No real estate bubble pop expected in Canada
No real estate bubble pop expected in Canada
Commentary: Canadian banks don’t behave like their U.S. counterparts
By Bill Mann, MarketWatch
VANCOUVER, B.C. (MarketWatch) — Is there a housing bubble in Canada? It sometimes looks like it, judging by the eye-popping prices I saw being asked for condos in this city’s fashionable West End.
Listings of $630,000 and up for a two-bedroom unit aren’t uncommon.
But looks can be deceiving: I also saw something here in Vancouver during my latest trip I hadn’t expected — numerous ‘For Sale’ signs in some of this city’s finest West-End neighborhoods, where prices average well over C$1.5 million for a modest, detached single-family unit.
U.S. ratings agency Fitch seems to think housing prices here in Canada are too high, warning this week that Canadian banks’ credit portfolios are threatened with loans for sky-high housing and record consumer debt. The report said that six big Canadian banks have a combined C$730-billion in mortgage exposure and an additional C$182-billion in home-equity loan exposure, but adding that because of stricter banking laws, a subprime mortgage crisis here is unlikely.
Fitch also said something that just about everyone I spoke to here in this booming city agreed with — that the Bank of Canada is going to have to raise interest rates before too long to put a damper on the heated housing market, and that leveraged homeowners are at peril.
Fitch says that Canada’s housing market has been fueled by low rates the past decade. Since home prices have risen at a faster pace than household income, household debt levels are at record highs. It also noted that low interest rates make debt seem more affordable than it really is to home buyers.
The central bank has held the rate steady at 1% for the last 13 consecutive policy meetings, dating back to September 2010. It’s the longest Canada’s bank has held steady since the 1950s.
Both Bank of Canada Governor Mark Carney and Canadian Finance Minister Jim Flaherty have been warning Canadians to cool it with their credit and get their financial houses in order because higher interest rates are coming. But…is anyone listening?
What makes the big picture unclear is that a lot of new homeowners in Vancouver aren’t leveraged at all. Realtors tell me that a lot of their recent sales are to buyers fresh from China and flush with cash. A report in The Wall Street Journal a few months ago underlined how the huge flow in Chinese cash into the Vancouver real-estate market has caused home prices to soar. Those previously unheard-of $650,000 condos? Many are merely second homes for Chinese buyers in this increasingly Asian city. That ruins the house-hunting party for many Canadians, and there’s plenty of grumbling here about that.
“Housing in Vancouver still seems cheap to many of my Chinese clients,” a Realtor here told me. “That’s because in some cities in China, housing is two or three times more expensive than here.”
When the Organization for Economic Cooperation and Development issued a warning last year that Canada needed to raise interest rates, it was ignored. The OECD issued the same warning again this week.
A modest interest rate hike is needed to slow the trend of rising Canadian debt loads, said Paris-based OECD’s senior economist Peter Jarrett in his report, singling out the also-soaring condo market in Toronto.
Jarrett says, “We feel that at least in the hottest real estate markets, particularly Toronto, that people should think twice about continuing to leverage up in order to buy more house than maybe they really need.” This, of course, doesn’t apply to those who buy with cash.
A variable-rate mortgage at Canada’s big banks is currently prime plus 0.2 percentage points, or roughly 3.2%. That looks like a green light to many would-be homeowners or current ones thinking about trading up.
Canadian real-estate analysts don’t expect the central bank to tighten monetary policy until the first quarter of 2013, according to the average forecast in an April Reuters banker poll that was done just after the latest hawkish statement by Bank of Canada governor Mark Carney.
The OECD said keeping rates low in Canada is appropriate, at least for now, to keep the economy moving. But when risks to the economy recede, it said, gradual increases in the rate will be required in 2013. We’ll have to see if anyone pays attention to the OECD THIS time.
(The OECD report added that “Housing prices have risen substantially for several years and may have become overvalued in some markets.” Well, duh.)
I lived in the San Francisco Bay area for over 20 years, and I’ve seen skyrocketing real-estate prices firsthand. I’ve also watched the price of the wine-country home we sold there in 2006, near the top of the market, drop by 60 %. The current Vancouver run-up looks eerily familiar — like those new ‘For Sale’ signs here that reflect the “Buy low, sell high” truism.
Fitch is also reassuring, pointing out in its report that Canadian banks, unlike their U.S. counterparts, service their own mortgages. Plus, independent mortgage brokers, some of the biggest culprits in the U.S. subprime crisis, are used far less in Canada.
Fitch did compare the big Canadian banks’ domestic mortgage value relative to total loans, and CIBC and RBC had the most exposure to potential risk, TD Canada Trust and Bank of Montreal the least. The agency also noted that TD uses more insurance relative to the others, RBC the least.
(BMO Financial Group is on a roll this week, kicking off the Canadian banking sector’s earnings season Wednesday by reporting a 27% increase in second-quarter profit, coming in ahead of analyst expectations.)
The current real-estate market here is reminiscent of the one I experienced a few years ago in California, when a few were poised and ready to sell at the top of the market. We nearly succeeded, but we were able to become what Washington state Realtors call California “equity refugees.”
One old-pro Vancouver Realtor told me, “Look, interest rates are going to go up in Canada. Maybe later than sooner. We all know that. But you’re not going to see a real-estate bubble pop, like it did in the United States. What we’re starting to see here now is some of the air slowly coming out of the bubble. We don’t do things here the way you do in the States.” Thank heavens for that.
A soft landing for Canada’s real-estate market, in other words, is expected by many. That’s preferable than the other kind that happened in the U.S.
Bill Mann is a MarketWatch columnist, based in Port Townsend, Wash.