Canadian Housing Market Will Not Crash!

Canadians are a very self effacing people.  They hate success.  Athletes, singers, politicians and businessmen who succeed generally do so despite the lack of support from Canadian audiences and people.  We just don't like to be too successful. 

The same characteristics seem to apply to Canadian's views of the housing market.  Certain sectors of the residential housing market in Canada including Vancouver, Calgary, Toronto and Montreal have done exceptionally well over the last number of years, with Toronto and Vancouver leading the pack in the high-rise sector.  Notwithstanding low rental accommodation and the need for new housing accommodation for immigrants and people moving into both of these metropolises at an amazing rate, 80,000 to 100,000 people a year in Toronto alone, Canadians, and in particular news pundits, seem to revel in predicting a housing crash, a burst housing bubble and similar words of doom.

The most recent group of alarmists include Canadian Business Magazine which had on its front cover of the February 2012 edition, predictions of a major housing crash.  Previous to that, 3 major banking CEO's, Gerry McCaughey from CIBC, Gordon Nixon from RBC and Bill Downe from Bank of Montreal predicted a cooling of the housing market based on an oversupply and a concern of overheating in markets like Vancouver and Toronto.  More fuel for the fire.

Unfortunately, perceptions become reality.  When the media blasts headlines over and over again about an impending housing crash and overheated markets in excess of prices, and banks start tightening up lending guidelines to both consumers and high-rise construction loans, inevitably a perception of a crash can become a reality.  And headlines like that in Canadian Business do not help.

Certainly, an easing of the market over its frenetic pace over the last few years is warranted, but the continuing demand for rental housing stock, increasing rental rates, lack of alternative investment sources for both local and foreign investors, and low interest rates, make bursting the housing bubble (which it is not) unlikely.

One recent economist from BMO Nesbitt predicated that the Canadian housing market would be more like a balloon than a bubble.  What is the difference?  A balloon merely seeps out air slowly whereas a bubble bursts.  He forecasts a slight shrinking of demand and easing of price increases as a potential small price corrections but not a major crash.

Certainly there will come a time when the market merely needs to pause or factors will come together that create a lack of liquidity for both builders and owners and the affordability factor restricts demand.  The latter is probably the most worrying of all the factors based on not ever-increasing prices in the market but the inability of incomes to match the moderate increases in housing prices that have occurred over the last few years.  The one area that may bring the market down with some type of correction, will be the ability of potential homebuyers to afford purchase and carrying costs of houses given the limited increases in their earnings.

Hence, spending and income gains will largely depend on strength in the Canadian economy and world economies.  It is those areas that I would watch out for in the coming months, not headlines in the media.