Book review: When The Bubble Bursts: Surviving the Canadian Real Estate Crash
By Hilliard MacBeth
Investment advisor Hilliard MacBeth’s book about the coming Canadian housing crash is well researched and engaging. It is the scariest financial book I’ve read.
He starts with the observation that whatever his retail clients are fascinated by usually ends in epic disaster. In the early 80s it was oil and gas stocks; the mid 90s featured Bre-X. Tech stocks (including Nortel) took centre stage in the late 90s. Since the mid 2000s, his clients talk about one thing: real estate. What they say to him: “It keeps going up, it can’t go down, buy now before it’s too late.” Some of his clients own multiple properties which they rent out, often at a negative monthly cash flow in the hopes of future capital gains. Sound familiar?
MacBeth uses research and data to back up his arguments for a coming housing crash:
1. Over long periods of time, real estate tends to keep up with inflation. It doesn’t perform much better than that. Periods of price growth beyond basic inflation matching are unusual and often turn out to be bubbles. Canadian real estate, especially in major cities (Vancouver, Toronto, Montreal), have risen three-fold since 2000 which seems unsustainable; incomes and prices of other goods have not risen in proportion. Canadian house prices in relation to average household incomes have risen to some of the highest in the world, higher even than in the US at its housing bubble peak.
2. The bubble could burst for any number of reasons including higher interest rates or a recession. Interest rates are currently at historical lows. At higher rates, many people wouldn’t be able to afford their mortgage payments. In a recession, people who lose their jobs will be unable to meet their mortgage payments.
3. Structural shift. The large wave of baby boomers downsizing will create a large supply of homes. Boomers won’t want the upkeep, won’t be able to climb stairs, and will want to use those assets for retirement. This supply will be added to large supply that has been added in recent years due to the building boom. Taken together, this supply will overwhelm demand and prices will fall.
MacBeth tears apart commonly held opinions about real estate. These include the ideas that renting is wasting money (it’s cheaper than owning and the savings can be invested in stocks or bonds), that real estate always goes up (not true, look at USA/UK/Ireland/Spain/Japan/etc.), and that the Canadian market is somehow unique and immune from a downturn (sorry, it’s not).
MacBeth points to the government run CMHC mortgage guarantee program as one of the reasons mortgage lending and personal debt levels have gotten to this point. Without this program, banks would be more conservative in their mortgage lending because they would bear the risk of loss. In economics, this is called a moral hazard.
The people that will be most hurt by the crash are retiring baby boomers hoping to cash out and pay for their retirements, new buyers with high loan to value ratios, landlords trying to make money renting out condos, shareholders of Canadian financial institutions, those in the construction industry and last but not least the Canadian taxpayer (who will foot the bill for the CMHC losses and bank bailouts). But those won’t be the only groups affected. As housing is usually by far the largest asset for most households, the consumer, who drives our economy, will be negatively affected in a big way. Rather than continuing to enjoy the wealth effect from rising home values, they will feel poor. In response, they will start saving and spend less resulting in a dramatic effect across the Canadian economy.