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Last updated: February 6, 2013 4:27 pm
Desperate times demand desperate measures. When Jordan and Russ Macnab, estate agent brothers in Vancouver, Canada, had a glamorous single-bedroom apartment, priced at over C$600,000, that was stubbornly refusing to sell, they decided on a marketing innovation: the “crib crawl”.
They rented a limo bus, stocked it with drinks and snacks, and took a party of possible buyers on an evening tour to see the apartment in question and about half a dozen others, in a mobile viewing party.
The experiment was not a complete failure: the Macnabs attracted a lot of interest, and are developing a television series based on their idea. They are planning their second crib crawl next month.
As a way to shift slow-moving inventory, however, it was a flop. Not one of the apartments they showed found a buyer. Vancouver, which until last year had Canada’s strongest growth in house prices, is now its weakest region. The number of homes sold in the greater Vancouver area dropped by 23 per cent last year.
“It’s a bit of a stalemate at the moment,” says Jordan Macnab. “Buyers are waiting for it to crash, and sellers don’t want to give it up.”
The lack of buyers is sobering evidence that Canada’s housing boom, which began in 2000 and bounced back to life after the financial crisis of 2008-09, is now over.
Nervousness about the outlook for house prices, and the effect on the economy if they slump, is casting a pall over the last few months in office of Mark Carney, the Bank of Canada governor who will take over at the Bank of England on July 1.
Mr Carney, who will appear to face questions before the British parliament for the first time on Thursday, was courted by UK Prime Minister David Cameron’s government partly on the strength of Canada’s relatively strong performance compared with other large economies. Just as he is leaving, the shine is coming off that record.
Worries about Canada’s house prices and rising consumer debt prompted Moody’s, the rating agency, to cut the credit ratings of six of the largest Canadian banks last month.
Construction is still booming. Toronto is putting up more skyscrapers over 150 metres tall than any other city in the western hemisphere. But the demand for homes is fading.
The Teranet/National Bank of Canada index of average house prices has been falling for four consecutive months; its weakest performance since early 2009. Nationally, average prices were still up by 3.1 per cent in the year to December, but in Vancouver they were down 2 per cent.
Paul Ashworth of Capital Economics, a research company, believes other cities are likely to follow.
“Everybody is hoping for a soft landing,” he says. “Maybe we’ll just get a few weak spots like Vancouver and apartments in Toronto. But I am not convinced.”
Mr Carney deserves neither all the credit for Canada’s successes nor all the blame for its failures. The economy has been driven by forces beyond his control, particularly events in the US, and he has shared economic management with ministers and government agencies. The biggest changes in the housing market last year were the government’s moves to cut back the availability of mortgage insurance provided by the Canada Mortgage and Housing Corporation, a state-owned company.
Nevertheless, it was the decisions by the Bank of Canada under Mr Carney’s leadership to cut interest rates during the crisis and hold them down subsequently that enabled a surge in household debt and house prices. While American consumers were running down their debts, Canadians were adding to theirs, so that by the end of last year household debt was 165 per cent of income, in the same territory as the peak in the US at the start of the crisis.
House prices, meanwhile, rose 23 per cent in the three years to April 2012. The International Monetary Fund has been warning since 2011 that Canadian homes looked overvalued, because the ratios of house prices to incomes and to rents were respectively 20 per cent and 29 per cent above their long-run averages.
Mr Carney has acknowledged the problem. Testifying to the Canadian Senate last October he said: “One of the known side-effects of having low interest rates for a period of time can be the build-up of financial imbalances in various sectors of the economy . . . [including] the household sector.”
But he said there were “various lines of defence to address those risks” that could be taken by banks, individuals and the government. He added: “Under our flexible inflation targeting regime, we could use monetary policy as the last line of defence to reinforce these other measures if it were necessary.”
Those defences are likely to be tested, economists argue. Mr Ashworth says the pattern seen in Canada is a familiar one.
“When you build up so much debt and load it into the housing market, that’s generally a worrying sign,” he says. “The US, the UK, Spain . . . they had fast rising house prices, and high levels of consumer debt, then a house price correction. The only difference with Canada is we haven’t had the last step yet.”
If house prices do crash, it will be a blow to consumer spending and to the construction industry, which is still engaging in significant “overbuilding” of apartment buildings, according to the Bank of Canada.
One threat that appeared imminent last year – the impact on heavily indebted Canadian consumers of higher interest rates – seems to have receded. Presenting the central bank’s latest Monetary Policy Report last month, Mr Carney said the Canadian economy was growing more slowly than the bank had expected, partly because of the global slowdown, meaning that rate increases could be put off for a while.
Even so, the housing market is still one the most serious threats to the outlook. Canada is “unlikely” to suffer a US-style housing boom and bust, the IMF said last year, but warned: “the unwinding of domestic imbalances could prove more disruptive than anticipated in our baseline scenario”.
The Vancouver housing market is not entirely dead, and at the top end of the market there are often foreign buyers prepared to put their money down. Yet in a sign of how the tables are turning, the reviving US market is now attracting envious looks from across the border. Mr Macnab says he knows many Canadians who are planning to buy property in Arizona.
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