Financial Post

Joe Chidley | June 4, 2015 9:00 AM ET


American economist Paul Samuelson back in 1966 famously said of the predictive power of stock markets that “Wall Street has correctly predicted nine out of the last five recessions.” These days, you could say much the same thing, in a different way, about the Canadian housing market.


At $1.11 million, Toronto’s detached home is climbing further out of reach

As the Toronto market continues to blaze, nowhere is it hotter than in the detached home category. In the city proper, the average sale price was $1.1 million, 18.2 per cent higher than last year

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Media and some economists have been dutifully predicting a crash in house prices every year since at least since 2010. Yet every year, the market continues to go up, seemingly defying gravity.


In Toronto, we’ve all heard stories of termite-ridden shacks selling for $200,000 above asking. Bidding wars are the norm. Nobody asks for an inspection before signing on the bottom line. Those of us old enough to remember the last Toronto housing crash, in 1989, find it all eerily familiar.


Certainly, those who think the end is nigh will be heartened by the recent surge in home prices.


The Toronto Real Estate Board on Wednesday released data that showed home sales in the Greater Toronto Area rose 6.3 per cent in May from a year earlier, and the average home price rose 11 per cent to nearly $650,000. In the city of Toronto, detached homes were selling for an average of $1.1 million, representing an 18-per-cent increase from a year earlier.


Similar stories are playing out across the country. Nationally, the Canadian Real Estate Association reports that resale home prices rose by 9.5 per cent in the 12 months to April 2015.


Vancouver, the country’s priciest place to buy a home, continues on a tear, and the B.C. Real Estate Association said demand for housing in the province is the highest since 2007.


Even the Calgary market has seen renewed demand, and the Canada Mortgage and Housing Corp. expects residential prices to fall by only 2.9 per cent in 2015. That’s hardly a crash, especially in a city hard hit by crumpled oil prices.


Of course, for the bears, this is all only more evidence that a crash is coming. There is no doubt that there is some froth in the spring market. And yet, if you look more closely, it’s hard to see where or how the sky is about to fall.


For one thing, we like to think that bubbles are inflated by irrational behaviour. But is there anything really irrational about Canadians buying homes for unprecedented prices? Well, no. They are only doing what makes sense: borrowing money when money is cheap.


Still, even with cheap mortgages, you have to pay. And, yes, thanks to rising prices, affordability has come under pressure. RBC said affordability in the Toronto market, for example, appears “stretched relative to historical norms.”


The Toronto Real Estate Board’s affordability index shows that the share of household income that goes to mortgage, property tax and utility payments is around 35 per cent, the highest it’s been in 20 years.


But even at that level, we’re not anywhere near where we were in 1989, when carrying a resale home ate up more than 50 per cent of income, according to TREB.


“Historical norms,” by the way, are hard to read. In 1989, the Bank of Canada benchmark rate reached 12.61 per cent. People were cheerfully buying houses with mortgage rates in the high teens.



Today, the overnight rate is 0.75 per cent. And you can get an 18-month mortgage from one southern Ontario credit union for 1.49 per cent.


In 1990, the central bank raised rates to fight inflation, topping out in May of that year above 14 per cent. It was successful – too successful – in fighting inflation, which dropped well below its target of three per cent as the economy slipped into recession. It took a decade for the Toronto real estate market to recover.


This is a different world.


We started the year with the expectation that rates would go up soon. It’s clear now – even after the surprise January rate cut from the central bank – that they won’t.


The recent terrible GDP growth data for Canada, along with indications that the economy might not pick up in the second half as BoC Governor Stephen Poloz expected, are raising expectations that the next move from the central bank will be another cut, not a hike.


Sure, rates will eventually go up, but that looks more and more likely to happen later rather than sooner.


When interest rate increases do come, they are unlikely to be dramatic. As the U.S. has shown, economic recovery in the new world of low growth is a precarious endeavour.


The U.S. Federal Reserve has pretty much promised that its interest rate increases will be low and slow, whenever they happen.


We can expect the same here in Canada. Not that the BoC’s job is to protect house prices, but let’s face it: it serves nobody’s interests to choke the one segment of the economy that is building wealth for Canadians.


No, the biggest threat to the housing market isn’t an interest rate increase. It’s a good old-fashioned recession – and, technically, thanks to last quarter’s negative GDP growth, we’re already halfway there.


If there is a reversal in the recent trend towards job creation, there could be big downward pressure on housing sales and values. On the other hand, the BoC still has tools at its disposal to free up money and stimulate the economy – which, of course, would be supportive of house prices.


I’m not saying, mind you, that high real estate prices are all good. They are creating a real social problem, because people on the low end of the income curve simply cannot afford to own a home.


I’m not saying, either, that the market won’t correct – some day. But that’s the thing about bears. They’re very good at predicting a downturn will happen. They’re just not very good at telling you when.