By Tom Bradley

In the previous two posts, I put my perspective on the current news around the Canadian housing market and reviewed the valuation measures. Mercifully, in this final one, I want to talk about what REALLY worries me.

My biggest concerns are what I’ve already talked about - unsustainably low mortgage rates and toppy valuations – but what pushes me over the edge is the simmering combination of leverage, emotion, the marginal seller, contagion and complacency.


Leverage worked beautifully on the way up - the bigger the mortgage the better. But when prices are going down and bankers get testier, it works the other way just as powerfully. When a $300,000 home drops to $250,000, the owner’s $50,000 of equity goes to zero. As we learned from the hedge fund world, the biggest surprises and overreactions come from strategies where long-term, illiquid assets are financed with short-term debt.

And there’s the related issue of credit availability. As Chris, my partner and a former banker, likes to say (ad nauseam), "Bankers offer you an umbrella when it’s sunny, but are quick to take it away when it starts raining." To his point, when rates go up and monthly payments get to be a struggle, lenders will be less accommodating.


Home ownership is laden with emotion. The combination of emotion and leverage is a potent one. It dramatically increases the chance of exaggerated outcomes and irrational decisions.

Changes at the margin

When markets go through big moves, it’s not because everyone wants to buy or sell at the same time. Indeed, it could be quite a small percentage of market participants who want or need to do something. It’s those few buyers/sellers (i.e. at the margin) who determine prices. The other owners, most of whom are stable and well financed, are innocent bystanders.

What does it look like at the margin? I don’t have data on this, but it appears to me that buyers are increasingly dependent on low mortgage rates, long amortizations and accommodative bankers. On the sell side, there doesn’t appear to be many urgent sellers at this point, which is good. I don’t have a reading on how many deposits on new homes and condos are from speculators.


When the sub-prime mortgage market in the U.S. started to melt down in 2006, the first thing we heard from analysts and industry officials was that it was “contained” and would not affect other parts of the mortgage/real estate market. Oops.

There is always contagion, it’s just a matter of how much. In the case of Canadian real estate, it‘s hard to imagine that the inevitable ripple effect won’t create some waves. Think about the connectedness of jobs, banks, CMHC, government revenues, credit card balances, credit ratings, the loonie and ... did I say jobs? Will a market decline be restricted to silly Vancouver or overbuilt Toronto (condos)? Don’t count on it.


We’ve been in a secular bull market for real estate since the baby boomers started buying in the 70’s. Who wouldn’t be comfortable owning real estate? What young person wouldn’t want to get in as quickly as possible? Who wouldn’t be smug about having 70% of their net worth in property?

Everyone, that’s who. And that’s what nags at me. The edict, ‘You never lose on real estate', is as strong as ever while the market’s underpinnings are about as weak as they’ve ever been.

Death spiral

Since the 1970’s, real estate has been riding a virtuous circle. Baby boomers buying, more women working, interest rates declining and an increasing comfort with debt has led to prices spiraling higher. It’s always hard to call the end of a long-term trend (40 years ... Yikes!), but certainly the potential is there for the circle to become less virtuous. Baby boomers are moving into the selling years (more sellers than buyers), women’s participation in the work place is maturing, interest rates have more room to go up than down and Canadian consumers are maxed out on credit.

Am I worried? You betcha. Lots of my assumptions will prove to be wrong, whether it be rates, the economy or jobs, but my concerns don’t hang on one individual statistic or measure. What REALLY has me worried about the Canadian housing market is the fact that everything I look at is at an extreme and it’s all very connected.

I believe we’ll look back in 5 years and say, “Wow, what were we thinking? It was so obvious.”