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By now you’ve likely seen uncountable articles reported from many sources advising that there is a housing bubble and we are headed for a crash. Here are a few recent reasons why:
Until this past year Canada’s economy, while shaky, was not in terrible shape. The US/Euro recession made our banks, bonds and economy look safe and a cozy place to park investments. Those turned out great returns over the past 7 years up until this past year when we saw oil & gas plummet and the Canadian dollar be dragged down with it. Last year 10 out of the 12 months Canada was in a recession and finished 2015 with a dismal 1.2% inflation. A healthy economy functions at 3% and our outlook for 2016 according to Government is 1.8% – this is not good. 80,000 jobs have been lost in as a result of the oil crash at a time when Canadian’s have struggled to find full time and good paying jobs. We have yet to see the ripple effect of a prolonged downturn in oil & gas.
Canadian’s as a whole are in debt. Statistically for ever $1 Canadian’s earn they are spending $1.64 – looking back prior to the US crash they were under $1.24. This is a big difference, Canadian’s are just too far in debt to handle a shaky economy (let’s be honest debt is never good no matter what) The problem is banks by and large continue to lend MORE and MORE. As a personal experience. In the past month the two major banks I deal with have given me an extra $50,000 in unsecured available credit when I already had more than enough. Why are they extending me my annual income in unsecured debt? This alarms me because if things go sideways massive defaults could occur.
Interest rates are rising and there’s nothing Canada can do about it. With the crises in the European Union continuing to affect North American business operations, government and corporate bonds are starting to suffer. Investors know anyone doing business with any European nation is at higher risk of defaulting. For that they are demanding a higher rate to get a long-term loan that a bank can then offer to their lending clients. This risk is also affecting Canadian bond rates. The US raising their rates also has an affect on bond yields in Canada as investors obtain a higher yield from the US and capital markets are attracted there. We could very well see fixed rates back up to 4.5-5% as the US plans to raise their overnight rate 2-4 times per year over the next two years. Next BOC announcement is Jan 20, The Fed Jan 26. Indebted Canadians have known only 3% interest rates for the past 7 years and according to CMHC a 1.5% increase in mortgage rates would make mortgages unaffordable for 20% of Canadian mortgage holders. Not good when we are in a recession.
China is unpredictable and volatile. Their stock market was halted this week. Twice. And also late June of last year. It has been stated that China’s economy has been falsely propped up and is in a bubble of their own. They are our largest purchaser of resources. If they slip into a recession we slip further. China is still a communist country, if they pass restrictions or laws to save their domestic soil, we could be in trouble. Our real estate market is heavily reliant on overseas buyers. The backlash could go one of two ways – maybe Chinese continue to park money in investments elsewhere in the world. Maybe they can’t or won’t. Sadly, we have now stats to this point and all opinions I’ve found are purely speculation.
I hope we simply level off and the supply/demand of real estate in Greater Vancouver and Lower Mainland balances. These are real issues Canadian’s are facing and the reasons why people say “we are in a bubble”.