BC housing bubble

[Connor Griffiths]

This summer the BC housing market seemed crazier then it's ever been. Since the active housing market resulted in ballooning prices should BC be prepared for a market correction in the coming months or years? 

[Giovanni Isaksen]

@Conner,

Houses only go up in value, why worry? ;) I know a lot of people in the US who thought that and learned otherwise. Fortunately Canadians are smart enough not to make RICO level mortgage origination fraud legal (unlike your southern neighbors here in the US) so a collapse brought on by mortgage rates resetting on borrowers who had no business getting a mortgage in the first place is very unlikely.

On the other hand with mortgage rates below 3% and most Canadian mortgages being short term (compared to a 30 year in the US at least) if rates rose significantly a lot of folks might have a hard time affording the new payment when the loan was due to roll over. If they all try to head for the exit at once that could definitely swamp the market with inventory which would quickly create a buyers market (remember those?). 

However it looks like the odds of rates rising significantly (or at all) based on the US Fed's decision last week is extremely low (Seehttp://www.theguardian.com/business/live/2015/sep/... ). In fact I believe most central banks are trapped at the zero bound and that we're all turning Japanese (Whose 'Lost Decade' is now old enough to be graduating with a master's degree) because low interest rates distort investment and hurt savers who would normally be a big part of the spending in consumer driven economies. In the US Wall St. bankers are doing great but a poll last year showed that half of Main St. Americans thought the economy was still in recession.

Another possible cause for a correction is demand disappearing. Some have postulated that with the renminbi being devalued and the Chinese stock market 'crashing' (only back to Feb 2015 levels) that foreign investment from China would slow down but anecdotally at least we haven't heard that from our Chinese clients. My theory is that it may speed up overseas investment as investors there race to get ahead of further devaluations (and before they're swept up in 'anti-corruption' investigations which are mostly designed to weed out anti Xi Jinping factions).

There is another hit to demand that also could originate in China; the slowdown in their economy and it's effect on raw materials producers (see http://www.visualcapitalist.com/china-consumes-min... for a good look at that). Since 30% of Canada's GDP comes from exports (and more than a quarter of that is oil) any slowdown in purchasing from China plus any knock on effects from other countries tied to China could really put a dent in the Canadian economy (see http://www.worldstopexports.com/canadas-top-export... for the top 10 list). Then it's domestic buyers who would stop purchasing, a group that despite the press is much larger than all the foreign buyers put together.

So, long answer but short on conclusions; it's why US President Harry Truman wished for a one-armed economist (so they couldn't say 'on the other hand'). The reality however is that in a complex adaptive system like the world's economy for you or I to pretend we can predict the future is to deceive ourselves. The thing I'm most sure of is that if we can envision it we can plan for it and therefore reduce the risks. Unfortunately that means the thing that will get us is the 'unknown unknown', the risk we don't even know exists.

Einstein said that compound interest is the most powerful force in the world, I'd say that non-recourse loans are a very close second which is why investing in the US is so attractive to Canadians... and everyone else.

BTW I think your VRBO investment(s) up at Whistler are great.

Giovanni