Vancouver is beginning to show some cracks!
If Toronto was the only market in bubble territory, the potential fallout wouldn’t be that serious. However, Canada’s third largest city, Vancouver, is beginning to show some cracks.
Swiss-based UBS Group AG recently released its Global Housing Bubble Index. In this report Toronto and Vancouver are ranked in the top five international cities likely to be in the bubble territory. Hong Kong and Munich were the only markets with higher risk ratings.
The report noted that these bubbles might be ready to pop. “The first cracks in the boom’s foundation have begun appearing,” the report noted. “House prices declined in half of last year’s bubble risk cities.”
But if you’re waiting for a crash, keep waiting
Clearly, across multiple indicators, the housing markets in both Vancouver and Toronto have been overheated for an extended period of time. A recent report from RBC tells housing market bears “don’t hold your breath.” It went on to highlight that whenever stresses were introduced to the market, new buyers quickly “jumped back into the market,” stemming any temporary losses.
Perhaps that type of behaviour can’t last forever, and it certainly can’t persist at forever increasing prices, but the fact remains that calling a bubble is very difficult to do. But when bubble’s pop, they can impact financial returns for long periods of time.
Over the past 60 years, for example, Toronto’s housing market has seen three periods of multi-year decline: a five-year decline starting in 1958, an 11-year decline starting in 1974, and a 7-year decline starting in 1989. The most recent Toronto housing bull market has lasted for more than 20 years!
But beware: even small market dips can have outsized effects on Canada’s banking stocks. During the 2007 and 2008 turmoil, housing prices were impacted for less than 12-months in Canada’s largest markets. Yet the stocks of major banks fell as much as 70%. BMO shares fell from $70 to $30, RBC fell from $60 to $30, and TD fell from $35 to $18.
Bubbles may be hard to predict, but their impact on banking stocks are well-documented. If you’re concerned with capital preservation but have investments in Canada’s banking sector, now may be a good time to start taking some chips off the table.