Often thrashing economic and housing stats, a number of pundits have sought to find that elusive bottom in the Canadian housing market. (REMAX, on the other hand, is perpetually predicting a rebound, conveniently releasing their auguries just prior to the two seasonal waves to give themselves initial credence, at least among the naïve and gullible.)
During periods of sharp upheaval, economic and housing pundits are rarely accurate. During the last major decline in house prices in the GTA, only one pundit, Frank Clayton, accurately predicted a minimal 25% decline. That was his sole one-hit wonder as an augur.
Data driven prophecies have proven evidentially worthless, especially when the fluctuating edicts of the leader of an economic hegemon are capricious and deliberately intended to harm foreign jurisdictions in his less than rational self-interest. With real possibility of abrupt changes to one’s fortune, it becomes difficult to see a turnaround prior to January 2029, when Trump is constitutionally required to surrender authority. Even should he die in office, I doubt that this would alter American policy significantly, such as it can be called policy. Lack of the predictable leaves only the bold and reckless to risk major investments.
There exists a more commonsense predicate, at least in understanding the economic dynamics of the present predicament. I am personally acquainted with this dynamic from that earlier decline in house prices in the early 1990s. A variant of this dynamic also occurred during the Great Depression.
For during an extended period of ever steady price declines in house prices, a rational person is inclined to delay any purchase, especially if he/she is a first-time buyer and/or has little equity. For further declines in house prices may place that homeowner underwater or with much less net equity, which makes purchasing a different house impossible. This has the effect of trapping that family household in place, even if they concluded that their initial purchase was a mistake and desire to move or an economic opportunity opens up which requires a move.
I like the country. Hence, we purchased a detached house in the country in 1991 because of the large lot which gave our children room to play. However, my wife soon concluded and complained about how isolated she felt.
Like Frank Clayton, I had concluded that house prices would drop 25% from 1989 peaks. However, one year after our purchase, the builder dropped the prices of the same house type another 10%. The price remained at that level until all lots were bought. After dropping closer to 30%, house prices in general remained level until near the end of the decade.
In the early years of a mortgage, little of the principal of that mortgage is paid. Hence, while a homeowner acquires some equity, it is insufficient to overcome any major decline in house prices. Hence, we were stuck, (even if I had wanted to move).
There exists yet another peril during an extended period of price decline. A mortgage company is under no legal obligation to renew the mortgage after the term ends. While rare, it does happen, especially if house prices have precipitously declined as they have since the frenzy of late 2021 and early 2022. Five year terms are up for renewal at rates which are somewhat higher than during the frenzy.
The additional expense, however, is probably not greater than nominal wage gains (c. 19%) since then. However, the self-interest of the mortgagor is reasonable averse to renewing a mortgage if the outstanding debt exceeds the present price of the house.
A Self-Perpetuating Dynamic
The curious aspect to this dynamic is its extended lifespan, independent of, sometimes in the face of, present economic circumstances. Barring some tumultuous event, abruptly reversing the trend, it becomes self-perpetuating, a vortex of anxious expectations propagating actualities.
During the American Great Depression, a civic jolt was required, a deliberate set of reflationary policies by the FDR administration which reversed three years of high single-digit deflation, during which one made significant ROI, merely by stuffing one’s cash in the proverbial mattress. However, this took currency out of the economic system, perpetuating the decline in GNP and in prices in an ever incessant vicious spiral.
In the 1990s, the jolt emanated from an export boom into the United States, courtesy of NAFTA, the end of the Cold War, and a maturing PC revolution (c. 1995), which finally produced the long hoped for productivity gains.
Other than some sane governance reemerging in the United States, whether from the Left or from the Right, it is not apparent from where that reversal shall come.
Even if one believes, as I do, that Canada is presently well-governed; because of the continued overhang of trade dependence upon the United States, it will require several years of resolute and steadfast political will to break free from that maddened society and the deleterious consequences of its self-serving policies and capricious edicts.
How Bad Could It Get?
After decades of inordinate price rises, the average price of a home in Ireland peaked at €349,838 in April 2007. (I regret not buying anything there in the 1980s and 1990s in Donegal where my wife’s family was from.) By February 2012, prices had dropped to €205,476, a decline of 41.3%. (Cost of living in the Euro area rose 9.6% during that period.) The decline from peak in February 2022 to present in the GTA is 24.4% so far. (Cost of living has risen 14.5%).
Metropolitan areas like Vancouver and the GTA rose inordinately in the 2010s, courtesy of lascivious monetary policies, the excess of liquidity funneling into asset inflation. Housing prices rose and fell more modestly elsewhere in Canada.
Hence, there may yet be more financial pain to suffer.
New and Active Listings: A Flawed Indicator
Two of the statistical indicators, cited by pundits to discern the tightness of any housing market, are new and active listings. However, in a depressed market, like the current one, these indicators may be delusional. For just like the potential employee who, out of the apparent hopelessness of the job search during bad times, stops searching for work and is therefore not counted in the employment statistics, those, who otherwise desire to sell their home, may not do so out of the hopelessness of selling, and hence do not list their house. Consequently, when the market does pick up, there may be a seeming interminable stream of new listings coming onstream. The housing market does not appear to tighten and prices remain flat until the actual pent-up supply is exhausted.