If Canada's biggest housing markets are bubbles, why aren't they popping? | The Big Story Podcast

you're listening to a frequency podcast Network production in association with City news for years these two Canadian cities were two of the world's hottest housing markets then it was a little bit of a correction Canada's housing market is facing a historic correction that's according to a new RBC report the price of residential homes skyrocketed during the pandemic but the major Bank predicts the price of National Homes will slump by 12 percent early next year and now the question is if it will go further than that Where Do We Begin Toronto topping a list do we want to be at the top of this let's let's break it down nope no uh we are ranked as the number one city in the world for the potential for a housing bubble isn't that just lovely it is one thing to be declared a potential bubble and another thing entirely for it to actually pop so is a housing collapse imminent in Canada especially in Toronto and Vancouver what makes a city's housing market a bubble anyway how dangerous would a dramatic drop in home values and prices be to people who have so much of their savings tied to that value and on the other side wouldn't that decline maybe finally help some people who simply can't afford a home get one I'm Jordan Heath Rawlings this is the big story Ari altstetter is a reporter with Bloomberg who covers among other things Canada's housing markets hello Ari hey Jordan how's it going good thanks for making the time for us no problem I want to start with uh what I think might be a simple question but maybe sometimes gets lost in the terminology we toss around so when we say that Toronto and Vancouver are among the biggest housing bubbles in the world what is bubble technically referring to in that statement right well the tricky thing about a bubble is you don't really know something is a bubble until it pops but for the most part a bubble refers to when an asset price the price of any asset really becomes inflated and and out of whack with its fundamental value and when that comes to the housing market it really means that house prices are completely inflated compared to the the economy because house prices obviously have to be supported by the general economic condition of whatever Market whether it's a city or a country that they they are a part of and if they're completely out of whack then people say that they can be at risk of a bubble when we say that something is out of whack with their fundamental value how do we determine what that fundamental value is isn't a house worth whatever someone will pay for it I mean that is true to a certain degree I think you know if we talk we're talking about the housing market in particular economists look at it compared to again the economy so are people earning enough money generally in that market are median or average income is enough to support house prices where they are that's sort of one indicator people look at is there enough economic growth to Warrant prices where they are often you look at rents our prices completely inflated compared to what people are paying to rent a house which is another part of the housing market and so when the Divergence between prices and all these kind of other indicators that theoretically we think should be supporting those house prices should underlie those house prices when they're completely detached people start saying economists start saying this could be a risk of a bubble so I mentioned Toronto and Vancouver the reason we're talking today is a new report came out last week that kind of compared those two cities and and many others in terms of how bubbly I guess for want of a better term that they are so where do those two cities and where does Canada in general rank in terms of how bubbly our markets are right well this was a report by the Swiss bank UDS and they actually do this report every year they've created a kind of a measurement for how far house prices have detached from again these fundamental Local Economic conditions they call it their house price bubble Index this year Toronto actually came out on top of all the cities they looked at in the world wow the report doesn't actually look at markets by country they only look at markets by city as you know sort of a mantra in the real estate market that all real estate is local real estate is so uh shaped by local conditions sometimes even a neighborhood or a street can impact the value of a house but UBS looks at each year they look at City's housing markets around the world and measure the house prices there compared to a few of these or fundamental economic indicators that usually should be more determinant of house prices right and try to get a handle on how badly things are out of whack in each City so Toronto was number one Vancouver I believe was number six and we've seen a little bit I won't say a lot but you know you and I spoke I think a few months ago about this a little bit of uh decline in the average prices in the Toronto home so I guess would that mean that the other fundamental aspects of the economy you're talking about have tanked by a lot more um to kind of create this bubble situation is that why these two cities are so high well you always have to remember when looking at these kinds of reports they are to a degree backward looking because by the time yes can collect all the data from all these cities uh from all over the world it's not going to always be the most current data in every single market so they actually didn't say exactly when the data was up to in all markets but we can be pretty sure that it's relatively backward looking and a lot of the price declines that we saw in Toronto which had been going on on for the past six months or so they probably hadn't really got started when uh most of this data was collected so in a lot of ways it's probably a snapshot of what the market was like before the correction we are currently undergoing got started so that correction then is that the beginning of the bubble popping if it is how will we know that's that's a matter of debate right now and and you know it is tricky because of course you never uh really know if something is a bubble until after it's popped and even you know in terms of did it pop or not there's some debate about that so right now most mainstream economists like a lot of the economists that work for Canada's big Banks say what's going on right now is probably not a crash probably not a pop they call it a correction I mean gets more of a deflation than a pop home values sort of grinding lower to the point when maybe they'll become more in line with some of those economic fundamentals uh like how much money people are earning so that they maybe make a little more sense that is I guess sort of the mainstream consensus view but the worry I suppose is that it starts developing sort of momentum of its own things go faster and further than uh perhaps those economic fundamentals dictate and Things become a little bit disorderly and chaotic as they fall I suppose that would be people would call that a bubble popping it's not really what we're seeing now it's not what most people who follow the space closely are predicting but it's it I suppose that is the danger that is the word what would that actual pop look like like when we say it would gather moment Phantom and decline more rapidly what are we talking about here just sort of in in real terms is there some kind of percentage or some kind of threshold because um you know here I'm asking this question for for people in Toronto and Vancouver and and other markets in Canada that have seen real increases over the past few years um a lot of their investment is tied up in those houses right right again there is a certain amount of subjectivity I think in applying all these terms it's more an art than a science I suppose you could say yeah let's take Toronto as an example The Benchmark price since since it hit its peak in in February March some time it's down about 17 percent which is a big decline people might look at that and say wow I mean is that not a crash that sounds pretty dramatic but you got to remember that in the period leading up to this decline home values in Toronto Rose by more than 50 percent and that was in only the you know two years or so since the pandemic started right so it's Fallen fast but you'd argue it Rose even further and even faster and so we're all only really down to about the values from you know the back half of last year and so it's not really a case of you're just looking at the absolute decline or how much the decline is or even the percentage decline because it's relative to what house prices did before and it's also relative to how much kind of pain it's causing people how many people are getting in trouble a lot of the time a housing market crash or a bubble popping is associated with a lot of people getting into financial distress and having to sell their house at any price that was my next question you know what is the concern for homeowners they already own the home just live in it who cares what it's worth you know in imaginary numbers as long as it's uh safe for you you're right and and a lot of people who own their home outright uh it won't matter but there are a substantial portion of Canadian homeowners who own it with a mortgage they've borrowed in order to buy their home and that is often where people end up running into trouble if home values decline far enough fast enough some people may find that the market value of their home is less than their mortgage which psychologically is is kind of a depressing situation to be in I'm more own I owe more to the bank than this thing is worth but even that in itself aside from you know these psychological factors wouldn't necessarily Force someone to have to sell their home the problem comes when the debt on that home the monthly payments their mortgage payments become unbearable to them they can't keep up with the monthly payments and interest rates have been risen very far very fast in Canada the last six months it's basically what's driving the house price decline house prices have fallen because interest rates have risen and Rising interest rates mean people who don't have a house and want to buy a house can afford a lot less house and therefore prices have to fall but the other effect of that is that people who already own their house and have a mortgage on it if they have a mortgage worth a variable rate a rate that moves up when the Benchmark industry moves up they could wind up having to pay a lot more monthly and the question is can they afford that and I think that's where this worry of distress comes is that if you find you're in a situation where you can't keep up with your monthly mortgage payments you may have to sell regardless of how much you're going to get for the house because you can't stay above water month to month foreign we've covered uh the inequality in housing in cities like Toronto and Vancouver a lot as you mentioned it's also probably one of the indicators that's used uh for these bubble studies looking at it from their perspective is there a sweet spot maybe for the housing market where it corrects enough that some of those people can get into the market that it's actually possible for them but at the same time it's not driving interest rates too fast or deflating so quickly that people who already own homes are struggling like it really feels like a balancing act yeah it is I mean and to some degree it's it is a bit of a zero-sum game you know prices fall it's good for people who want to buy and when prices rise it's good for people who already own in terms of affordability right now in Canada theoretically prices fall because they're too high and people who might want to buy can't afford them so they have to fall to get to a point where the people who want to buy can afford them that's how it's supposed to work what we've seen so far this time in Canada though because this house price decline is being driven by a very fast rise in interest rates which is to say a fast rise in mortgage rates and most people need to take out a mortgage to buy a house affordability has actually decreased so far for most people who need a mortgage hmm Royal Bank of Canada came out with a report recently saying it's actually never been more unaffordable to buy a house in Canada than it is right now despite the declines in house prices we've seen and that's because mortgage rates have risen even faster than prices have declined and prices were so inflated before compared to incomes that most people are are still really out in the cold and so that's sort of the tricky point in the market we're at and and theoretically prices have to keep on falling until they get to some level of affordability even with mortgage rates where they are but we're certainly not there yet and I think the really confusing thing about Canada right now is that most economists think that even as prices continue to decline they're probably not going to fall so far to really ease affordability for most of the people who want it because underlying all of this is a sort of theory that there's just not enough houses in Canada for the number of people who want them right and for the rate at which our population is growing and so generally the expectation is that mismatch that fundamental mismatch between supply and demand is going to put a floor under house prices that is probably still going to leave them pretty unaffordable for a lot of people what's happening right now is just in a lot of sense a kind of mathematical equation that prices have to fall to get in line with where interest rates are or where interest rates end up but once that sort of equilibrium happens at a certain level there's still the underlying problem of just not enough houses for the number of people that want and need them how manageable is that equation you're referring to and by that I mean if we do start to see a massive decline that looks like it could be a bubble popping what levers if any uh do governments have to try to preserve that value or even to try to manage the decline to a point where houses are affordable I guess how much of this is just the market and and how much control over it uh do our politicians have so in terms of what they could do directly it's hard to say I mean the key thing would be economic growth I suppose if they were to just focus on making sure that the economy is growing and healthy and stable which may allow the Bank of Canada to start easing up on its interest rate increases or perhaps even lowering interest rate increases that would broadly help the market but in terms of directly stepping in it's hard to say what they would do and whether or not they necessarily want to I suppose if if a housing crash were were happening you know and there were serious concerns about it destabilizing the whole economy they may feel that they really need to that that the risks of doing that the moral hazard of stepping in seeming to favor homeowners versus prospective homeowners they may decide that that's outweighed by you know the need to save the economy but I think we're I mean we're a long way from that right now right we probably have to get pretty bad for for them to feel that that's worthwhile I mean a lot of Realtors would say uh um real estate associations across Canada would say that one thing that they could already do right now would be to lower the the stress test uh you know if you're gonna buy a house with a mortgage in in Canada you have to show that you could handle interest rates a certain amount above the current rate because the idea is that we wanna be comfortable that if rates do rise faster than we're expecting or rates rise from here you can handle the higher payments a lot of Realtors would say or real estate associations might say that maybe now that rates are so high and the market is is slowing considerably maybe now is the time to relax that stress test and and keep the market going and make sure there are people who can buy houses when other people have to sell them but you know the stress test was put there for a reason it was to make sure if things go badly wrong and interest rates rise and expect me people can handle them the strong argument to say that now we need that more than ever because we don't know what the economic future is going to be and we don't know how much further interest rates may have to rise so last question then and I'll ask on the behalf of homeowners is there anything they can do to get out in front of this somehow uh whether or not you know housing prices continue to slide or is it just kind of hang on and hope should they be looking to renegotiate their mortgage do they have any options or just pray well I I mean the most important thing I suppose would be to it's easy to make sure that their their financial houses in order and that they are able to handle higher costs and that's not just higher mortgage costs but you know we all know that inflation is at or near 40-year highs in Canada right now so there are rising costs uh you know from the grocery store to the clothing store yep you you know your mortgage and also credit card debt and auto debt and so it's really making sure that you can handle all those payments now and also you can potentially handle them going higher in the future uh right now most economists are forecasting more rate increases from the Bank of Canada but of course the current pace of rate increases that started in March have already gone faster and further than were forecasts say at the end of last year or the middle of last year so you also have to account for that things could move further and faster than even we're expecting right now there's a lot of unknowns right now in terms of the economy in terms of the interest rate Outlook and so I guess it's more important than ever that people leave themselves some sort of financial leeway uh that there's there's they have room to uh um account for the unexpected and to afford costs that are perhaps higher than they expect to be right now never a bad idea Ari thank you for this I guess we see what happens next yeah it's hard to say it'll be an interesting six to eight to 12 months well perhaps we'll talk again thanks again thank you Ari altstadter reporter at Bloomberg that was the big story for more from us you can head to the big story podcast dot CA I promised you I would share some more results from our listener survey one of the questions that we asked you is if there were any subjects you are sick of us talking about now 49 of you said you like all subjects which is amazing even I don't like all the subjects we cover on this show I'll give you one guess as to what number two was yep it was Sports does that mean it will stop probably not but I will tell you it means that the bar has been raised in terms of what constitutes a big enough sporting event that I get to spend 30 minutes talking to somebody about it [Music] find us on Twitter at the big storyfpn you can write to us and say please no I love sports talk about sports more by emailing hello at thebigstorypodcast.ca you can also call us leave us a voicemail 416-935-5935 and as always this podcast is available in whatever podcast player you prefer if it allows you to rate and review that's amazing please do it if not that's okay just subscribe and download every single episode thank you for listening I'm Jordan heathrollings we'll talk tomorrow [Music]

Channel: CityNews

Views: 32,560

Keywords: citynews, city news, news, housing market, real estate, housing bubble, real estate bubble, canada real estate, real estate canada, canada housing market, housing market crash, home ownership, canada housing, toronto real estate

Id: 3HEiaabB4lk

Length: 24min 6sec (1446 seconds)

Published: Tue Oct 18 2022