The Globe's Real Estate Beat offers news and analysis on the Canadian housing market. Read more on The Globe's housing page.
Hilliard MacBeth is staking his reputation on the controversial idea that there will soon be a housing crash in Canada.
Mr. MacBeth, an Edmonton-based portfolio manager with Richardson GMP Ltd., has written a book called When the Bubble Bursts: surviving the Canadian real estate crash.
The book is coming out in a few months and it is certain to cause a stir.
So who is Mr. MacBeth? He obtained a BA in economics at the University of Alberta in 1971; he's had a lengthy career as a stockbroker and financial adviser, and at the moment he says that he and three of his colleagues manage about $209-million for roughly 175 households; he's a former chairman of the Alberta division of the Investment Dealers Association of Canada; and in 1999 he wrote a book called Investment Traps and How to Avoid Them that, among other things, pointed to problems with mutual funds and warned generally against buying high and selling low.
He dropped by The Globeand Mail's offices to share his thoughts (this interview has been edited and condensed).
How did the book come about?
I wrote a book in 1999 called Investment Traps and How to Avoid Them and I talked about the buy-high trap, which at the time was the technology or dot-com stocks. I'm getting the same sense today about the real estate market. Bubbles have characteristics that are very common – a period of rapidly rising prices, people telling each other stories as to why it makes sense, people feel regret for missing out, and the media gets involved in writing stories about the bubble. We tick all four boxes in this bubble. Some of my clients have been with me for 35 or 36 years, and I started noticing them getting more and more obsessed with real estate either on their own behalf or as the bank of mom and dad on behalf of their millennial offspring.
How bad do you see it getting?
There's a money manager, Jeremy Grantham, he's head of GMO in Boston, I met him about 10 years ago. He had his team of research analysts search out all the bubbles they could find, historic bubbles, and every single one of them corrected all the way back to the trend line that was in place prior to the bubble. So the housing bubbles in Canada, the U.S., Ireland, Portugal, Spain, Australia started in about 1999 or 2000. To get back we'd have to have a 50-per-cent drop in prices.
We talk about the Canadian market, but is it truly a national problem?
It is. I've got clients in Vancouver, Toronto, Calgary, Edmonton. In Toronto, generally they talk about foreign buyers buying condos 20 at a time in high-rise buildings downtown, which I'm sure is true. In Vancouver, they talk about people trying to get their money out of China. In Edmonton, they talk about the oil sands and development there. And in Calgary, well, it's Calgary. So everyone's got their own story.
You're worried about debt levels?
Debt is a very serious problem. When you look back at the dot-com bubble and the macroeconomic picture, it was a very minor thing because most people didn't take a huge chunk of their life savings and put it into dot-com. They bought Nortel Networks, and there are always exceptions but the average person did not take today's equivalent of $200,000 and put it in Nortel. And they didn't borrow any money to do it – if they did put that much in, it was cash they had saved up. I lived through the early 80s when there was a housing bubble and debt bubble (in Alberta), but it was nothing like this. The difference then was that interest rates were 14 per cent and you could only qualify for a fairly small amount of money on a loan.
What's your advice to consumers?
It's kind of radical, yet in a way not radical at all. You have to talk different demographics in Canada. There's a demographic which isn't the millenials and isn't the baby boomers, they're people in between 30 and 50 years old, and they have the highest debt level. So the advice is that people who have a lot of debt should sell and rent. The number one advice would be to sell the condo, because condos are a terrible investment, they're not even an investment at all. The houses are going to correct obviously, perhaps even more than condos, but there's always a market for single-family homes – at some price you can always find a buyer for any single-family home in Toronto or Edmonton or Calgary because there's always going to be a shortage of those. You might not like the price, but you could sell. But condos, literally, I could see a situation where you just can't find a buyer.
Do you own a house?
We do. The difference is is it an investment or a lifestyle choice. I'm anticipating that I'm going to consume some of the household investment that we have, my wife and I, for the rest of our lives, and we're okay with that. But that's not what I hear from people who are 20, 30, 40 years old, they see it as an investment. Now, there is one aspect of housing that actually does rise in value over time at the rate of inflation, and that's the land. Which you don't get with a condo.
When do you think the correction will happen?
The housing market pretty well dries up starting in about October, November and then the new wave starts in February or March. I would think that, depending on the price of oil, depending on world economies and all that, we'll see next spring, next summer.