Some people think the housing market in Canada is headed for a repeat of the hard landing in the 1990s. Toronto was particularly hard hit, with home prices suffering double-digit declines that took over a decade to reverse.
But if one takes a close look at the bust of two decades ago, they will see that the conditions were way more hostile to housing than they are now. This suggests the landing for house prices should be much softer in the 2010s.
First, affordability measures were considerably higher back then. Mortgage payments on a standard bungalow required 52 per cent of household income in 1990 whereas they now require only 42.5 per cent, according to the May, 2013 issue of RBC Economics' Housing Trends and Affordability. House prices are currently high but interest rates are much lower.
Second, there were critical differences in the economy. In 1990, the Bank of Canada was trying to bring down inflation of more than 6 per cent with interest rates above 13 per cent. As a result, Canada entered one of the worse recessions since the 1930s: growth in inflation-adjusted gross domestic product plunged to -3 per cent by early 1991. The unemployment rate jumped from 8 per cent to 11 per cent over the two years to 1992.
In 2013, interest rates, GDP growth and unemployment are nowhere near as negative. In fact, the current inflation rate of 1 per cent is below the central bank's target of 2 per cent, so it's more concerned about maintaining sufficient monetary stimulation to avoid deflation and recession. Nor do these benign conditions appear likely to reverse anytime soon.
Larry MacDonald is a retired economist who manages his own portfolio and writes on investing topics. He tweets at @Larry_MacDonald
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