Canadian house prices have been flagged as over valued, unstable, and a risk to the financial system for a long time. These concerns have been noted by institutions such as the IMF (International Monetary Fund) since at least 2012, and have been cited as a major concern by our very own central bank since about 2005. However, betting against the housing market in Canada has proven to be a widow-maker trade. Maximum pain.
The housing markets resiliency here has ultimately reinforced confirmation bias that prices never go down. A 20 year bull market that keeps on giving. This view that you can’t lose on housing was recently re-affirmed when house prices failed to drop during a period of record job loss at the onset of the pandemic. Yes the market was ultimately bailed out through government intervention, but that is irrelevant. People believe the government will always be there to support housing because, why wouldn’t they? They’ve already showed their hand- housing is too big to fail.
We can see this belief in the form of market activity. House prices nationally ticked up again in May, now up 24% on a year-over-year basis, the fastest pace of home price acceleration ever. Boomer parents want their millennial children in the housing market, after all if it made them rich it will surely make their kids rich. It should come as no surprise that parents are co-signing mortgages at a record clip.
This type of activity is concerning, but perhaps I am too skeptical that this can continue indefinitely. Look around the country, housing activity is off the charts. Take for example, Moncton, New Brunswick, where home prices have inflated by 33% over the past 12 months. That’s more price growth in the past 12 months than they’ve seen over the past decade combined. Then you have the nations capital, where Ottawa single family house prices have now doubled over the past five years. Hamilton home prices are up 31% in the last year, now more unaffordable than than Los Angeles and New York City according to research from Oxford Economics.
Not sure how this plays out but there is no easy solution. The share of Canadian household net worth comprised of real estate equity has reached the highest level in over 30 years. No policy maker wants housing falling on their watch. House prices are of systemic importance.
Some day, somehow, this will come to a head. But, like CEO of Citi Bank Chuck Prince famously said in July 2007, “When the music stops, in terms of liquidity, things will be complicated, But as long as the music is playing, you’ve got to get up and dance.”