Housing Bears Must Be Patient
February 15th, 2012 by PotatoOver at CMF user Uranium101 asks when the correction to Canada’s housing bubble will come. He wants to buy a house. I’ve seen similar questions around, or people saying things like they’ll wait a year or a few months or whatever before buying. I’ve been fairly vague on timing for the most part, focusing more on valuations, but it’s a topic worth addressing.
You’ll have to be very patient. On the one hand, we don’t have jingle mail and all the other positive feedback elements that sped up the US crash; on the other, after witnessing that wreck the common buyer may be a little quicker to slam on the brakes, slowing things faster here once the correction does start. Assume the two factors roughly cancel and our unwinding will proceed at about the same rate as the US.
So if you’ve spotted the bubble with good timing near the top (and weren’t early like myself or Mike Burry or whatever), then for the US experience that would be sometime around 2006, maybe even as late as 2007. When is the time to buy? It’s still not clear if the US market has bottomed yet, but maybe around 2011/2012 you agree that even if there is more downside, the fundamentals are back in line and that it’s worth the risk to buy again.
That’s a good 5 years or so. More if you were early in spotting the trouble. Maybe you figure once the major declines started to peter out in 2009 was close enough; that would still be 3 years from the peak you’d have to wait.
Similarly, if in Toronto you had spotted the problems close to the peak in 1989, you’d have had to wait 3-4 years before you’d want to pencil “house shopping” into your day planner.
Real estate is not a fast-moving, efficient market, so patience will be required. But a 30% correction on a $600k house is $180k, and that savings can be even greater if renting is cheaper while you wait. Plus you expose yourself to less risk. Sitting out the insanity will require finding a nice rental you’ll be happy in for several years and patience, but you’ll be very well rewarded for it.
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February 16th, 2012 at 10:42 am
I agree, although I’m still on the fence for if we will see an actual crash/correction, or if prices will just stay around-2/+2% per year until incomes catch up (ie a long time). We may see a few areas crash and the rest just show no growth, I’m thinking mainly Vancouver and Toronto. But that all said, the government is going to do everything it can to avoid a crash, and people are still going to see real estate as the simple way to make money, so the timeline for everything could get dragged out even further.
February 16th, 2012 at 9:23 pm
“But that all said, the government is going to do everything it can to avoid a crash”
Unfortunately the government only has so many tools at its disposal, and it’s already used most of those up. The US equally wanted to do everything it could to avoid a crash, and despite lowering interest rates and paying first time buyers to buy, they only slowed the decline. Canada has already used up low rates, and many other tools (including government guarantees of mortgages), so if they did want to somehow stop the decline, what’s left to do?
As for people seeing real estate as the simple way to make money, that takes some time to turn around. But the sentiment does change.
The stagnation until inflation fixes the problem scenario is possible, but I still think it’s very unlikely. The overvaluation in Toronto and Vancouver is so bad that it would take decades of stagnation to correct. And there are some “specuvestors” that are losing money renting out their units that need that appreciation. How many years of stagnation before they decide to stop the bleeding and dump? Or from the other side of the coin, how many years of stagnation before that component of demand goes away?
So far Calgary has managed to walk that tightrope for about 3 years, though with very sustained low interest rates to help out. Maybe Toronto and Vancouver can too… but I doubt it.
February 18th, 2012 at 7:53 pm
“Unfortunately the government only has so many tools at its disposal, and it’s already used most of those up.”
Agreed, and I feel that is why the situation is holding on still. Rates bottomed out a while back, and I think that will probly sustain for another couple of years. You are right though, the government tool box is flush out of fixes.
Personally I see a few major markets like Toronto and Vancouver and maybe Calgary having a crash, with a minor correction in a few other places (no real specifics, but likely the nearest suburbs to these crashes, and maybe here in Victoria as well). The rest of the country will see a no growth situation as inflation attempts to fix it.
Personally I try not to complain about speculators renting out apartments for a loss hoping for price appreciation, cause I’m pretty sure I’m living in that exact situation. Based on what the next door unit sold for, rent would have to be 500 or so higher to cover a mortgage, taxes, and condo fees. So I am happy it isn’t me paying it.
I’ll also be interested to see if there is any spike in activity following the reversal of HST here in BC, because that is a potential impact on the Vancouver housing market as all new homes over I think 500k (somewhere in there, which is the majority of Vancouver real estate) currently have to pay HST, but won’t have to pay PST.
But hey, I could be way off. As much as you can look at indicators, very few people treat real estate as a rational investment. It is all guesses at this point.