If a couple of our big bank CEOs are right, the housing market is either fine or going to correct in orderly fashion.
What a relief. Other financial corrections we've had in the past few years were car wrecks, but housing will brake before hitting anything.
When the stock markets corrected in the financial crisis back in 2008-09, they didn't so much fall as crumble. Stocks have recovered, but some people still suffer from a sort of posttraumatic stress that has welded them into safe investments. And then there's the decline in oil prices.
The bottom more or less dropped out of the oil market at a time when we were all pretty complacent about energy prices. The result is yet another negative surprise – our economy is really struggling right now. Bank of Canada Governor Stephen Poloz has described growth in the first three months of the year as "atrocious," an unusually vivid term for a central banker to use.
House prices in Canada have pulled back modestly in some cities lately, but the national average price is still almost 42 per cent ahead of where it was at the end of 2008. If houses had behaved normally and gone up by the inflation rate over that same period, the increase would have been closer to 12 per cent.
Bharat Masrani, CEO of Toronto-Dominion Bank, acknowledged last week that the bank has been worried by big housing price gains in some cities. But he said population growth and a shortage of single-family homes in some markets should soften the impact of falling sales and prices.
Dave McKay, Royal Bank of Canada's CEO, told a New York audience earlier this month that much of the rise in prices in some markets is driven by a lack of supply in single-family homes and immigration. He also mentioned strong household formation – young people moving out of their parents' homes to their own place.
When the price for any financial asset rises sharply, there are always explanations that suggest the fundamentals are sound and thus there's no reason to worry. Energy prices were sustained up until last fall by a belief in rising economic growth and declining oil supplies. The theory was undone by surprisingly persistent global economic weakness and the effectiveness of fracking, which is technology that captures oil in the ground that was previously thought to be inaccessible.
We've had a long series of warnings about the housing market from outsiders such as the International Monetary Fund, which said earlier this month that prices are overvalued by 7 to 20 per cent and in line for a soft landing in the next few years. The global financial giant Deutsche Bank has said homes in Canada are 63 per cent overvalued, while Goldman Sachs and the Financial Times newspaper have also argued that Canadian housing is vulnerable.
The more we have sharp, unexpected corrections like we've seen since the global financial crisis, the more analysts will strain to see these shocks before they hit and issue warnings. The term "bubble" is certainly overused right now – for every asset that rallies in price, there's someone who sees trouble ahead. So maybe the outsiders worried about our housing market are just twitchy. They focus on negatives like weak affordability and high debt loads, and ignore the positives the bank CEOs talked about.
The heads of banks that make billions lending money are comfortable with the housing sector. But not too long ago, you did – now and then – hear a note of concern from bank economists and executives about housing. In January, 2014, for example, TD's previous CEO, Ed Clark, said people running banks should be cautious about the runup in house prices.
At the big banks, there seems to be less critical thinking on housing today than there has been at any time since prices started rallying back in 2009. And yet, since Mr. Clark spoke up, the country's economic outlook has steadily deteriorated. It's not out of the question that the economy actually shrank during the first quarter of this year.
The bank chiefs may be right that house prices will keep rising, or fall in a moderate, orderly fashion. But the kind of corrections we do get in financial markets these days tend to be nasty, not delicate. Stay alert, homeowners.