 |
| Apartment buildings in the skyline of Vancouver. Photographer: Jennifer Gauthier/Bloomberg |
Canadian housing once seemed so infallible that the head of the world’s biggest asset manager in 2015 described Vancouver condos as a better store of wealth than gold.
The coronavirus is putting that theory to the test.
While lockdowns, job losses and uncertainty are roiling property markets from the U.K. to Australia to Hong Kong, Canada’s situation is more precarious than most. As its oil sector shriveled in recent years, Canada’s economy became ever more driven by real estate, an industry now in a state of paralysis. Nearly one in three workers has applied for income support.
What’s more, its households are among the world’s most indebted, poorly placed to weather the storm.
“I think it is the Great Reckoning,” says Douglas Hoyes, a bankruptcy trustee in Kitchener, Ontario. “We’ve been in a period for so long where it didn’t matter what property you bought or how highly leveraged you were. Well, guess what? Now it matters.”
Since the economy began shuttering in mid-March to slow the spread of coronavirus, policy makers have raced to buttress the property market. Banks are offering mortgage holidays, including to landlords with multiple loans on investment properties.
That has raised eyebrows even within the real estate industry. “Should someone with four properties really be granted financial assistance?” asks Steve Saretsky, a Vancouver realtor. “Where exactly do we draw the line?”
A ‘Flammable’ Market
The country may not have much of a choice but to prop up housing. Real estate has become Canada’s largest sector. Including residential construction, it accounted for 15% of economic output last year; energy accounted for 9%.
If it collapses, there’s not much that can pick up the slack — certainly not oilnor the seemingly unflappable consumer.
Canadians have been on a two decade spending spree since a downward shift in mortgage rates began in the 1990s. Toronto and Vancouver, the two biggest housing markets, haven’t had a major correction during that time. Housing turned into a wealth-conjuring machine. As values spiraled higher, homeowners felt richer — they spent more, borrowed more, and sent prices even higher.
That virtuous circle just popped. The City of Vancouver fears it’s heading for insolvency after it surveyed residents and found that 45% of households say they can’t pay their full mortgage next month and a quarter expect to pay less than half of their property tax bills this year.
It’s a stunning contrast to 2016, when those lucky enough to own a detached house in the west coast city watched their net worth balloon on average by more than C$1,600 ($1,130) a day without ever leaving home. In one year, the city’s properties surged in value by C$47 billion, more than double the cumulative take-home income of all its residents.
Tellingly, billboards by the consumer financial watchdog began cropping up — “Don’t use your house like an ATM” — as homeowners borrowed against those gains to fund renovations, vacations, and rental properties.
Today, Canadian households owe C$1.76 for every dollar in disposable income. In Vancouver, that spikes to more than C$2.30 — a ratio that puts the so-called supercar capital of North America on par with Iceland before the global financial crisis.
Source: Natalie Obiko Pearson | Bloomberg
No comments:
Post a Comment