Canada’s Largest Real Estate Developer Declared A Soft Landing. They’re Wrong

Break out the champagne for the next open house, because it’s all clear sailing from here. That’s according to the CEO of one of Canada’s largest real estate developers, who declared Canadian real estate achieved a soft landing. The situation is not unlike the US being declared a soft landing in 2006, but just like then – it’s way too early to tell. Here’s what you need for a soft landing, and why Canadian real estate markets aren’t even close at this point.

Soft Landings

A soft landing is when a period of high growth is followed by flat growth. No crash, no bust, and there’s probably a few unicorns roaming around. The theory was developed by an O.G. of economics Robert J Gordon, who authored a paper in 1983 on business cycles. He theorized central banks could use monetary controls to dampen the business cycle. There’s only been one instance of a true “soft landing” occurring. The year was 1994, when Alan Greenspan managed to raise rates by 3 points without a recession. His second attempt at a soft-landing resulted in the popping of the dot-com bubble.

The soft landing has been achieved once with an economy, but never for a real estate market. Wealth manager Hilliard Macbeth, who literally wrote the book on Canadian housing bubbles, hasn’t been able to find a single instance of a soft landing in Canada. Heck, he hasn’t been able to find a soft landing in any major market that has experienced an exhaustion move. He explains “what people are calling a soft landing is really a pause and then a continuation of the bubble.” Before adding, “[that] means affordability gets worse and that means a hard landing is even more likely.”

Let’s suspend all logic, and take a trip down the same path that everyone selling a home or mortgage takes. We’ll assume a soft landing for real estate is possible. Unfortunately, even if we believe that, it’s too soon to be able to determine if we’re going to have a soft landing, nevermind if we’ve already achieved one. You see, a soft landing doesn’t just imply flat prices. It also means interest rates have peaked and will be flat, time has passed, and mortgage credit resumes growth. Let’s see how that looks right now.

Interest Rates Aren’t Even Close To Stable

Interest rates need to rise to neutral, and s**t needs to not fall apart. The Bank of Canada estimates the full impact of an interest rate adjustment takes 6 to 12 months to hit the market. The most recent hike was in October, which means we will experience the full impact in April at the earliest. That’s not even factoring that we haven’t reached the neutral rate, which is around ~42% higher than where we are now. We have a long way to go before the impact of rising interest rates has topped out. Heck, we have a long way to go for rates to no longer need to provide stimulus.

Bank of Canada Target Rate

The overnight rate set by the Bank of Canada .

Source: Bank of Canada, Better Dwelling.

Not Enough Time Has Passed

Toronto real estate has had three significant downcycles, and they lasted longer than a few weeks. The first one started in 1959, bottoming out 5 years later in 1964. The second started in 1974, bottoming out 11 years later in 1985. The third, which your parents probably have a vague memory of, started in 1989, bottoming out in 7 years. People that are good with math, likely realized the median Toronto correction lasted 7 years. After they bottom, even more time passes before we see prices recover.

Toronto Average Real Estate Sale Price (2018 Dollars)

The average sale price of a home through the MLS, adjusted to 2018 dollars.

Source: TREB, Bank of Canada, Better Dwelling.

The major reason it takes so long is the gap between incomes and home prices needs to come closer. As Hilliard explained, “a soft landing implies house prices level off and wages grow faster than inflation for long enough to close the gap.” Adding, “that won’t work because there will be a recession before that process can be completed.”

Real Mortgage Credit Growth Is STILL Falling

Once a soft landing has been achieved, we see growth resume. That certainly isn’t happening for mortgage credit growth. The annual pace of growth for real outstanding mortgage credit is up just 0.93% in October, the lowest it’s been since 2001. During that period, it was only this low for four months. The decline into those four months also occurred while interest rates were being aggressively slashed. Unless we get a whole lot of interest rate cuts in the next 6 months, we’re on the path to negative mortgage credit growth.

Real Canadian Mortgage Credit Growth

The annualized pace of mortgage credit growth at large Canadian lenders, adjusted for inflation.

Source: Bank of Canada, Better Dwelling.

Yes, I’m glossing over how serious this is, but I did explain why it’s likely to cause a once-in-a-generation type recession in Maclean’s this week.

Declaring a soft landing right now isn’t just rich, it’s wrong. Right now we have a broken altimeter, and can’t even see the landing strip. It’s actually fairly common for experts to declare a “new normal” after a break in declining prices. It’s actually so common, it’s a stage in the textbook chart for asset bubbles.

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  • Ethan Wu 5 years ago

    Thank you for reminding people that making a final call 30 minutes into a 90 minute game makes no sense. I have to roll my eyes when clients say “price are on their way up.”

    Actually, prices are up from the same month last year, but down from peak. Until prices break above the all-time high, there’s substantial risk.

    • Paul 5 years ago

      22 years up, six months down is the logic most people are working with. Prices are sticky with housing on the way down because the average person takes a long time to realize they’ve made a mistake. Housing is a company where 70% of the population is a shareholder. When there’s fraud and overvaluation, they’re fighting to retain equity.

  • AJ 5 years ago

    Hi Stephen will interest rate cuts going forward cause an increase in mortgage credit growth? This would mean lenders are willing to lend and in this pre-recessionary environment, wouldn’t the banks be less willing to take on these mortgages? The yield curve term premium is already at its lowest . Would cutting rates reverse that?? I am trying to understand the factors affecting liquidity and if liquidity and credit availability are different

    • Jay 5 years ago

      interest rate cuts would tank the CAD even faster than it’s going down now.

    • Trader Jim 5 years ago

      Not Stephen, but the article mentions in passing mortgage credit growth in 2001 declining with interest rate cuts. Real prices in Toronto were still -28.98% below their 1989 peak by then, so it prices could still move higher (afterall it fetched a higher prices 20 years before that). The problem is we’re way higher than we were, so there needs to be price discovery to find out where it needs to be – usually lower. How much lower is dependent on how much they can cut.

      IMO we would need to see negative rates to push home prices from here, and the real reason they would rise is they’re causing inflation uncaptured by their current measurements by printing more money.

      Further, over 40% of households in Toronto bought a home in the past 5 years, excluding new builds. People change homes once every 10-15 years. You’re not going to get a surge of buying demand at these price levels, immediately after everyone just moved.

    • @xelan_gta 5 years ago

      Just in case Stephen don’t answer I’ll provide you at least alternative answer.
      Study previous RE crashes and you will find all the answers to your questions.
      (Spoiler alert: in pre-recession/recession banks lend cautiously and credit shrinks even further regardless of the overnight rate). Tons of data around about US 2008 crash.

      Credit only has a chance to recover if we completely skip recession altogether which looks extremely unlucky when there is 80% US recession chance within the next 3 years.

      • AJ 5 years ago

        Thanks Xelan
        I think you answered my first question. Banks appetite for risk will be significantly lower than usual in this pre- recession period and that will trump the rate cuts(if any)

  • Investor 5 years ago

    I don’t blame a real estate developer for doing all he can to convince buyers to bring back their business. But I blame consumers for failing to observe and exercising caution. Things are never the way they seem, a wise person looks closely.

    • Trader Jim 5 years ago

      So many levels of government would be involved if a CEO told you there was no more overvaluation, continue to buy my stock. It only goes up in the long term. Real estate is an unregulated cesspool, meant to bilk 80% of middle class family’s net-worth.

  • Ian 5 years ago

    Ever since I read your piece on journalists helping developers “craft narratives” on housing, I refuse to trust anything out of their mouths. Give us data, or shut up developers.

  • CupaJoe 5 years ago

    “Stocks have reached what looks like a permanently high plateau.”

    Irving Fisher, Yale economist declared on Oct. 16, 1929

    The stock market crash struck 13 days later.

    • Quan Li 5 years ago

      Reminds me of the NBER economist survey in 1990. They surveyed 30 economist members on when the next recession will come. Results showed none of them saw a recession in the near future, because the economy was doing so well.

      They were 3 months into one as they filled out the survey.

  • Grizzly Gus 5 years ago

    Another distinction (at least how I understand it) is that its possible to have an overall economic soft landing , where the excesses of one or a few sectors are crushed, but the economy as a whole does not go into a recession (1994 as example). However, I believe it is impossible (or at least has never once been achieved) to have a soft landing in the specific sector where the imbalances were occurring. In Canada’s case, housing cannot be saved, in theory our economy could be. But because so much of our GDP is tied directly and or indirectly to an expanding housing market (I believe BD put the number somewhere around 20%), I would not bet on our overall economy being able to achieve a soft landing once housing crashes. Hopefully the next bust here only does happen once in our lifetime because it is going to be painful.

    • Joseph Wang 5 years ago

      Once-in-a-lifetime recessions are technically once every 30-40 years. Canada’s last once-in-a-generation recession happened in 1982, so we’re running a little close to the typical standard.

  • Joseph 5 years ago

    Do we have any takers on a 59 cent Canadian dollar by Dec 31, 2019? How about 54 cents? Or, gasp, 49 cents by April 2020?

    Unprecedented housing bubble in Canada means an unprecendented drop to the Canadian buck.

    The sad thing is that our government was essentially acting like that grasshopper in good times over the last 7-8 years when we should have been acting like the hard working ant instead. Cut back on expenditures, hammer away at the debt, align the provinces with the national vision to get Canada back on track. Unfortunately, a lack of vision over the last 7 years may end up costing us.

    Here’s hoping that I’m wrong,


    • Elijah 5 years ago

      50 cent dollar is very conceivable considering they’re losing a handle on inflation. CPI came in at 2.4%, 20% above target. Poloz doesn’t cut rates, expresses concerns. There’s a big difference between what’s happing in Canada and the US. When the US was dovish, their fundamentals were mostly fine, so the market turned that into a boost. In Canada, we’re extremely overweight in one sector, in the end of an extended business cycle.

    • JJ 5 years ago

      No idea about how low CAD will sink, but I think owning USD is an excellent play a short on Canadian housing and hedge against inflation. Not to mention USD usually surges higher during recessions anyways.

  • SUMSKILLZ 5 years ago

    I don’t think you’ll see a lot of believers until unfinished concrete condo tower skeletons dot the skyline and transit becomes less crowded.

  • @xelan_gta 5 years ago

    One of the best articles.
    Bulls, here is the question to you: can you please present any sources of bullish forecasts for Canadian/GTA RE with at least similar level of analytics as this BD article has?
    I’m dead serious, I would love to read those and try understanding analytics presented.
    Anyone? Anything? Thanks!

    • neo 5 years ago


    • Dim Wit 5 years ago

      Here is the typical analysis you’ll get from a real estate agent; we’ll use the lecture from the boring prof in Bueller (the movie) as the format of a convo with an agent:

      – GTA home prices will keep going up because “anyone, anyone, anyone…”…there is a shortage of supply, which means that prices can’t go “anyone, anyone, anyone”…down.
      – It’s a great time to buy today due to “anyone, anyone, anyone…”…pent up demand.
      – The average agent has seen how many credit cycles…”anyone, anyone, anyone”…zero, but that doesn’t mean they aren’t all “anyone, anyone, anyone” experts in the housing market.

      I realize they are just trying to make a living…but in reality they add maybe $100 of value through the entire process. Sorry to all the agents on this board…but I’m just being honest.

      Clearly a conflict of “anyone, anyone, anyone”…interest.
      They want you to buy and pay them commissions even when they know that you should be staying on the sidelines to let the dust settle.

  • DB 5 years ago

    Is there a formula to at least forecast some proximate regional median where housing prices should be? I was thinking it would be based on affordability with speculation, inflation and foreign investment being factors as well but not to the extent of family household income. Would a graph be able to pick this up and give us a visual as to where it should be trending..even if it shows the speculative side to be way over valued, at least the consumer will have an idea how much he or she has over paid or even better, under paid.

    • JJ 5 years ago

      I tried to model something similar using the spread between a t-bills and rental cap rates, but gave up as I was unable to find adequate info.

      Not sure if it would even be economically relevant, but I see envision something like that capturing income, speculation, and inflation: Theoretically investors should want some sort of premium for owning RE over t-bills which would account for the speculative and inflation part of the measure, while the cap rate should help measure the changes in household income.

      • MH 5 years ago

        While using UST as a baseline is not unreasonable I doubt it’s applicable here. 99% of RE specs wouldn’t even understand what you are talking about, to begin with. More importantly, this type of analysis does not imply that you borrow your income multiples at credit card rates to own assets (and that’s BTW why a potential BOC rate increase slowdown will not make any material difference).

        Over the next five years one predominant factor in Tor/Van RE price discovery will be forced deleveraging AKA margin call.

      • Michael 5 years ago

        JJ I would venture out to say that 97% of people that speculated on RE in the last 5 years don’t know what a t-bill is.

        • JJ 5 years ago

          Agree! But they probably also don’t know what “speculating” is either!

  • Brad 5 years ago

    Hey look! Someone that makes a living building and selling houses is telling us that the bottom is in and we should all run out and buy houses!

  • Fraser 5 years ago

    ‘Hey look! Someone that makes a living building and selling houses is telling us that the bottom is in and we should all run out and buy houses!’, lolllllllllll, yes indeed we should ebleive everything coming from builders and real estate agents…lolllllllllll. They are about as crooked as Trudeau, or a used car salesman…one and the same, scum…none of them can be trusted…ever. Sit back, get out of debt, a house in Canada is a liability now…if you bought in the last 5 – 10 years you will be in deep, deep trouble…this will be fun to watch. Sit back, get some beer, pot, chips, lollllllll…enjoy the oncoming train wreck…it will not end well.

    • lollllllll 5 years ago

      lollllllll where did you buy your tinfoil hat? lolllllllll

  • Pranav 5 years ago

    All u folks that are bearish, if you can pay off the Emi with rent, and can take interest hikes its not a bubble. Still possib IN gta ! REnt control lifted, so ownership is even more valuable

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