Brian Lewis
Province
The house-buying mania and soaring price frenzy we’re seeing locally, nationally and globally is now described as an “economic bubble.”
And, like all bubbles, sooner or later it’s going to burst.
And when that happens, many homeowners — especially newer ones — may be in danger of owning a mortgage larger than the asset value of the home. It’s happened before, with devastating consequences.
Other signs support the concern that this frenzy has reached bubble proportions.
There’s a prevailing “I-can’t-lose” attitude among buyers, along with a “get-in-at-any-cost” or “quick-flip-for-profit” mentality.
Banks and credit unions are spiking their mortgage cocktails with easier and easier terms, while some homeowners now use their home equity like ATMs to extract extra cash.
Consequently, household debt in Canada and elsewhere has smashed all previous records. But some analysts and self-serving realtors say “don’t worry” because much of that debt is supported by rising real-estate values.
The fact is, as The Economist magazine warned recently in a special report titled “After The Fall,” the global housing boom is the biggest financial bubble in history — bigger than the late 1990s global stock-market bubble or the U.S. stock-market bubble of the 1920s.
“Prepare for the economic pain when it pops,” the magazine said.
Its most compelling evidence that homes are over-valued is the diverging relationship between house prices and rents.
In the U.S., for example, the ratio of prices to rents is 35 per cent above its average level during 1975-2000.
Although no figures were provided for Canada, The Economist says property is over-valued by 50 per cent elsewhere, such as the U.K.
In fact, the bubble is already beginning to burst in Britain and Australia — despite current low interest rates. This runs contrary to conventional wisdom that it will take higher interest rates to slow the housing boom, the magazine warns.
More importantly, it says a U.S. housing slowdown may only be a year or two behind the U.K. and Australia.
If that happens, it’ll impact the global economy significantly, a recent International Monetary Report says, since the global housing boom pulled the world out of the 1990s stock-market bust in the first place.
This should concern Canadians, since the U.S. is by far our largest trading partner. It’s a larger concern for B.C.’s forest sector, which ships 75 per cent of its lumber to the U.S. market.
There are also signs that the U.S. economy is beginning to slow. In a recent report, the TD Bank said this year will be its “last hurrah” and that a mid-cycle slowdown is on tap for 2006.
And we’re seeing early signs of a slowing housing market in Canada where, in May, national starts fell by five per cent. On a year-over-year basis, resales also have fallen, while house prices are increasing at a slower rate.
And, even though the Greater Vancouver real-estate market is still very healthy, there are early signs that it’s slowing down.
As for the housing bubble bursting, The Economist says it’ll be more like a “slow puncture.” The first sign will be when higher prices begin to force out those over-exposed investors.
But whether a bubble bursts or implodes slowly, it usually happens when least expected. So, when you borrow for a home, be careful and be conservative.
© The Vancouver Province 2005
