Mon Post #1: Real Estate Forecast - updated

Excellent interview with David Lepoidevin of National Bank on BNN about real estate last week (hat tip to Fish from Fishyre).

If you missed it you can watch it here.

Transcript excerpts courtesy of VREAA:

"Where we are concerned is regarding the value of Canadian real estate. The lessons from the world have been that real estate has had greater implications than just the value of your investment properties.”

“In Canada if you look at the actual numbers, the numbers don’t lie. If you look at median real estate prices compared with those in the US, at their peak the median US housing price was $265,000. Today in Canada, the latest figures we have is $375,000 for the median real estate price transaction. So therefore we are 42% higher in Canada today that the US was at the peak. And we’re [about twice] the median price in the US today.”

“Many of the banks are more exposed [to the mortgage market] than they have ever been. CIBC has 50% of their loans in real estate. When we got into trouble in the early 1990’s, the average Canadian bank was about 13% exposed to RE, and we know we got into a heap of trouble then [with overexposed institutions].”

“The Canadian bubble has extended far beyond the US bubble. We’re beginning to see cracks in the system and the cracks are coming from my home town which is Vancouver, which may have been the epicenter of the bubble. A stand-alone house in Vancouver was over $1 million and still is over $1 million.

Reports are coming in that Asian money is slowing to a trickle. [Real estate prices in China are dropping.] The frenzy had spilled over into Vancouver almost as a suburb of China. [The money has stopped because the Chinese real estate market has slowed but also because the investor immigrant program has ‘shutdown’.”

“If we look at the percentage of jobs in actual construction (this isn’t realtors this is actually guys swinging hammers) ... we can see that Canada, the red line, is way above not only where the US is today, but we are significantly higher at 7.5% compared with 5.5% in the US at their peak.”

“So we need to define whether there is a bubble and what I’m trying to point out to people is, yes, there is a bubble.”

“The myth in Canada is that real estate cannot go down unless there is a spike in interest rates. In the United States interest rates of 2% lower than they were when housing prices will almost double what they are today. So it wasn’t a spike in rates that caused house prices to go down it was a reduction in the availability of credit, tightening credit. We now have the first Canadian majority government we’ve had in 8 years and they are beginning to put the brakes on.”

“If we did an Internet search for ‘boom and bust’ you will find hundreds of examples in history, in various economies, of boom bust cycles. If you do an Internet search for ‘boom’ and ‘soft landing’ there are no entries. There are none. ‘Soft landing’ are the scariest words in investment history because they don’t happen. We are trying to engineer a soft landing in real estate just as the Chinese are. The NASDAQ bubble, the US housing bubble,The Canadian housing bubble... You will not find a soft landing.”

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