By Tom Bradley
Over the last couple of years, I’ve been writing about housing because it’s a big part of our clients’ net worth, it's great fodder for a devoted student of market cycles and ... it’s just so darned interesting. In the first of three posts this week, I’ll try to bring some perspective to the latest real estate news.
Stabilizing from what?
Over the last few weeks, the statistics and commentaries have generally been positive. The Canadian residential real estate market is stabilizing. The number of house sales in April (and likely in the soon-to-be-announced May) was down less than in previous months (-3% vs. April, 2012). In Vancouver, unit sales have stabilized and prices are up since the beginning of the year. And during my travels to Toronto, I’ve been hearing lots of stories about properties selling quickly with multiple offers.
It’s absurd, however, to be using the word ‘stabilize’ to describe the residential real estate market. Why? Because it hasn’t gone down yet. Yes, sales have been softer compared to a previously torrid pace, and some markets have experienced lower prices, but we haven’t even had a month where the Canadian market overall has had a year-over-year price decline. Prices in April were 2% higher than last year.
I looked at the CREA (Canadian Real Estate Association) numbers recently and the charts for the different cities look downright healthy. They certainly didn’t suggest there was anything to stabilize from. If people think the market has been weak (including Vancouverites), they should harken back to that old BTO lyric, “You ain’t seen nothing yet.” Weak real estate markets are characterized by: deserted Open Houses; properties that take months, or even years, to sell; unfriendly bankers; and ‘wipe out your equity’ price drops.
Why so gloomy?
Mixed with the encouraging short-term stats is a continuing chorus of doom and gloom. We’ve read about a U.S. hedge fund manager who is shorting Canada because of our overpriced real estate. Every quarter the house price table in The Economist Magazine shows Canada being severely overvalued. And hell, even this rational, even-handed blog has been trumpeting caution.
This Canadian housing cycle has been a powerful and lengthy one. Depending on who you talk to, it started in the 70’s, 80’s, 90’s or 2000’s (I’m in the 70’s camp – when the baby boomers started buying). Regardless, I’ve never seen a cycle of this magnitude that hasn’t been followed by a significant downturn. Bob Farrell, the former Chief Market Analyst at Merrill Lynch once noted, “Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways.” As I’ve said many times, if the ‘soft landing’ scenario that’s often talked about by industry representatives and bank officials were to happen, it would be heroic and unprecedented.
As one of the doom and gloomers, I recognize my view on Canadian real estate may prove to be too bearish, but believe me when I say, what we’re going through now is not a down cycle. It’s a squiggle on a long-term uptrend. If we experience a decline commensurate with the magnitude and length of the up cycle and the market’s extreme valuations, we’ll look back at today and say, B-B-B-B-Baby, we certainly hadn’t seen nothing yet!
In Part II tomorrow, I’ll address valuations and other reasons for concern.