Hilliard MacBeth
Author of When the bubble bursts: Surviving the Canadian Real Estate Crash
"The Canadian bubble is actually worse than the U.S.'s was prior to the correction. In the metric of household debt, we're quite a bit higher than the U.S. was. The length and the amount of the price increase in house prices are also much more extended than the U.S. was prior to the crash."
"In Toronto, where the biggest bubble exists, we're looking at [house prices] six or seven times household incomes. And prior to this bubble, the high end of that range was three times. That would imply a 50 per cent correction to get back to where things are normal and reasonable again."
"In Toronto, where the biggest bubble exists, we're looking at [house prices] six or seven times household incomes. And prior to this bubble, the high end of that range was three times. That would imply a 50 per cent correction to get back to where things are normal and reasonable again."
"If we are in a bubble, as I'm convinced we are, then we can't get out with a soft landing," MacBeth said. "We have to have a hard landing, and a hard landing means that we have to go back to the trendline that was in place before the bubble started to appear."
In this case, MacBeth says, a hard landing means prices could decline by between 40 per cent and 50 per cent, causing an economic recession.
"It probably would be a little worse than the early '90s, depending on how long it takes," MacBeth said.
A market crash could be triggered by anything that affects the ability of first-time or investment buyers to afford a home, he said. That could include external economic factors, stricter lending rules imposed by Canada Mortgage and Housing Corp. or an interest rate hike that makes mortgages less affordable.
In this case, MacBeth says, a hard landing means prices could decline by between 40 per cent and 50 per cent, causing an economic recession.
"It probably would be a little worse than the early '90s, depending on how long it takes," MacBeth said.
A market crash could be triggered by anything that affects the ability of first-time or investment buyers to afford a home, he said. That could include external economic factors, stricter lending rules imposed by Canada Mortgage and Housing Corp. or an interest rate hike that makes mortgages less affordable.
If this is true, the market post-1989 dropped for 7 years straight. But what's different this time is that the group of largest equity holders (i.e. Boomers) will be increasingly leaving the market, so where does that leave us 7 years from now?
"Canadian housing is some of the most expensive in the world. The gains in Canadian house prices since 1975 have been a ninefold increase and inflation would only be a fourfold increase. What that means is that we're in a bubble and we need to get back to the trendline being the rate of inflation. So housing normally grows at the rate of inflation. Now there's always individual exceptions and I'm sure everybody listening to this in Calgary will say that yes Calgary is an exception. And there are some really unusual things about Calgary. First of all, some of the reports indicate that everybody in the whole world is moving to Calgary. Average household incomes in Calgary are above 100,000 which is shockingly above the rest of Canada which is at 74,000. Edmonton is slightly behind at 99,000. So you can see very high income people in Calgary and they have the capacity to borrow a lot of money. But unfortunately for them, house prices are also extremely high.
I'm one of those older baby boomers and I lived through the 1979, 1980/81 situation and this is very reminiscent of that. The housing bubble was booming, the economy was going great guns. The oil price was high. There were two big housing companies in Alberta that went bankrupt a few years later. There were two banks that went bankrupt. Then Principal Group went bankrupt. And all of that happened in the context of a 40% correction in house prices in Alberta. It was actually worse in Alberta than in Ontario because we have more of a boom-bust type of economy in Alberta because we are more focused on one type of economy.
I'm one of those older baby boomers and I lived through the 1979, 1980/81 situation and this is very reminiscent of that. The housing bubble was booming, the economy was going great guns. The oil price was high. There were two big housing companies in Alberta that went bankrupt a few years later. There were two banks that went bankrupt. Then Principal Group went bankrupt. And all of that happened in the context of a 40% correction in house prices in Alberta. It was actually worse in Alberta than in Ontario because we have more of a boom-bust type of economy in Alberta because we are more focused on one type of economy.
Question to those older boomers who talk about 19% interest rates: What caused the central banks to raise the rate so high? People say it couldn't happen now but I don't hear many people talk about the circumstances that led to it in the first place.
Presumably cash-rich foreigners were not around back then. So would a 50% correction be too high since at least some portion of the increase is independent of declared salary?