Bursting Canada's Housing Bubble Myth
by Jim Adair
Carl Gomez, an economist with TD Economics in Toronto, marvels that "after four years, the housing market has continued to defy gravity, charting its way to one of the longest cyclical booms in recent history." For years, observers have been predicting an end to low interest rates and a crash in house values, but Gomez says there's no housing bubble on the horizon, and that buying a home is still a good long-term investment. His new report, "Bursting Aspects of the Housing Bubble Myth" says one of the key tenets of a housing bubble is speculative buying, and that's just not happening in most markets in the country. "Canada's red-hot housing market is on a solid foundation because there is very little evidence of speculative activity," says Gomez. "While a modest cooling is in the cards this year and next, there are a number of misconceptions about the state of this housing market and where it's going." The report says one misconception is that recent homeowners, who entered the market when interest rates were low, will be deeply hurt when rates rise. "Despite the growing popularity of variable-rate mortgages, longer term fixed- rate mortgages remain the most frequently used financing option for most homeowners in Canada," says a TD Economics news release. "As such, most homeowners are already insured to some extent against the risk of rising rates since their mortgage payments would remain fixed over the term of their mortgage." But given the current economic conditions, Gomez says "the risk of an intense interest rate shock is quite low, given Canada's currently benign inflation environment. Indeed, core consumer prices, which exclude the volatile effects of food and energy prices, continue to sit just below the midpoint of the Bank of Canada's inflation target and inflation expectations remain well contained." As a result, rates will rise at "a measured pace" during the next few years, avoiding the kinds of spikes that happened in the 1990s. Gomez says another popular housing myth is that the condominium market is becoming overbuilt, especially in Toronto and Vancouver. He says there are sound economic reasons that continue to support condo development. "Higher land prices in places like downtown Toronto and Vancouver put a premium on the price of single-detached housing in these areas," Gomez says. "But condos keep homeownership accessible to many potential buyers like younger people and recent immigrants who are drawn to the urban regions of Toronto and Vancouver, but who are the most constrained by affordability." The report says that while condo developments can result in a volatile pattern of over- and under-building, the homebuilding industry has instituted a number of risk management techniques such as pre-selling prior to construction. "As a result, today's backlog of complete and unoccupied condos remains broadly manageable in Toronto and down-right tight in Vancouver," says Gomez. "So even if demand suddenly cooled, the risk of a supply overhang would not be as great as previous cycles." Gomez also takes on those who point to demographics as the reason why the housing market is heading for a collapse. That theory says that as baby boomers retire, there will be too many homes on the market for the younger generations to absorb, and prices will plummet. "There are two big problems with this assertion," says Gomez. "Not all boomers are of the same age. In fact, this large cohort currently spans in age from 60 all the way down to 39. So while the leading edge of boomers may be pondering retirement, there are just as many younger boomers with growing families that are still thinking about trading up to larger homes and who are not even thinking about retiring until around 2020." The report says that even as older boomers retire, they will not give up on homeownership. "The fastest growing segment for homeownership is those above 65," it says. "Aging boomers are likely to reshape the types of housing that will be in demand over the next two decades but they are unlikely to cause a deep correction in prices." Given that there is no coming crash in real estate markets and only a modest cooling, housing should remain a sound investment, the report concludes. Assuming that the market remains fairly balanced and the economy grows moderately, TD expects home prices to grow at an average annual pace of about three per cent over the next decade. "The return per unit of risk in housing has actually been better than in the topsy-turvy world of stock markets," Gomez says. "That's reassuring, given that land and structures account for more than a third of households' total assets." | 
