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Hilliard MacBeth didn’t beat around the bush when he cast doubt about the Canadian housing market last year. The Edmonton-based portfolio manager with Richardson GMP released a book called When the Bubble Bursts: Surviving the Canadian Real Estate Crash. Speaking ahead of the boldly-titled book’s release, he gave a timeline for the impending correction: the summer of 2015.
While the possibility of a U.S.-style housing bubble has long been on the radar of Canadian real estate watchers, now concerns are being voiced from within the housing industry.
Royal LePage president Phil Soper warned Tuesday that a Bank of Canada interest rate cut could push already hot housing prices even higher, putting the market at risk of a correction. Even without a rate cut, prices are continuing to rise. The cost of a home in Toronto and Vancouver, Canada’s two hottest housing markets, is expected to rise by another 10 percent this year, lifting the nationwide average by 6.1 percent, according to the latest forecast from Royal LePage.
“Either a recession or rising interest rates would be enough to puncture the bubble. It’s unlikely we are going to get rising interest rates given we have a weak economy in Canada. So [we could see] a recession where people find out they can’t afford to take on new risks and take on that much debt. It really comes down to debt more than housing prices,” said MacBeth.
He says all bubbles have four characteristics in common; a period of rapidly raising prices, people telling each other stories as to why it makes sense, worrying about missing out, and media writing stories about said bubble.
“For sure there is a bubble. House prices against income are just completely stretched,” said MacBeth.
“Anecdotally, talking to young couples in Edmonton, Calgary, and Vancouver, they [banks] are willing to lend up to five and six times annual combined income of two people recently married. That’s just unprecedented. That’s never happened before. I can’t even imagine how we got into a situation where that is the actual policy of the major chartered banks in Canada.”
With a note of frustration, he questions why Royal LePage's Soper is looking to the Bank of Canada to pump the breaks on the nations' surging housing markets.
“Their [Bank of Canada] main goal really is to regulate the currency and credit markets in Canada, not control the housing bubble in Toronto and Vancouver. I’m not sure that his comments really make too much sense,” said MacBeth.
In his book, MacBeth says the best strategy for survival is renting and avoiding the mistake of looking at a home as an investment in the first place, noting condos buyers are the worst offenders for this sort of strategy. If you own a condo, he says you should look at selling it. While home ownership has proven to be lucrative investment in most Canadian markets, he says renting and earning investment income will yield a better and safer return in the long run.
“I ask 30-year-olds, about renting and the answer I get back is, ‘Everybody wants to buy a house as soon as they possible can’ and ‘Renting has a got a stigma attached to it.’ It’s a lot cheaper and you don’t have to sign on for enormous amounts of debt for the rest of your life,” he said.