Why Toronto needs to brace for a real estate–bubble burst.
What exactly do you do?
M Hanson is a U.S. mortgage-and-credit research firm. My job is to track macro trends in Canada, particularly the impact of housing and credit trends, and their impact on the broader economy.
You’re sounding some serious alarms about real estate in Canada.
The housing boom is a disproportionate part of our economy right now. If you look at how many people are employed directly by real estate—construction, or real-estate-related services—the percentage is at an all-time high. In terms of GDP output, real estate is at a record high when it comes to its place in the total economy.
What’s wrong with that?
This sort of euphoria around real estate does not last. People have short memories. It’s illogical to think that a 10 per cent year-over-year gain will last forever. The boom has made people feel wealthier because their house values are going up. They’re spending more. They’re using their house as an ATM—getting home-equity lines of credit, or rolling more debt into their mortgage when they refinance. Then they’re using the money to buy cars and vacations. If prices stagnate or fall, people could end up with negative equity, where the house is worth less than the loan they’re carrying.
Is it always stupid to put five per cent down?
I have a great problem with that. It really ties your hands if prices stagnate or fall for any length of time. That becomes a real drag on the economy. It will affect everything. The unemployment rate will rise, and people could find themselves out of work with a house they can’t sell without taking a cheque to the bank. If they get a job in another city, now they’re tied to an asset they can’t sell. I’d strongly advise to put down at least 10 per cent, if not more.
Is buying a condo in Toronto foolish right now?
It’s not foolish per se. I realize that people need stability and renting doesn’t always provide that. I’m probably one of the people who is most bearish on the Toronto condo market. As an investment, I think it’s quite at risk right now. But I know some people are willing to trade some equity for stability. It’s a lifestyle choice.