Canada's Housing Bubble

Mar 03, 2010 Garth Turner greaterfool.ca

The latest Greater Vancouver stats show the extent of the bubble, as the price of a SFH is now within striking distance of $1 million.

Hang on. Could get interesting.

Bank profits surge. Economic growth numbers soar. And a federal budget that refuses to see the 800-pound deficit gorilla. No real spending cuts. No tax hikes. And a forecast of a bounding economy.

Hmm. Seems to me the feds have pretty much guaranteed higher interest rates in a few months, which is exactly why F moved to ‘tighten’ mortgage rules a couple of weeks ago. Following Thursday’s budget there’s every reason to believe the prime rate could be doubled by the end of the year.

So what?

So we flash you to two of the country’s real estate hotbeds, Victoria and Toronto, where local media were orgiastically celebrating the latest real estate board numbers in the last few hours. Sales in the BC capital were ahead 54% last month from a year ago, while in Toronto they surged by 77%.

Realtors, being genetically engineered, were saying basically the same thing in both places: Consumers are confident about themselves and the future, and so they buy. Of course they’re buying – which is why smart people aren’t. 2010, trust me, will be a great time to be a contrarian.

In Toronto, as my Post City Magazine article yesterday sought to show, housing mania is in full bloom. Usually snowy and lost February was instead a hotbed of bidding wars and curb cruising. Sales hit almost 7,300 and the average price rose 19% y/o/y to $431,509. At the same time, the number of homes for sale shot ahead of Feb ’09 by 24%.

In Victoria, as I mentioned, sales catapulted by over 50%. At the same time listings actually dropped from year-ago levels, to about 3,300 homes, from 3,800 in ’09. And the average price also took a hit, from $644,000 down to $620,000. That’s 3.7% in a month, or 45% on an annualized basis.

So, what gives? Both cities have been real estate honeypots. Both saw massive sales gains last month. But in one place listings and prices soared while in the other listings and prices dumped.

Of course, real estate is a local asset, and there can be lots of reasons – from weather to property tax changes – that affect prices. However, in house-crazy Victoria people have simply hit an affordability wall. Prices have been pumped so high so fast that the average family can no longer afford the average home.

Victoria is not an international destination, does not have a massive inflow of population and is, sadly, a government town in a new era of restraint. In other words, no flotilla of dripping-rich Chinese immigrants is going to rescue people from the housing trap they have set for themselves. Prices are coming down.

Toronto, in contrast, does have a strong inflow of people. But it also has a hinterland full of shuttered factories, depressed autoworkers and families looking at the end of EI benefits.

This means the advent of higher mortgage rates – now certain in light of Ottawa’s moves this week – will erode affordability, as runaway prices have done in the west. There is no alternative. F knows it. Carney knows it. The bankers know it.

As I said some time ago, 2010 will turn out to have been a tipping point. If you’ve been thinking about listing, get ‘er done. If you’ve been hunting for a house, quit.

If you just bought, c’mere. Hug.