Peter Colls

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I am now convinced that we will never hear the end of housing bubble speak. The premise is now as firmly entrenched in popular consciousness as carbon emissions and TMZ. It has taken the form of idolatry in the blogosphere, where any countervailing narrative is demonized. It has catapulted university dropouts into media darlings because of a hackneyed webpage and an opinion. It has been tarted up by so-called experts who predict impending doom year after year, despite being completely wrong every time. House Bubble

 

Now, I'm not wearing tinted glasses.Housing markets go up and they go down.However, my point is that sharp and significant declines in home prices are usually created by massive economic shocks,like the 21 per cent mortga,ge ra.tes and recession of 1982. Yes, there can be short· term speculative bubbles that float back to earth after the circus leaves town, but  home prices in Vancouver, for example, have been incongruous with other Canadian markets for decades.

 

The big test was 2008. That was the year of the doomsayers, when the largest financial crisis since the Great Depression besieged us and the collateral damage hurled us into a global recession, one from which we still haven't fully recovered. The airwaves were all a buzz with end of the world prophets and those predicting home prices would be chopped in half, at least. It was going to be the big one! The housing market had gone through a significant inflationary period leading up to 2008. Unlike today, speculation was clearly evident. Accusations abounded that Vancouver was overvalued, unsustainable and frothy. One financial institution even had a publication called Housing Bubble Watch, now defunct, in which Vancouver was always the straw man.

 

So what happened? Home prices fell 15 per cent from peak to trough, but that was short-lived. Indeed, once the clouds of uncertainty dissipclted only a few months later, buyers came back in droves. 

 

The most dramatic turnaround ever recorded occurred in Vancouver during 2009, when the year began with 1980s level consumer demand and ended with sales tracking near record levels. Prices came right back to where they were before the crisis, and have stayed there, for the most part, for the past three years. If such a severe financial crisis and global recession couldn't trigger a meltdown of the housing market or pop any asset balloon, what could?

 

The main misconception about housing markets is that they behave like the stock market. They don't. Bad news can drive  stocks lower in a matter of seconds, whereas homes are relatively illiquid; they take a long time to sell and have higher closing costs. In addition, owner-occupiers typically don't speculate with the family home. In times of hardship, the home is typically the last thing to go. Instead, they hold off on other expenditures like lattes,. movie tickets, new TVs and vacations.

 

In a market that has a well-diversified economy and expanding population, fire sales are extremely uncommon. Unless
there is household financial catastrophe on a large scale, potential home sellers simply wait until market conditions improve.

 

I have no doubt that the voices of impending doom will soon renew their bellicose refrain. Perhaps their tea leaves will be right this time and the market will indeed collapse, leaving homes selling for 50 cents on the dollar. I'd put my money on that refrain continuing for a long time to come.

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Volatility is the spice of life, especially for economists. It keeps us on our toes. It keeps us questioning the assumptions, forecasts, and even the analysis we do. And it certainly leaves us scratching our heads from time-to-time. Two head scratchers that seem to permeate contemporary economic and housing market commentary are the great housing crash of 2013 and Vancouver's notoriously hot condo market.

 

Home prices are not headed over the proverbial cliff despite repeated attempts by media outlets like Maclean's magazine to sensationalize a slowdown in consumer demand. Housing market meltdowns are typically caused by household financial disaster at a large scale, caused  by such things as a recession or rapidly rising interest rates. In other words, a large proportion of households can't afford to buy or even keep their homes because of lost jobs or big jumps in monthly mortgage payments.


Those conditions simply don't describe today's economy. In fact, employment growth in the province was only eclipsed by Alberta, Saskatchewan and Newfoundland in 2012. And while job growth slowed over the last quarter, part-time jobs are continuing to decline in favour of full-time employment. Combine this with persistently low interest rates, indications of a more substantial recovery in the US, and strong trade diversification globally, and you get a relatively solid foundation to household finances. 

 

Over the past four years, policy makers in Ottawa have deemed it necessary to restrain mortgage credit with the most impactful change coming from a shortening of amortizations on high-ratio mortgage from 40 to 25 years. While some tightening of lending standards was prudent in the wake of the US sub-prime fiasco, the rationale provided by the Federal Government has not always been air-tight, particularly when it comes to Vancouver.

Inflated Adjusted Benchmark Condo Price Vancouver

When explaining the need for tighter mortgage lending standards, it is common to hear the words "overheated" or "red-hot" when it comes to Toronto and Vancouver condo markets. Since recovering from the global financial crisis, inflation adjusted condo prices in Vancouver have actually trended some 6 per cent lower since 2009. The same story holds for condo sales, which fell dramatically during the financial crisis, posted a strong recovery, and have fallen well below prerecession levels since.


To an impassioned observer, the Vancouver condo market appears to be entering the fourth year of a quintessential soft landing,  where flat prices gradually lead to improved affordability as inflation adjusted prices decline or incomes grow relative to the price level. The Vancouver condo market has not been "hot" for quite some time. Perhaps it is time for federal policy makers to update their talking points.


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