Canada’s Housing Boom Expected To End In a Bust
Canada’s housing boom is expected to end in a bust according to a new report from New Zealand’s central bank and it is likely to end badly especially for those at bottom of the income ladder.
New Zealand and Canada has faced the same problem of house affordability as their prices rapidly increased over the past decade. Like in Toronto and Vancouver, one of New Zealand’s biggest real estate markets, detached homes cost an average of $1 million. The government recently declared that it will be banning foreign home buyers from the existing home market.
The Reserved Bank Of New Zealand released a study this month checking the booms and bust around the world in the past three decades. The study discovered house prices through several economic disasters, like the Asian financial crisis in the late 1990s, Scandinavian banking crisis of the 1980s, etc.
The study found out that up to 40 per cent and 50 per cent of housing booms usually end in a bust, just about a quarter of stock-market end in a bust.
Maitland MacFarlan, an economic consultant stated in the report that “The cycle of booms followed by busts appears stronger with house prices than with equities.”
However MacFarlan does not properly define “Housing boom,” although he wrote in an email to HuffPost Canada that “multiple years of double-digit price growth would seem to be a signal” of a housing boom. That sure sounds like Toronto and Vancouver.
He also found out that when a housing boom busts, the lower-income homeowners are the ones affected the most.
“In the lead-up to the Great Recession of 2008-09, for example, the strongest house price appreciation in the U.S. tended to be with smaller homes in cheaper areas – price growth that reversed when the crisis hit,” as stated in the report. It also added “What’s more, house price collapse are longer, more drawn-out affairs than stock market busts.”
The report said “Equity market busts tend to be short (a V-shaped cycle), with prices falling for about two years before fully recovering over the next couple of years. While house prices may fall by less than equities in a bust, they show a more protracted, U-shaped pattern of downturn and recovery, with downturns lasting around four to six years.”
That is similar to Canada’s housing bust in the 1990s when Toronto house prices dropped for over seven years straight. Whenever a housing bust takes place, it is usually a risk for the country’s financial system, the report indicated.
“There is a strong association between housing bust and banking crises… All of the major banking crises in industrial countries in the post WWII period have coincided with housing price busts.” MacFarlan stated, however he did not indicate that not all housing bust lead to financial crisis, verse-versa.
He concluded that the risk of housing bust does not make one inevitable, after all, if 40 to 50 per cent of booms end in a bust, then 50 to 60 per cent of them don’t.
“There seem to be a good number of booms that have more benign outcomes.”
