Why we should stop worrying about the condo market
If the Bank of Canada were a character from “Winnie the Pooh,” there’s no doubt it would be Eeyore, the gloomy, thistle-munching donkey.
It means terribly well and feels terribly responsible for our collective well-being, but it just can’t seem to stop throwing shade on the domestic housing market.
There’s a tradition of central bankers “jawboning” markets and trying to precipitate change through rhetoric. But the latest analysis from the Bank of Canada — a fretful forecast about the economic consequences of the overbuilt condo market (especially in Toronto) — is more like “Chickenbelittling.”
If the Bank is really so worried about fragile consumer confidence, maybe it needs to stop with the kvetching all the time. Truth is, people just start to tune that stuff out after a while.
For those of us who have lived through a couple of condo crashes already, it’s not surprising in the least that a) they’ve been overbuilt yet again and b) there’s anxious discussion about the impact that another condo crash will have on the overall economy.
"Any correction in condominium prices could spread to other segments of the housing market as buyers and sellers adjust their expectations," a recent Bank report stated. "Such a correction would reduce household net worth, confidence and consumption spending, with negative spillovers to income and employment."
Well, yes, that’s true. But it’s also true of any number of other potential shocks to the economy as well. Maybe you can’t leave everything to free market forces, but when you’ve implemented some strong policy measures — something that’s already been done in Canada’s real estate sector — you have to let go.
Taking our economic temperature every few hours and pronouncing morbidly about our ill health isn’t exactly going to boost the consumer confidence that the Bank is perpetually fretting about.
If the large number of unsold units now under construction or in the pre-construction phase aren’t sold in the next 12 to 30 months, warns the Bank, it could cause house prices to fall, crushing residential construction and affecting jobs, incomes and — ultimately — the quality of bank loan portfolios.
To be fair, one heck of a lot can happen over 30 months — which is two-and-a-half years for goodness’ sake. And the condo market does tend to march to its own drummer.
As for the threat of widespread economic contagion, the household debt picture has improved in Canada as the pace of debt accumulation has become better aligned with disposable income and no near-term likelihood of a rise in interest rates.
Another point to consider: about 25 per cent of the current condo inventory is held by domestic investors, for rental or tax purposes.
A big chunk of the rest of the market is dominated by foreign investors who typically purchase such properties as a long-term hold, a strategy that contributes to condo market stability.
There’s evidence of stability elsewhere as well.
Economic growth picked up a bit in the first quarter of this year, employment numbers were unexpectedly strong in May, and housing prices also rose by two per cent in that month. For housing prices, this is the smallest year-over-year increase since November 2009, which suggests that tighter lending rules and other cooling measures are working.
According to a recent Reuters poll of 21 forecasters, house prices will gradually ease off by about five per cent over the next few years instead of either crashing or burning.
Given that housing prices rose 88 per cent in the past decade (according to the Teranet-National Bank Housing Index), some orderly easing of house prices is a healthy — and deliberate — thing. It’s exactly what recent policy moves have intended.
As it stands, of Canada’s 14 key residential real estate markets, Vancouver isthe only one where weak sales activity is pulling down average prices and therefore shifting into a buyers’ market.
The Bank of Canada has certainly been instrumental in encouraging the federal government to tighten mortgage lending rules four times in the last five years. As well, there’s been a gradual shortening of the maximum length for an insured mortgage from 40 years to 25 and limits have been implemented on how much people can borrow against their homes.
For those reasons alone — all well known to the Bank — the dire clamoring seems a trifle excessive.
It’s also worth noting that if interest rates creep back up next year, the combination of growing incomes and slowing home price growth should preserve affordability in most markets.
The Bank of Canada has a responsibility to flag emerging economic issues but it might also want to remember to be strategically judicious about the number of times it rings the warning bell.
When you live in a thistle patch, you’re forgiven for believing that a steady diet of thistles is the norm. But it isn’t.
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