Analyst outlines dangers looming in the housing market's horizon

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Marked by seemingly non-stop growth, Canada’s real estate sector continues to establish its status as one of the most attractive destinations for overseas investors, but an industry observer noted that signs of weakness have already started appearing two decades after the “bull run” started.
 
“Both Calgary and Edmonton have been affected by oil’s decline… Other markets are actually showing year-over-year declines,” financial blogger Nelson Smith wrote in an analysis for The Motley Fool Canada.
 
Smith argued that Vancouver and Toronto, the cities mainly responsible for the housing industry’s sustained strength over the years, might also experience a similar downturn in the near future.
 
“After all, bull markets can’t continue forever, especially at current price-to-rent and price-to-income ratios. And interest rates can’t get much lower either,” Smith stated.
 
The observer warned that the dangers looming on the market’s horizon would have grave effects on the portfolios of each of its investors and stakeholders. Smith cited recent steps taken by long-time industry players such as Genworth Canada, which has started formulating contingencies in the event of a housing crash.
 
“Many of the mortgages it guaranteed have been paid down pretty aggressively since they were first insured. It’s just the last few years’ worth of loans that could be in jeopardy,” he said.
 
Smith also pointed out that banks are exposed to these risks, despite much of mortgage risk now being assumed by insurers such as CMHC.
 
“There isn’t a Canadian bank without significant exposure to the housing markets in Toronto and Vancouver. A big decline in those markets will hurt every lender in the country,” the analyst explained.
 
Smith further argued that most importantly, the country’s overall economic health is sensitive to any fluctuations in the housing sector.
 
“It’s easy to see how [current trends] can turn out badly when the value of the underlying real estate starts to decline. Sure, the majority of homeowners are making wise financial decisions. But all it takes is a small minority taking on too much debt to turn a housing correction into a major event,” he said.
 
“Nobody really knows how this massive real estate bubble will end. We might get a soft landing or a devastating crash. Whatever happens, I know I don’t want to put my money into a company that could potentially be damaged severely by the fallout,” Smith concluded.
 

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