Why the Housing Market Won’t Crash in 2016

Edward Trapunski
by Edward Trapunski March 21, 2016 / No Comments

The Toronto Maple Leafs will win the Stanley Cup. What I didn’t say was when. That’s the same thing the doomsayers do when they tell you that there’s a housing bubble and that home prices are going to come crashing down around us. Without a timeframe they’re probably right. Just wait long enough.

Doug Porter, chief economist with BMO Capital Markets, says essentially the same thing. He says the real estate bears have been predicting a housing market crash every year for the past eight years. Yet over that time, average housing prices in Canada are up by 60%, led by the hot markets in Toronto and Vancouver. The increases have been fuelled by low mortgage rates and despite many changes to the down payment rules.

Porter, who thinks forecasting is a mug’s game, is predicting a strong selling season this spring as rates remain low and demand outstrips supply in Toronto and Vancouver.

Monthly data for February from the Canadian Real Estate Association (CREA) shows that the average price of a home was $503,057. That’s 16.4% more than it was in the year-ago period. But if you strip out the hot markets in Ontario and British Columbia, the average price of a Canadian home was $291,510, a drop of 1.4%.

CREA is forecasting that the national average price to go up by 8% in 2016, driven again by Ontario and British Columbia. CREA’s president, Pauline Aunger, says: “major urban markets elsewhere in Canada are well balanced or have ample supply.”

Only five months ago, the Canadian Centre for Policy Alternatives and the OECD were publicly crying woe, raising fears that that higher interest rates would create a housing correction in an overheated market. It hasn’t happened yet.

The Bank of Canada left rates unchanged in both January and March. And earlier this month, the U.S. Federal Reserve held its benchmark interest rate steady at between 0.25% and 0.50%. It indicated that it’d only raise rates twice in 2016 by a quarter point each time, if that often.

So let’s look at the factors the doomsayers cite as the triggers for a housing crash and why it’s not likely to happen anytime soon:

  • Baby boomers—Many of them are now retiring, putting their houses on the market, and downsizing. Since there are more baby boomers than echo boomers, there’ll be more houses than demand and that would unwind a housing bubble. But in the big cities of Toronto and Montreal there are a lot of rich people and a limited supply of single family homes. So demographics researchers are forecasting a very slow unwind matching the baby boomer spread of 20 years.
  • Supply and demand—People have to live somewhere and they like living in cities near schools, shops, and their work. The number of buyers in the big cities still outstrips the sellers and bidding wars haven’t cooled. When markets are slowing down and prices are falling you can see the signs that it’s coming. So far there are no signs.
  • The economy—If people lose their jobs they’re forced to sell their homes. There’s no recession on the horizon in Toronto. The Conference Board of Canada is predicting the city’s economy will grow by 2.8% in 2016. Prices fell twice in Toronto in the past 30 years—the recession of the early 1990s and again in 2008/2009. The recovery was robust. Even when the economy has been sluggish, housing prices have stayed steady
  • The bubble—A housing bubble is defined as when people are buying houses purely for speculative reasons with the sole purpose of making money. Evidence shows that people buying houses in Toronto and Vancouver are living in them.

Finally, here’s a theoretical long-term prediction that Maclean’s came up with: If real estate prices continue to appreciate at the same rate as CREA found in February, the average home price in Canada would double about every five years. In 24 years that average home will be worth $21 million.

However, Maclean’s also noted that “It’s preposterous to think home prices will maintain this torrid pace forever, despite their ability so far to defy gravity and so many predictions of a housing crash.”

Also read:

Flickr: Joe Mabel