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Is Canada Really Sitting on a Real Estate Bubble That’s About to Burst?

An ex-Lehman bro says so, but there are plenty of reasons to ignore him.

by Sarah Berman
Aug 31 2016, 4:30pm

If you've been following headlines over the summer, you might think Canada's real estate market is on the edge of total meltdown.

One of the latest warnings came from a finance dude who traded for Lehman Brothers before they went bankrupt in 2008 (lol, right?); Jared Dillian told the Wall Street website Mauldin Economics that Canada's housing market "is in extreme bubble territory," adding, "I don't see how it could get much worse."

In an interview picked up by Forbes and Global, Dillian said Canadian real estate has become a "very popular short," now "crowded" by US investors like himself, keen to make money off a Canadian crash. (VICE talked to one such shortseller earlier this summer). And, because our banks don't play around with derivatives like their American counterparts, Dillian predicted the crash would be slow and painful over many years, rather than quick and dirty like the 2008 crisis. By Chinese media's estimation, our debt levels will make it even worse.

For those of us living in Vancouver, this has been an easy enough narrative to swallow. Housing has been horribly expensive for years now, and the last six months have broken all kinds of records for insane prices and unprecedented sales, not to mention rising eviction complaints. But even as banks pump out new studies that say affordability in Vancouver is the worst it's ever been, there are plenty of reasons to ignore the Lehman bro. That he has an obvious vested interest in a crash, and his former employer was super-duper wrong that one time, is only part of it. The bottom line is: Vancouver ≠ Canada.

Read More: Meet the Wall Street Shortseller Betting Against Canadian Real Estate

To get a better handle on all this bubble talk, I called up Robert Hogue, senior economist at RBC Economic Research and coauthor of a study released yesterday that confirmed housing affordability in Vancouver is in the actual worst in the country. The bank measured this by comparing median incomes to average "homeownership costs" including mortgage payments, utilities and taxes.

Hogue says Vancouver had its biggest drop in affordability since they started measuring this stuff over the first two quarters of 2016. Right now housing costs sit at 90.3 percent of what a Vancouverite earns before taxes. That's an 18.3 percent drop in affordability over this time last year. (Ownership costs for single-detached homes are an even more ridiculous 126.8 percent of median incomes).

"I think the numbers speak for themselves," Hogue told VICE. "This clearly puts significant pressure on affordability that was already stretched to begin with."

But just because Vancouver's prices have shot up an unsustainable 30 percent in a year, doesn't mean the whole country's housing market is about to come down. By Hogue's account, Vancouver is an outlier when you look at the country as a whole. "We're really only talking about two markets, Toronto and particularly Vancouver, where affordability is deteriorating—not only deteriorating, but at an accelerating pace," he told VICE. "Elsewhere the vast majority of markets are balanced and not an issue."

On the list of least affordable cities, Toronto is second at 60.2 percent, followed by Victoria at 51.4 percent. The rest of Canada is holding stable well below the country's 42.8 percent average. "Most markets across Canada are pretty much within historical norms," he said.

That the rest of the country is pretty stable hasn't stopped us from losing confidence. A Bloomberg survey released this week showed a record 20.5 percent of Canadians are expecting real estate to tumble in the next few months. That's up from 12.5 percent the week before—the most bubble-theorists seen since they started tracking it in 2013.

In fact, depending who you ask, the crash has already begun. Vancouver's house-buying bonanza already started slowing down in July, and has dropped off dramatically in the first half of August, after the British Columbia government brought in a tax on foreign investment. Upscale areas like Richmond and West Vancouver saw up to a 94 percent drop in sales in the first two weeks of the month, with prices coming down as much as 24.5 percent over the last three months.

Hogue points out that even a 20 percent drop in Vancouver only takes us back about nine months in prices—a time when the market was still deemed unaffordable. Though it seems pretty dramatic—"frozen solid" or "imploded" by some observers' characterization—it could just as easily be the correction the area needed.

Another study by TD Bank seems to back up the fact that Vancouver and Toronto are on totally different levels, and headed in different directions. The study found Vancouver is facing a "modest correction" that could see prices come down 10 percent over the next year. On the other hand, TD found Toronto has room to for prices to grow, and investors snubbed by the new BC tax might just move their money east.

If you ask Tsur Somerville, director of UBC's Centre for Urban Economics and Real Estate, we've been entirely too fast and loose with the bubble label—particularly on a national scale. "Bubble is a very particular definition in economics. Just because prices are higher than equilibrium—that's not the definition of a bubble. That's part of it," he told VICE. With interest rates so low, he says it's impossible to definitively say what we're seeing is a bubble.

Seeing the drop in Vancouver sales in August, Somerville thinks the Vancouver market could go in a number of directions, but says the smartest move is to wait and see. "Before the tax was announced, sales were already dropping year on year, so you had a bunch of things going on at the same time, which makes it very hard to make a bold declaration."

"I think people are looking for explanations, and people are driven to think what they want to be the narrative, and are looking for facts to support that."

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