The headline alone has to grip you, doesn’t it?
This article first appeared in Thursday’s Globe & Mail, and I’m still trying to wrap my head around it…
“Could You Survive A 40% Plunge In House Values?”
By: Michael Babad
The Globe & Mail
DBRS Ltd. is highlighting a somewhat shocking number today. The ratings agency isn’t saying it’s going to happen – not for a moment – but it does say Canada could withstand a plunge in house prices of 40 per cent.
That’s a dangerous number, but the DBRS study says it wouldn’t put most Canadians under.
“A catastrophic 40-per-cent property value drop would reduce household net worth by $93,000 and lower the average equity ratio to 44.8 per cent from the current 66.9 per cent, but would be unlikely to cause immediate, large universal mortgage defaults,” says the study, whose lead author is Kevin Chiang, a senior vice-president.
There is no timeline for that.
That doesn’t mean DBRS isn’t concerned about the mounting debt burden among Canadian families, and what it sees as “stretched” housing affordability. Other observers have also sounded warnings.
Household debt, it finds, ballooned by more than 381 per cent between 1990 and 2011, to $1.6-trillion, while average home prices reached almost five times average gross income.
“While housing prices increased faster than the average household income, the current affordability ratio of 37 per cent is aided by the low interest rate environment and is only slightly worse than the long-term average,” the report says, though it notes that an increase of 2 per cent in mortgage rates could drive that to 43 per cent, or more, of pre-tax income.
“An increase in mortgage rates or a home price correction in itself, in DBRS’s opinion, does not have a large impact on mortgage defaults,” according to the study.
“However, a combination of higher interest rates, lower property values and a drastic increase in unemployment would be of great concern as mortgage defaults are closely related to employment and individual family situations. Higher interest rates would likely cause some households to reduce consumption and fewer people would qualify for the same mortgage amount, putting downward pressure on housing prices.”
If you simply read the headline, scrolled down to the bottom, and are reading this now – the answer to the question is “yes.”
YES, according to the article, “Canada could withstand a plunge in house prices in house prices of 40%.”
So let me go out on a limb here and say something that isn’t just to stimulate conversation, but rather something I truly believe: the real estate market will not drop 40% in Canada.
I won’t insult your intelligence and say something like, “This baby is shooting for the moon! The market is going to increase forever!” No, I’ll leave that for the pure salesmen in my line of work. The market will level off at some point, no doubt. When is the million-dollar question, since those people saying “Stay tuned – the great crash is happening” have been saying that for nine years, during which time, Toronto house prices have almost doubled, and those geniuses have left huge tax-free capital gains on the table…
I won’t make a prediction on when or by how much the market will decrease, but I will say that it won’t drop 40%. It can’t.
So often, people say things like “Anything can happen to our economy! Look what’s going on in Greece!” But we aren’t Greece; not even close. We’re not socialists; we’re hard-working Canadians who understand the value of a dollar and who, with the exception of Quebec it seems, are willing to acknowledge that success and financial gain in this world simply cannot be achieved without hard work.
I just don’t see Canadians up-and-leaving the work ethic and values that have brought us this far.
Our economy is healthy, both on its own, and grading on a curve when you consider what is going on around the world.
There is no doubt that the real estate market cannot continue its upward trend forever, but I don’t see a 40% drop across the table in Canada, and let’s remember that Toronto would likely not depreciate anywhere close to the national average, if that were the case.
Am I being a dreamer?
Is my cup beyond half-full?
I don’t think so. I read this article and thought, “Oooookay. Well, it’s nice to know that the experts think our country could withstand a monumental drop in real estate values. That says something about the health of our economy.” But I followed that up with, “It’s also nice to know that we’re not dropping 40%….”
Every day, I open the paper and read about two things that bother me to no end: Greece & Quebec.
These two regions are faced with a host of different problems, but these problems can all be traced back to the source: entitlement.
Quebec students are lazy, ignorant, and entitled.
Is Greece any different?
Don’t all these people want something for nothing?
I’ll spare you my rhetoric. Every time I sound off on politics, one or two readers, who disagree with my political views, will comment, “You should stick to writing about real estate.” Nobody who actually agrees with my political views has ever advised me to act accordingly…
But as Canadians continue to work hard and produce, I keep thinking that this country is on its way to being a worldwide super-power. Real estate values will correct at some point, but I don’t see a crash coming, and I think, as the article above suggests, that we can withstand short-term fluctuations on our way to long-term triumph.