Because I work in the housing industry, I’m often asked my opinion of how “the market” is doing or how I think it will do in the future. Well, I’m sorry to say that I threw out my crystal ball a long time ago. I don’t know what will happen in the housing market tomorrow, but my years of experience can certainly help me make a good guess.
For some time now, the Canadian media has predicted a US-style housing crash in Canada. I’ve also heard about a housing bubble that is ready to pop. Although it makes for good headlines, I just don’t see changes of that magnitude happening to the housing market anytime soon, and I have a few reasons why.
In my opinion, the Canadian housing market has been very good for a long time now (except for maybe Vancouver). Yes, I believe that the market is slowing down and that housing prices won’t rise as dramatically as we’ve seen in the past. This slow down is a good thing, however. That might sound strange coming from someone who runs a new home-building business. You’d figure I’d want the boom to continue so I could sell more houses for higher prices. Although that might be good in the very short-term, I tend to take a long-term view of things. I’d prefer that the market gradually slow down rather than crash like the US market in 2006.
Plus, I don’t think we need to worry here in Canada because there are some fundamental differences between what happened in the US and our current housing market. The US crisis was not so much a house-price problem as it was a lending problem. In the US at the time, new homeowners could often borrow up to 130 per cent of the purchase price of their house. Homeowners could also get a loan on a house with no proof of income or assets. With such loose lending practices it’s no wonder there were problems.
The ridiculous lending that happened in the US doesn’t happen in Canada. Just go to your local bank and speak to the manager about getting a 130 percent loan on your house. Or try to persuade them to help you buy a $500,000 house on a minimum wage salary with no personal assets. I don’t know how your banker would react, but you would not get very far into the conversation before the words “No way!” came from their mouth.
Before the US crisis, many of the banks there didn’t care what or to whom they were lending. They didn’t worry about someone repaying the loans. They simply worked some accounting magic and packaged the loans as investments and sold them to investors, who have since lost a lot of money.
In Canada, bank loans follow a very different process. Most banks hold your mortgage on their books. If you default on the mortgage, then the bank is on the hook. Because banks have to worry about getting their money back (and then some), they are very careful about to whom they lend and how much. Canadian banks have tougher mortgage rules as well. Plus, on top of that, our federal government keeps a much closer eye on what the banks are doing. Just recently, the banks started to lower their interest rates and then stopped after Finance Minister Flaherty shook his finger at them.
Even builders are more cautious with their selling practices. Many, including Landmart Homes, require you to prove that you’re approved for a mortgage and can afford the house. If you can’t produce a letter from your bank, then we don’t sell you the house.
The Canadian market will also remain strong because of the demand for housing from new Canadians. Canada has strong immigration with many more families needing a place to live every year which helps create demand for housing.
The role of the condo in the GTA has also changed over the last decade. For many, a condo is their only affordable option (especially for first-time home buyers). A generation ago, you would buy a small house as your first home. Today, in many areas outside of the GTA, the townhouse is a first-time buyers only affordable option. As you move to more populated areas in the GTA, like Toronto, even this option is out of reach and people accept condos as the new beginner or family home.
Some argue that too many condos are not being bought by end users and that is cause for concern. Certainly too many investors in the market is not a good thing, but those rentals are an important source of housing for many people. I don’t see many rental apartment buildings going up. Most were built in the 1960s or so, and people need places to rent. The investor market for condos is helping to fill the gap between the supply and demand for rental property.
In the end, my feeling is that the Canadian housing market is stable and there is a balanced market. Prices will likely rise, but more for inflationary and cost-to-build reasons. In my opinion, that’s okay. Slow and steady over the long run is good both for people like me, who build and sell new homes, and the people that buy them from us.
Jason Roque, CEO.
Follow me on Twitter @landmartceo