Goldilocks

Eighteen months ago house lust peaked. You recall those days, surely. Prices shot ahead 30% year/year in the spring of ’17. FOMO swept across the landscape as young buyers were convinced they’d never own if they didn’t plunge immediately. Royal LePage, Re/Max. Sotheby’s and their ilk milked it relentlessly with ‘reports’ proving real estate was actually under-valued. Household debt romped higher. A million became the starting point in the bubble markets. Contagion spread throughout 905, 705 and the LM. Suddenly people in Saint Catharines and Vernon were being priced out. Multiple offers. Blind auctions. No conditions. Risk on.

Well, as 2018 winds down it’s a different world.

Interest rates have increased five times. The mortgage stress test knocked a fifth of new buyers out of the market or dashed their expectations. Sales are down. Listings are up. In 11 of the 13 largest markets real estate activity has slumped. Gone are the expectations of unbridled advance.

But wait. Prices haven’t moved that much in demand markets, despite all.

Sure, Cowtown and Deadmonton are pooched, but with Canadian oil virtually being given away, what can we expect? The exurbs on the frontier fringes of the GTA saw 20% to 30% plops months ago and have not recovered. But the inflation there was just senseless. And, for sure, tony properties in YVR, especially on the Westside, have been seriously kicked. However, plunging from $5 million to $3.5 million lacks tragedy.

So year/year values in both bubble markets prices are stable, even ahead a little – pulled up by condos. Detacheds gave up some froth, but it’s hard to call that a correction. Other markets – like Montreal, Halifax and Ottawa – are, in a word, stable. This might change. But maybe not.

Meanwhile the Bank of Canada is predicting three to five more increases and the stress test rate will be approaching 7% if it happens. Within four years almost all families with mortgages will have renewed at a higher rate. Oil – our biggest export – has crashed. Ontario – our biggest province – has a larger deficit than the entire nation. And yet surveys show almost 45% of people expect house prices to be up in six months.

All of this begs one question. Is this the soft landing? Did it arrive? Was this blog actually correct four months ago in telling people who *really* wanted a house to go shopping in those areas where prices had crashed by a fifth and sellers were desperate? And in suggesting those waiting for a 40% decline in 416 might was well covet a pony?

Some economists say so. Naturally they work for banks who float mortgages, which is worth remembering. Last week some were crowing this message to Bloomberg. Not too hot. Not too cold. Just perfect.

Eric Lascelles, RBC: “It’s a pretty good spot to be in, avoiding boom but avoiding bust as well. The rule changes that have been made have been effective in cooling these markets down.”

Robert Kavcic, BMO: “It looks like we’re settling into this environment in Canada where price growth is going to be flat in real terms.”

The pro-housing Benny Tal, CIBC: “Overall, yes the medicine is working. We are reaching some sort of landing, how soft it will be I don’t know, but we aren’t in a free-fall by any stretch of the imagination.”

So are these guys trying to lead the market, joining hands with the big property marketers and real estate boards to encourage FOMO, more buying, more debt, steady demand, price escalation and a higher home ownership rate? Not purposefully, perhaps. But that’s the net outcome. If Canadians fall for it, there’ll be no housing reset. Not until a personal finance crisis arrives.

However, here’s the reality. We’ve never been more indebted than at this moment. The economy is doing okay, but real income growth has seriously lagged. Interest rates are in the middle of a tightening cycle. The cost of servicing all that debt will only rise. Tighter lending regs have hit detached and high-end housing the most and inflated the price of cheaper stuff. Major demographic changes are underway with Boomers needing to cash out and Mills – now the largest cohort – struggling to buy. Subprime borrowing has blossomed. HELOCs are out of control. Four in ten people couldn’t survive one missed paycheque.

Does this sound like it will end softly?

In 2006, just months before the entire US housing market came crashing down – after a relative period of soft landing and soothing words, the National Association of Realtors (America’s equivalent of CREA) ran this ad in major markets across the nation:

At that time, as in Canada now, people could buy houses with adjustable-rate mortgages, relatively scant down payments, interest-only loans and play the futures market with pre-construction condos. Yes, interest rates were rising and tighter lending controls were being implemented and, yes, sales and prices had stabilized, but none of this prevented the inevitable. Two years later the average house price across the States was down 32% and in some bubble markets (Florida, Arizona, California) there were 70% declines.

Mr. Market’s funny that way. Goldilocks can end up as lunch.