July 9, 2021 | Canadians Need Wishful Thinking to Believe in the Housing Bubble

Canadian housing is expensive. Household debt in Canada is at record levels. And yet there is still enthusiasm about buying more real estate, and very little fear of a crash.

Why are Canadians so complacent about houses?

Canadians buying real estate have a very positive view about real estate prices. They have little or no fear, or they would not be buying real estate.

Here are some things that most Canadians believe:

One, house prices always rise. But prices have fallen in Canada several times, most recently in the early 1990s. People believe this because it has been so long since the last crash.

Two, any amount of mortgage debt is good debt. Many Canadians agree that credit card debt is dangerous and borrowing for travel is a poor choice. But they are comfortable with mortgage debt as real estate prices always go up.

Three, there will never be a financial crisis. Most people remember the 2008-09 global financial crisis and how Canada was exempt from any serious repercussions. All the banks in the U.K, save one, failed. Many banks in the U.S. went bankrupt, in the thousands, and a few very big ones like Goldman Sachs and Citigroup were bailed out. But Canadian banks pulled through, with a little help from the government.

Four, interest rates will stay at record low levels. When mortgages come up for renewal — every five years — the buyer will still be able to handle the mortgage payments since rates will not rise. This one is odd, as interest rates on mortgages are well below the rate of inflation. The Bank of Canada is keeping rates artificially low, for now. But it seems almost a certainty that rates will rise to normal levels, which means about 5-6% by 2023 or 2024.

Five, the housing sector has become “too big to fail” and the government will never let the housing bubble burst. This became a common belief when people saw how the government reacted to the COVID-19 pandemic. Now people expect the government to handle every downturn in a similar manner. Most people ignore the fact that the government ran a $340 billion deficit in one year, an incomprehensible amount of money for a country the size of Canada, and it would be impossible to do that again. To stop house prices from falling the government would need trillions, not billions.

In summary, there are a number of persistent beliefs held by those who have bought homes with large mortgages that allow them to sleep at night. Unfortunately for them, most of these beliefs are only wishful thinking.

For those who want to be more prudent, have a close look at this list and think how unlikely it is that all five of them will be true in ten years.

The probability of even two or three of them surviving that long is very low. And for the housing bubble to avoid bursting all five of them must prevail for at least that long.

Hilliard MacBeth

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Hilliard MacBeth July 9th, 2021

Posted In: Hilliard's Weekend Notebook

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One Comment

• G. Summers says:

  July 11, 2021 at 4:50 am

  House prices will continue to go up. The Bank of Canada’s policy of deliberate inflation will make sure of it. The only way house prices will go down will be if the Bank of Canada abandons its policy of inflation. Which it will never do. It would be anathema for the banking/mortgage/real estate industry. Any drop in house prices will be mild and very temporary, after which prices will continue their climb.

  Because the economy is so highly leveraged and interest rates so low it is very sensitive to even small increases in interest rates. An increase of just 0.5% could send the economy into a recession. The lowest that 5 year fixed mortgages went during the pandemic was 1.23% from Butler Mortgage. Today the 5 year fixed is 1.54% at IntelliMortgage and they are holding that rate until November 05 2021.

  Most likely the new normal will be sub 2% mortgages. And if we enter a recession I wouldn’t be surprised to see 5 year fixed’s at just a bit above 1% and the average price of a detached house at 1 million. Which would be just peachy for the real estate industry. Especially if buyers “get used to” and “expect” that 1 million figure.

  I hope I am wrong. though.

  Reply