'The Housing Bubble has Burst'

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‘The housing bubble has burst’: Economist warns market imbalances are threat to economy in long run

Those booming housing markets may make some homeowners rich and provide a short-term boost to the economy, but a Canadian economist is warning about the long-term impact on the country.

David Madani, of Capital Economics, said in a report out Friday that while the housing boom supported the economy through the oil shock in 2016, a further deterioration in housing affordability will cost the economy over time.

“The abrupt slowdown in Vancouver’s housing market serves as a warning shot. As things stand now, the performance of the economy this year could hinge on the direction of the much larger overheated Toronto housing market,” Madani writes. 

Toronto faces ‘serious’ housing crunch as prices soar 22% and supply drops by half

The report notes that Vancouver home sales have plummeted 40 per cent over the last 12 months and despite mortgage rates remaining very low, house prices are also beginning to drop.

“Contrary to the conventional wisdom, there hasn’t been any macroeconomic catalyst or trigger for this abrupt slowdown. The new provincial foreign buyer tax also has little to do with this,” the report states, referring to an additional 15 per cent foreign property transfer tax the province brought in for August, 2016.

“The new foreign buyer tax announced by British Columbia’s government in July doesn’t tell the full story either. We simply think the housing bubble has burst. Housing bubbles are, of course, inherently unstable because they are largely driven by unpredictable investor mania.”

Madani says gains in Toronto continue to be fuelled by loosening credit standards and points to research from the Bank of Canada that says the size of an average home loan has ballooned as a proportion of household income which he says makes mortgage lending increasingly riskier.

“The largest banks are now being strongly advised by OSFI, the federal banking regulator, to bolster their working capital base for their own protection,” write Madani.

“Overall, while the investment boom in housing supported the economy through the oil shock, the further deterioration in housing affordability and greater housing imbalances are worrisome, symptomatic of an economic crisis in the making caused by investor speculation and excessive financial leverage.”

(Courtesy: The Financial Post)