Monday, June 22, 2020

When The Bubble Bursts

Canada's housing market is in an insatiable, multi-decade upward rise. In When the Bubble Bursts: Surviving the Canadian Real Estate Crash, financial advisor Hilliard MacBeth explains the causes and potential ramifications for investors.

I need no convincing that Canada's housing market is in a bubble. I have lived in or around its epicentre for most of the last decade. Prices have de-coupled from fundamentals (e.g. price to income, price to rent, RE as a percentage of GDP, home-ownership levels, debt levels etc are all way above historical averages).

MacBeth goes into detail on the demand side. Low rates combined with government support kept this thing growing even when the US bubble eventually popped. Whenever the banks have gotten in trouble, the government has been there to take risk off their hands by buying up mortgages to keep capital levels strong.

Maybe this latest recession results in a deflation of this bubble. Or, maybe the government will continue to find ways to prop it up some more until next time. I've been waiting for this bubble to pop for many, many years, so I don't pretend to know when it's going to happen. My best guess is that inflation will eventually return, bringing higher interest rates with it that make both debt less palatable and governments less able to throw money at the problem. I haven't a clue when that might happen, however.

MacBeth suggested a potential catalyst in the form of boomer downsizing. While that's plausible, it's also a gradual process that may not even occur at a large scale; what if boomers with children just pass their houses on to the next generation? Canada's estate tax is very low, so there wouldn't be much impact in terms of forced sales.

I was surprised MacBeth didn't go into the supply side much, which could also be a potential solution. NIMBY residents have made increasing supply extraordinarily difficult in areas where prices are high. Zoning regulations disallow owners from building developments that would house more than a few people, keeping pricing at a premium. A relaxation of zoning requirements could lead to a huge construction boom while at the same time making housing more affordable, but municipalities seem uninterested in such a scenario. But that could change with some political will, which seems to be growing.

1 comment:

Unknown said...

Re. Demand Side, it is also worth considering the impact (particularly in BC) of AirBNB and the rise of the investor class of AirBNB hosts. Also impacts Supply Side in terms of rental units with many former long-term rentals now being utilized for short-term AirBNB rentals.

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