Monday, May 1, 2017

Canada's house prices -- nose bleed levels

Housing is a fundamental and important component of the economy, its represents a substantial percentage of any country's GDP -- think not only new construction but renovation.  Most in the West, and especially in North America have a conception that housing ownership is a basic component of life, liberty and everything else.  In other words, buying a house should be the first and most important move anyone makes.

House price in Canada didn't correct in the same way as they did in the US (or anywhere else) banks were not affected by the "housing crash" which didn't happen anyway!  After 2008, despite the world correction, oil prices and commodity prices remained high in Canada.  There are no doubts that places like Windsor suffered (Canadian capital of the automobile manufacturing).  Moreover, none of the exotic American mortgage products made it to Canada -- no teaser rates, no NINJA no nothing.  Moreover, mortgage rates in Canada reset every 5 years -- there is no 30 years fixed rate mortgage in Canada, and borrowers are fully liable for their losses (no jingle key concept either).

The discussion in Canada is about housing affordability.  In many cities across the country (the worse are Toronto and Vancouver) prices are very high, when compared to average wages -- probably even worse when compared to median wages.

The American press has been full of terrible stories (manly because one specific mortgage lender is in trouble as opposed to anything systemic), Canadian banks are relatively well provisioned and although some cities will see potentially huge reduction in house prices (20-30%) then reality is that the rest of the country is still in relatively decent shape.  Moreover, with 5 year only fixed rate mortgage and 20 year maximum term there is a limit to what bankers will do in terms of stupid stuff -- the central bank of Canada made the rules very clear years ago, specifically with regards to minimum deposit (25%) and other rules.

Sure Canada's real estate market is due for a correction, its been overvalued for years, but it remains that demand is strong for a variety of factors -- some have to do with Canada's southern neighbors and others have to do with Canada being an attractive immigration destination (people are better received there than in the US).

What is the future of Canada's housing -- crystal ball being missing, I will say that the likelihood of further 10% increase in the house prices over the next 3 years is lower than a 20% decrease over the next 3 years!  The reason is that salaries and income are not tracking, aging baby boomers is also an issue.  However, also an issue is changing demographics -- the Millenum and Gen X&Y rather live in the city than the burbs.

How will this affect the banks?  My guess is little, but I suspect that the baby boomers that were hoping so sell their burb dream to some unsuspecting millenumer -- are about to be disappointed!

C'est la vie!


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