Canada’s defiant housing market is making the bears look bad, but at least one economist is showing some empathy in his own tongue-and-cheek way, borrowing a tune from one of the world’s biggest bands.
In a report called “Sympathy for the Doomster,” Bank of Montreal chief economist Douglas Porter calls on market watchers to “spare a thought” for the critics who have been predicting for years that Canada’s housing market will crash, but have yet to be proven correct.
Porter’s ode is closer to crocodile tears.
“Please allow me to introduce myself/I’m a bear of stealth and haste/ I’ve been around for long, long years/ Stole many homebuyer’s soul and faith,” writes Porter in a new report, borrowing rewriting lines from The Rolling Stones song Sympathy for the Devil.
“Got it wrong last year too/ Though I’ll keep saying the same/ Ah, but truly scaring you/ Is the nature of my game.”
Despite the humorous jab at housing market bears, Porter says he can understand why some people are critical of Canada’s strong housing market. Average home prices have doubled in 11 years, mortgage debt has skyrocketed and if that’s not frothy enough, just look at Toronto’s skyline.
“Toronto has the most towers under construction in North America,” notes Porter.
Still, he’s not convinced Canada’s housing market is in a bubble, despite the “heated” Toronto market, where new condo sales soared 94 per cent in June, to 2,588 units, compared to a year earlier and 19 per cent higher than the 10-year average.
“Even august bodies like the IMF, the OECD, and some ratings agencies have weighed in with a stream of warnings about Canada’s hot housing,” Porter says.
“And yet, all have been proven wrong — at least so far — as the market just keeps grinding relentlessly ahead, even widening the already enormous gap with U.S. prices.
Porter lists three key factors he thinks are stabilizing Canada’s housing market (in order of importance):
1. “Extremely” easy monetary policy. Basically, low interest rates are driving affordability and aren’t expected to spike anytime soon. “Simply, the pronounced decline in rates has almost offset the run-up in prices to keep affordability surprisingly close to its long-run average,” says Porter. “Even some of the housing bears allow that the bubble will not pop until interest rates start rising meaningfully.”
2. Demographics. Canada’s echo boom – the children of the Baby Boomers – are in their prime buying years. This should support the housing market for the next few years. However, Porter expects these demographic factors to “turn mildly against the housing market” by 2020. That’s around the same time rising interest rates will “make their presence felt, a potential double-whammy for housing,” Porter says.
3. Foreign buyers. Foreigners see Canada as a stable country and its parts of housing market as inexpensive compared to some other international cities such as New York and Hong Kong. “Foreign buying may play an important role in pumping up Canadian prices for some time yet, especially in Toronto and Vancouver,” says Porter. There are growing calls for Canada to tax foreign real estate buyers, as Australia has done, to help cool activity.
Overall, Porter says he doesn’t see a need for Ottawa to intervene in the housing market.
“Much like the weather, it seems like everyone is talking about how hot the housing market is, but (appropriately) no one is doing anything about it.”