.4%, and the percentage of those expecting little change dropped 5.3 percentage points to 36.3%. Bloomberg:
The reading marks a change from almost unbridled consumer optimism in a housing market that has carried the Canadian economy since the 2008 global financial crisis, even as policy makers warn price gains in some cities are unsustainable.
That list of fretting policy makers, regulators, and other organizations now includes:
The IMF (January 2015), the Bank of Canada (most recently in June 2016), the Canada Mortgage and Housing Corporation (CMHC), which found “strong evidence of problematic conditions,” and the Office of the Superintendent of Financial Institutions (July 2016), which said that it would require smaller banks to stress-test their mortgage portfolios to ensure they could withstand a drop in Vancouver home prices of 50%.
Plus, warnings about record levels of household debt have been circulating for a couple of years.
So when Nik Nanos, Chairman of Nanos Research Group, commented on the soaring expectations of home price declines in the Bloomberg Nanos Canadian Confidence Index, he said it showed Canadians’ “increasing concern about the value of real estate.”
The monthly data didn’t exist during the Financial Crisis. The quarterly data available at the time showed that expectations of price declines soared by 24 percentage points at the end of 2008. But it was just a blip. Two quarters later, optimism was higher than before, and Canadian home prices resumed their surge, particularly in Vancouver and Toronto.
Canadians have been bombarded with news about their housing bubble and by warnings about a potential housing crash, and by even more numerous and vigorous counter-arguments larded with hype that everything was hunky-dory, that now was the best time to buy or else you’ll be forever priced out of the market.
This summer, famed short seller Marc Cohodes came out of retirement (he now raises chickens on a farm in Sonoma County, CA, and sells the eggs for a fortune in San Francisco) and jumped into ring with a number of interviews on TV and in the print media, and this too rattled some nerves – largely because it hit home.
“I think it’s a money laundering-induced market,” he said as we reported at the time. “Where the local politicians, or the BC Liberals, are kept or in cahoots with the real estate brokers, developers, lawyers, that angle. And they have sought Chinese money to keep the market propped up and it won’t last,” he said. “China has capital controls on, and Vancouver has become the money laundering mecca of either the world or North America, and something is going to change and change drastically.”
He’s shorting the housing market not by shorting the banks but by going after “alternative” lender – in US Financial-Crisis English “subprime” lender – Home Capital Group, the same company I lambasted over a year ago.
Despite industry assurances that the hottest housing markets in Canada, particularly Vancouver, will always remain hot, and that it is physically impossible for prices to decline in this miracle economy, Canadians are now becoming aware that those assurances have just been another load of industry hype. And a larger share of them are starting to grapple with a new reality – a reality in an over-leveraged, inflated housing market where prices have come to rest on the edge of a cliff.
In Vancouver’s once white-hot commercial real estate market, the hunt is now on for Chinese buyers as big institutional investors are trying to unload. Read… Suddenly Scared of Vancouver’s Commercial Property Bubble?
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Yeah… something about Canadian banks demanding 50% down for foreign buyers post GFC, so lending is alt.
Oh and anecdotally something about nouveau riche rural Chinese being prime suspects in HAM flows…
Disheveled Marsupial…. if the latter is true that would be hilarious in a dark way… same sort of odd ball high jinks suffered by Europe by Americans back in the day… that did not end well imo…
It is amazing how your realtors/mortgage scalpers/’real estate professionals – just like here in these united states – push the same old snake oil……..’rising real estate prices are good for the economy’ ‘buy now while you can’ etc. Those vested interests even convinced our government to support these high prices through QE and to the detriment of main street.
How wall street and hot money special interests continue the con game around the world is the eighth wonder!
The truth is as it always has been….the more outgoing into inflated house prices, the less income to spend on other things. It has and never will end well…..it should be as well known as gravitational pull.
Vancouver and Toronto have been overheated for years now, but much of the rest of Canada has barely been touched by the real estate bubble. Assuming Toronto is a top tier or second tier world city, its real estate isn’t even that expensive, relatively speaking.
There will be a lot of pain in the industry, but nothing that should be of grave concern to the economy overall. Canada’s favoured method of dealing with a crisis is devaluation – and should the Vancouver and/or Toronto housing markets contract severely, you can bet that the dollar will quickly head towards 70 cents US again.
One thing that should be noted is that there are two long-term factors that support real estate prices in Canada’s largest cities: 1) the net foreign migration rate relative to population is,was, and will continue to be very high – those newcomers overwhelmingly settle in the biggest cities (and so will need housing); 2) with strife in much of the world, Canada is viewed as a safe-haven immigrant friendly country – this means it will be on the short list of candidates for people of means feeing war.
Re “… you can bet that the dollar will quickly head towards 70 cents US again”, we are already devalued. Today’s Canadian dollar is $0.76 US.
Big difference between 70 cents or less and 76/77 cents.
Not compared to the US$1.02 that the Canadian dollar fetched just five years ago, as the commodity boom crested.
Pre-emptive devaluation has been tried and failed. Now Siri is shrieking, “Terrain! Pull up! Terrain! Pull up!”
Are you suggesting that a flood of displaced Latvians from Canada’s NATO war zone can prop housing prices?
One thing that should be noted is that there are two long-term factors that support real estate prices in Canada’s largest cities: 1) the net foreign migration rate relative to population is,was, and will continue to be very high – those newcomers overwhelmingly settle in the biggest cities (and so will need housing)
I do love that statement of justification for rising house prices worldwide. Most of those migrants will be penniless economic migrants, much like they are in Europe. They have little spending power and often need housing under the welfare system. If you think you can sustain high house prices through dwellings funded by benefits then I wish you luck.
Your point about a flood of displace Latvians is on the money.
Actually, uh, no, not penniless migrants…Canada has a very selective immigration system (immigrants are not to be confused with refugees) that operates on a point system so in fact Canada gets to choose the highest educated, wealthiest applicants…And needless to say there are many doctors and engineers (whose degrees may need to be re-qualified let be said) that are in the queue…Canada benefits greatly from the brain drain of other countries.
Not to mention two oceans make boat people a once in a blue moon affair…Not quite a Mediterranean crossing (though that ain’t no piece of cake either).
Tl;dr version of your post:
1) this time it’s different.
2) we’re special, not like those other bubble areas
3) when the crash hits every Canadian will pay with a loss of purchasing power and asset value to bail out speculators in Vancouver and Toronto.
Did I get it right? If so, you might want to ask people from Miami, Phoenix, LA, Vegas, and (now) SF how that argument held up (well, at least the first two points; #3 will probably happen)
Really Wolf? Have you looked at a map of Canada lately and were Vancouver and Toronto the only cities on it?
There is no fear of a housing crash, or boom, anywhere else in Canada. Montreal is cool to the touch, and they never got hot. Same with cities in eastern Canada like Halifax, Fredericton, Saint John and St John’s.
The flyover area from Toronto to Vancouver used to have a bubble area in Alberta, with Calgary and Edmonton having cooled and Fort McMurray’s housing market going from super hot bubble to stone cold. One would think that after twenty percent of Fort Mac’s houses were burnt to the ground in the great fire this summer, their housing market would be hotter than hell, but no, they need much higher oil prices for fuel.
The hotter than hell housing markets are Vancouver and Toronto, and when they crash the rest of Canada will be on the hook for the tab. Canadian banksters are insulated from their greed by the federal government’s Canada Mortgage and Housing Corporation.
So, it’s going to end up being paid for by those far away from the super bubbles and least able to pay.
Fort McMurray cooled down now has it?
After the fire, came the flood.
If I were religiously inclined, I might suggest that God was casting a vote on the Tar Sands mining as a concept….
In the US, the argument was that there was a bubble only is areas that saw huge price increases. However, many areas with no prices increase were hit hard. Think Detroit. Why? Refinancing and debt.
Everywhere in Canada, households have chosen a lifestyle that will not be maintainable throughout old age.
Please give your evidence for that statement.
-The average CPP payment being paid out is something like 600$ per month and OAS 6500$ per year… and average house costs about 4K for taxes and at least the same for maintenance. The typical household will need good savings to stay in the average house…
– But most households are not saving enough:
http://www.cbc.ca/news/business/most-boomers-aren-t-saving-enough-for-retirement-actuaries-say-1.663606
-They plan on working longer but a significant percentage will be forced into early retirement…
https://www.thestar.com/business/personal_finance/retirement/2011/04/20/more_canadians_forced_into_early_retirement.html. Between 20-40% being forced out without much savings should have an impact…
-And since a significant percentage of Canadians are retiring with debt, interest payment will also take a good chunk of the income:
http://www.theglobeandmail.com/globe-investor/retirement/retire-planning/high-debt-loads-weigh-on-baby-boomers-and-their-retirement-plans/article27169889/
– I could go on and on but I’ll spare you.
What people often fail to realise is that those super hot housing markets in limited locations are funded by the same institutions that supply lending throughout the economy. When those markets crash those institutions take a hit and pull back from lending. That has the knock-on effect everywhere. You pay the price for a bubble even if you didn’t take part – it is a lesson learned the hard way why you should try to not let them occur (politicians take note).
I just got back from Halifax two weeks ago. There are condos going up all along the harbor waterfront facing Dartmouth – and these are VERY high-end, luxury high-rise buildings. Looked quite bubblicious to me.
Spent some time in BC this summer. Awesome place but all people talked about in Van and Squamish was real estate. I remember when it was like that in Florida maybe around 2004 or 2005…
The housing mania is Canada is much like the madness evident in the States. I lived in Calgary and watched the bubble mentality spread to outlying areas and beyond so that the inflated house prices in Calgary affected housing prices in small tourist towns, e.g., Fernie, BC, Kimberley, BC, Relestoke, B.C. Residents in those towns were amazed to see the prices from large ski lodges all the way down to shacks skyrocket. It was not uncommon to hear that oil and gas workers from Calgary were snapping up multiple properties in Invermere, Fernie, Kimberley and Revelstoke. Now that the core bubble generator such as Calgary is deflating, the outlying areas that include the tourist destinations are crashing. The bubble is in reverse and deflating from outlying areas inwards.
Calgary is in the midst of seismic changes. We rented a modest duplex in Calgary when it was sold to a young man. We received a letter from him telling us what an amazing landlord owning multiple properties in Calgary and Kelowna. He bought this so so duplex for $780,000 at the top and as a result was raising our rent from $1400 to $2200 overnight. This guy told us that he was a heavy machinery operator for Finning and was all of 26 years old. Forward to today, the duplex was listed for rent 3 months ago for $2000 and is now competing for dwindling rental pool with 12 other similar duplexes in the vicinity. No bites at $1699…
We fled to Nanaimo where we bought a decent house at $200K which is now worth $100K more after just two years. The locals are on fire with speculative frenzy because: 1. Vancouver is close and too expensive for locals so they will move to Nanaimo. 2. Everyone wants to live on Vancouver Island and there is no more land, etc…The credit fueled bubble is chugging along here.
Our friends from the Island in Victoria are on their 4th condo because being rentiers is a dream life. Who wants to deliver mail for the post office everyday.
Think about it: a machine operator and a postman have been given credit to purchase multiple properties thanks to collateral from other multiple properties, not based on income. This is a house of cards waiting to collapse – same as everywhere.
There are frauds being committed by real estate agents; Canada has interest rates that are so low that buyers can’t resist buying houses; and the government in Ottawa is not sure what to do to cool prices without causing steep decrease in housing value.
What could go wrong?
Wolf, please do not equate ‘what Canadians are thinking’ with what is said in the media. Everyone I know who has lived in Vancouver a long time understands what has been going on. We are very angry for what our governments have allowed to happen. Our cries to have this stopped have been drowned out by the vested interests, and now none of us expect this to end well.
So we are hunkering down for the inevitable- it has taken far longer than anyone one of us thought, but we know the day will come.
I always find something ominous about the Chinese preference for Canada. It’s as if they know that the S is about to HTF and the best bet is a big empty naive and friendly place insulated from all other foreign lands and hordes by Uncle Sam on the southern border.
Luckily I married a Canadienne so my daughter and wife will be safe at least.
Does Canada still have an immigration policy that allows “investors” with a pile of money to obtain the Canadian version of a green card?
I read an article a year or so ago that critiqued the policy insofar as it ended up costing provinces that were less attractive to immigrants. Apparently, immigrants would game the system and say they were moving to, say, New Brunswick, and then switch to Ontario or BC upon arrival which NB ended up being on some financial hook for.