Canada

Market “Bubble” May Crest Soon, So Buyers Make Sure You Love That Property: BMO

Canadians shopping for homes should make sure they really want that home — especially in cottage country. BMO senior economist Robert Kavcic sees the market cresting soon. In a research note to clients, he sees a few upbeat economic indicators, which may dump cold water on stimmy. People may debate whether or not big cities are in bubbles, but the bank sees cottage country as one for sure. 

Canadian Real Estate Markets May Crest Soon

The bank is warning markets may “crest,” or peak, in the not-so-distant future. Home prices have been driven by low interest rates and a lack of supply, relative to demand. Low rates have fueled higher home prices, as those not impacted by the pandemic went on a borrowing spree. As for inventory, pent-up listings have been waiting for a more ideal time than a pandemic to sell. Both of those trends are coming to an end in the not-so-distant future. 

Kavcic said, “Indeed the factors that have propelled this market to dizzying heights might be ready to crest soon.” He cites vaccination deployment, and rising home inventories as two big reasons the market may top. He also notes the BoC’s shift of narrative, from low rates forever, to they can rise soon.

If You’re Buying Right Now, Be Prepared To Ride Out Negative Equity

He acknowledges housing may be debatable as a bubble, but it’s harder to argue cottage country isn’t. “While the recreational property market is certainly unique, valuations have never been this high when adjusted for interest rates and provincial income.” 

He can “appreciate” incomes don’t matter to many high-end properties. However, the historic case for valuations is completely out of whack. The percent of income a median household needs to carry a mortgage in Ontario’s cottage country has never been higher. It breached the 50% ratio recently, hitting levels not seen since the early 90s bubble. The market stagnated for over a decade after that pinprick. 

Work-From-Home May Dampen The Impact, But Not Enough

The work-from-home trend may help to preserve some of the markets, but Kavcic still sees a lot of risks. “Even if we build in some permanence because of things like work-from-home and scarcity of waterfront, it’s still not hard to see a scenario where froth comes out and the last buyers in (especially in a blind-bid scenario) are faced with years of negative equity.” 

In other words, today’s buyers should really like the property if they are worried about a downturn. They’ll be carrying it for a while, or may have to top up equity to sell. It may not be a concern for price-insensitive or long-term users. However, those that thought they may just be dabbling in work-from-home, may be stuck a little longer than they want if they change their mind.

Consumer behavior has changed, and more buyers are looking for small-town properties. In fact, more buyers are looking to move to small towns than Canada’s big cities. However, the prices paid have become a little disconnected, even if it’s more affordable than big city living.

Kavcic is specifically discussing cottage country in his note, but he has previously mentioned this is turning into a national issue. The cresting factors are also macro indicators, so the impact isn’t confined to just one region. Right across Canada, easy credit has pushed markets to make frothy gains. As the economy improves, credit slack will tighten. As that shrinks, the frothiest of markets are likely to feel an adjustment.

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19 Comments

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  • Christopher Barclay 5 months ago

    The reversession. The first recession to happen without housing leading, so does it follow? Has this ever happened before?

    • Trader Jim 5 months ago

      Sure has. The early 80s recession happened because of excess printing, and everyone bought a house or four to guard against money being worthless. Whoops. Didn’t happen.

      It turns out since people are paid in money and need shelter, it didn’t matter if you thought it was a great investment. You can only unload it on people with sufficient funds.

    • don684 5 months ago

      What recession? Stock markets are making new highs. House prices are soaring. Commodities are increasing in price. World governments are spending/borrowing. Interest rates are the lowest they have ever been. Once the Coronavirus is controlled the world economies will boom.

  • RW 5 months ago

    Don’t worry. Canada approved millions of leprechauns with bags of gold that are rising unicorns, and they want to buy all of our houses from us as soon as the airports open.

    • Trader Jim 5 months ago

      That’s basically what everyone keeps saying. Don’t worry, no one needs to be able to afford housing. New people will come and work for companies overseas and pay more for housing. Heaven forbid they realize it makes no sense.

    • Marek Gronowski 5 months ago

      This prediction is only Holly wishes .With skyrocketing inflation .building materials lumber going 100 %up labour land prices triple how anybody would respect house prices going down ?basic math is very simple and money becomes worthless paper …keep on ..printing..see what’s happen

  • Nassim 5 months ago

    No one else thinks it’s a problem we drove our young adults out to the country, while cities are people that bought housing 20 years ago, and single guys whose mom made a downpayment on a condo?

    I make more than most households before factoring in my wife’s income, and I see less and less of a point to be in the city, if my peers are out in other places.

  • GTA Landlord 5 months ago

    I remember my first home. It was 1990. It kicked the crap out of me financially. You survive, you just feel really dumb when you have to sell at a loss.

    Although I will say this, IF prices do fall and you lose money but a bigger home lost more money, it’s worth taking a small loss to capture the bigger opportunity. I lost almost my whole downpayment having to sell the place I just bought less than 5 years later, but the other guy lost twice as much. It eventually recovers, you just ended up wasting a lot of time.

    • Adc 5 months ago

      As someone who just bought their first home and was born when you bought yours I really like this advice but am scared I’m likely to need it!

    • Paul 5 months ago

      Yes this is what they were warning against. Couples that spent 10 years saving their 150k down payment lose it to a softening market when they have to sell. They don’t technically end up in the hole but their savings end up wiped out because they were convinced their house was a retirement vehicle.

      • Don684 5 months ago

        You only lose $ if you sell. Just like the stock market. Both drop but then recover. Remember the USA in 2007-2008? Huge crash but now prices are soaring. The so-called experts have been saying Canadian house prices are in a bubble and way too high for at least the past 15 years. House prices are rising worldwide, not just in Canada.

    • RM 5 months ago

      This is fundamentally one of the big issues at play, I think: it’s so much harder to move up the property ladder. The rungs are just too far apart. There’s a lot of talk about young people never being able to get in but everyone that I know who’s my age (late 30s to early 40s), wants to move up but can’t justify it (in part because they know they’ll lose $100k in fees and taxes on the transaction). It’s also harder to shoulder that debt when your mortgage amortization will lead into retirement. And personally, I think this crisis of housing will turn into a crisis of retirement in my lifetime. What a mess.

  • Mike from Canmore 5 months ago

    I have heard all this projections too many times to hope that their is any basis in fact that it will happen soon. If I can not capitulate and buy in the next year or two and it falls I’m in great shape. Otherwise, whoops. no retirement for me. I hope like working at home depot at age 72.

  • Roni 5 months ago

    The government will do nothing to stop the bubble because the real estate is moving the economy forward.
    Go and buy if you can.
    If not you will learn the lesson : don’t believe the media and what people say.
    Belive in your self.

    • Thomas 5 months ago

      Imagine thinking “believing” in yourself is buying a house. Something that’s just secondary, should be your whole aspirational goal to some clowns.

      I could have bought a home when I was 25. I put the downpayment money into starting a company that now produces an annual 7-figure salary.

      If your end-goal aspiration is to own a run-down bungalow in a city like Vancouver, you’ve got to review your priorities.

  • Rick 5 months ago

    Someone said the same thing one year ago, and look what we got. But if you say something one thousand times you will absolutely make a hit at least once.

  • straw walker 5 months ago

    Inflation is real.
    King copper is now over $10,000/ tonne
    There is cause and effect when you print endless amounts of currency
    Its been called the New Economic theory …but it’s old as paper currency itself..

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