A big part of a bank economist’s job is to get the institution’s research in front of as many eyeballs as possible, and one of the best ways to do that is to be the first to spot a juicy new trend. If it happens to relate to Canada’s primary obsession, real estate, all the better. So Bank of Montreal senior economist Sal Guatieri had a winner on his hands last October when he analyzed the Canadian housing market and showed that three cities alone—Toronto, Vancouver and Calgary—were driving most of the overall price and sales gains in the country, while almost everywhere else, activity was slowing. He dubbed these cities the “Hot 3” and, for a short time, it became the main lens through which people talked about the Canadian housing market. That is, until one of the Hot 3 plunged into a deep freeze. And then there were two.
The speed with which that narrative crumbled—with Calgary falling as quickly as it did out of the ranks of the Hot 3—is being taken in stride around water coolers and at dinner parties in the remaining Hot 2 cities. Calgary, it gets said, is a special situation because of its connection to the floundering oil patch. The report this week from the International Monetary Fund (IMF) warning that the debt levels of Canadian households dwarf those of many other developed countries is also unlikely to push Canadians toward prudence any more than the IMF’s previous half-dozen similar warnings did. Even the latest report on housing starts, which showed an 18.8 per cent plunge in February from the year before, was quickly explained away as a weather effect.
At the same time, tales of excess from the market fail to shock anymore. Or, at least, they shock a lot less than they did a few years ago. And so, as the average price of a detached home in Toronto passes the $1-million mark—the price having climbed nearly nine per cent in the last year alone—it was noted with more amusement than alarm. In Vancouver, where a mansion just sold for $52 million (that’s not even a record), rundown shacks continue to list for close to $1 million. And why not? Lenders are hard at work pushing mortgages with rates as low as 2.24 per cent for two years, barely a notch above the Bank of Canada’s latest core inflation reading of 2.2 per cent.
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Still, can you really blame Canadians for their belief in the resilience of real estate? For years, sourpusses like me have been banging on about Canada’s teetering housing market, and it’s only continued to go up, up, up. The Bank of Canada once used to fret regularly that house prices and debt levels were too high, but you don’t hear that much anymore. As for Finance Minister Joe “there is no bubble” Oliver, he’s sticking to his claim that a soft landing for Canadian real estate is just around the corner.
What we see taking hold is deep-seated complacency. And that should be the strongest signal yet that we’re at the peak of this housing cycle, and that the long-awaited correction could be taking hold.
There’s been a lot of focus on the oil crash that began last June, and debate about what kind of impact it will have on the Canadian economy. But Canadians should put aside what they might think about the importance of oil prices to the economy. Because, for all the talk of Canada being an energy superpower, we’ve clearly shown that our greater strength lies in buying, selling, renovating and renting houses and condominiums. The economy certainly relies more on what gets built above ground than what lies beneath. Back in the 1990s, the manufacturing and energy industries were larger than the real estate sector, but, over the years, they’ve changed places.
Put another way, real estate now makes up close to 13 per cent of Canada’s GDP, compared to less than 10 per cent for energy. The real estate industry is also a bigger employer than the mining, oil and gas sector. Of course, for the real estate market to remain strong, sectors such as manufacturing and energy must, too. Weakness in either would compound problems for the housing market, because it would chip away at the jobs and wages people need to buy homes at such inflated prices.
Even if the housing market simply slows down from its torrid pace of the past five to 10 years, the impact will be widely felt. Should house prices actually crash, then we’re looking at a crisis far worse than anything oil prices could inflict.
Just as it was so easy for the Hot 3 to become the Hot 2, we’re a lot closer to a cross-country freeze than anybody is ready to admit.