Sunday, April 11, 2010

Admission of a Housing Bubble

OK, not exactly in those words, but when average home prices in Canada are up 10% and the head of a major Canadian real estate agency says:
“House sale data from the past two year period shows tremendous variances in terms of how different cities reacted to the recession,” said Phil Soper, president and chief executive officer, Royal LePage Real Estate Services. “In Vancouver and Toronto, for instance, the dramatic unit sales fluctuations exhibit a significant degree of market irrationality: inordinately fearful when faced with poorer markets; and overly enthusiastic when the tables turned.”
And to be clear, we haven't yet entered the "fearful" stage yet.   We're still in euphoric home orgasm mode. Human wants being what they are, there is always an overshoot in consumer sentiment going both ways, so while this bubble will eventually "correct" it is quite likely to eventually overshoot, where the bulk of the population will hate housing and realize it's a non-liquid, depreciating, terrible asset to own for investment purposes.  Looking south, this is the current sentiment of most Americans, and in general that sentiment is earned due to the collapse in home prices, the crushing reality of negative equity, and the evaporation of the American Dream for the middle class.

We as Canadians, are not so different from our southern neighbours...we're roughly where they were circa 2005.   The top is near.  I fully except the prospect of rising rates, tightening lending standards, and the introduction of the HST to be catalysts for the correction.  It's beginning.

Speaking of higher rates, just as the cost of fixed rate mortgages already have begun rising as per Tightening the Vice - It Begins, variable rates mortgages will soon rise as well, when the Bank of Canada starts raising the benchmark rate from it's historic low of 0.25%. 

Scotiabank expects the benchmark rate to rise to 3%.  No, that's not the prime rate, that's the overnight rate.  Expect prime to hit 5%.  And no, this isn't on some timeline far into the distant future (like 30 years from now when the bulk of new homeowners will still be paying their mortgages)...this is by next year.  I know what you're thinking...they can't/won't do that.  You're fine to believe that, but banks are pricing in that likelihood, so maybe consumers should too...after all, they're the one's setting the rates on the mortgages right?

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