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Why Haven’t We Crashed Yet?

13 January 2013

It’s a question many people – especially buyers in some of today’s hottest markets – are asking. When is the crash going to happen?

We’ve been hearing about the housing market crash that’s coming to Canada for at least a year now. Homes were too hot in just about every market, and interest rates were remaining, as they still do, at historic lows. That led to a flood of buyers on the market, and prices that kept going up, up, up. But we kept hearing that what goes up must come down. We kept hearing that the bubble was going to burst, and we were all going to be left soaking wet.

Then the latest round of mortgage rule changes was put into effect last summer, the government’s way of stepping in and trying to control a fire that seemed as though it was about to spread wildly. That helped. A mild – very mild – softening came. We saw sales activity decline, and home prices came down. Still though, that drop was only a slight shift. And here we are. Still waiting for that crash that everyone keeps talking about.

But guess what? It’s not coming. Or rather, it’s likely not going to until some dramatic trigger happens that really delivers a blow to the market. And that blow is likely not to come in the form of interest rate hikes.

Don’t get us wrong, the interest rate will rise. And it’s probably going to do so by the end of this year. But that simply won’t be enough to bring prices down. Which means that there will still be many buyers sitting on the sidelines, waiting for the drop to happen, so they can finally own a piece of the market.

“Crashes don’t just happen in a vacuum, you need a trigger,” says Benjamin Tal, deputy chief economist at CIBC World Markets. “I can’t point to any crisis in the history of crashes that didn’t have a trigger. If you have a gradual increase in the rate, this doesn’t happen.”

Tal points to the United States’ housing market just before their collapse. There, the interest rate jumping overnight, in some cases as much as four percentage points, was the trigger that caused millions of homeowners to be suddenly unable to afford their homes.

That lack of a trigger, says Tal, is what’s allowing home sellers right now to cling wildly to the prices on their homes that are simply too high. And it’s why we won’t see a huge softening in this country for some time to come. Instead, what Mr. Tal says he sees happening, is that things will remain fairly steady for the Canadian market.

“I think stagnation is a good word for what will happen. It’s what we saw in the market from 1992 to 1997. We are going to see a correction and the question is ‘what will emerge from that.’ The scenario is the market will not be strong, it will be stagnant.”

Mr. Tal also says that another very likely scenario is that, instead of reducing their price hoping to sell quickly, sellers will simply pull their listing off the market and wait for a better time. That’s what happened in the U.S., but Mr. Tal is still looking for that trigger that will cause that to occur.

“In the U.S., you had to sell your house because you were delinquent. If you tell me tomorrow the unemployment rate [in Canada] will jump to 12 per cent, we will have a crisis,” he says. “But the economy continues to be okay, people have jobs, interest rates are low. Historically, anytime when prices dropped it was tied to high unemployment and interest rates. It’s not the case today, people are not forced to sell, they are staying with their price.”

And that’s why we haven’t seen a crash, or even a huge softening, happen as of yet. And unless something fairly dramatic happens, we may not see it for quite a few years.

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