There's a well-argued opinion piece in today's Toronto Star, making the case that the Canadian housing market is overpriced and ripe for a correction. The author, Adam Peterson, is described as a "residential real estate investor"; he's Canadian but he lives in New York.
Peterson joins an extensive list of people making much the same call, among them: Steve Eisner, one of the protagonists of Michael Lewis's "The Big Short", which describes how he made millions from shorting the US housing bubble half a decade ago; Matthew Yglesias at Slate; and the ubiquitous Paul Krugman. Peterson's angle on the story is that while a correction is unavoidable, it may in fact already be under way, but in slow motion, unlike the sudden implosion that was seen in the US. Canadians should hope he's right.
I agree with most of what Peterson has to say, but think there are a few points of clarification that need to be made, particularly for the benefit of non-Canadians.
The first point is that the bubble is largely confined to two areas of the country: greater Toronto and greater Vancouver. Those are Canada's largest and third-largest cities, so this is not to downplay the severity of the problem. However, many of the country's large cities, places like Winnipeg or Windsor or Halifax to name just a few, are showing no real signs of a bubble. Even in the bucolic area where I live, less than two hours drive from Toronto and in the heart of a major area for vacation properties, house prices are moderate by international standards.
Second, in common with many other commentators on the Canadian housing scene, Peterson expresses puzzlement that although the number of houses getting sold in major markets is falling, prices are continuing to rise. I don't find this puzzling at all: it's a direct result of the way that house price indices are compiled (and a warning about why all such indices need to be treated with caution). Steps taken by the federal government to rein in the housing market, by requiring banks to seek a 25% deposit from buyers and cutting the maximum term of mortgages to 25 years from 30, have inevitably weighed heaviest on first-time buyers. To the extent that transactions in the lower price ranges have been drastically curtailed, house price indices, which are generally crude averages of completed sales, naturally move higher. Needless to say, such a rise is not a sign of a healthy market.
Finally, what about those federal government measures to rein in the market? Peterson is generally positive about the way the authorities are "facing the problem head on", and it's certainly true that the government and the Bank of Canada have tried to stay in front of of the problem. At the same time, Peterson notes that Canada's home-price-to-household income ratio is now very close to 5:1, the level that triggered all the problems in the US, which might be taken to suggest that attempts to clamp down on bank mortgage lending have not gone far enough.
It's a real balancing act. Homebuilders are warning that any slowdown in construction could cost the economy 150,000 jobs, which may be true, but should perhaps be weighed against how many jobs would be imperilled if a sudden housing collapse caused the entire banking sector to freeze up (or worse). Canada may have avoided some of the worst excesses that led to the problems south of the border -- no NINJAs here -- but the sheer importance of the housing sector in the national economy means there's very little margin for error.
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