Just a note of a personal nature describing the Montreal housing market. I think that prices have clearly increased too much, too fast. We have to ask ourselves why home prices have increased for the last 10 years at an abnormally high rate.
The fundamental reason for this rapid increase is government policy to lower and maintain low interest rates. Furthermore, banks have relaxed lending standards in Canada and come up with unconventional financing methods which make it easier for buyers of questionable financial worthiness to make a purchase. Banks have been able to fuel this credit expansion because their risky mortgages are being backstopped by the CMHC (the Canadian equivalent to Freddie Mac/ Fannie May). With the CMHC insuring most mortgages, banks are free to take on more eager purchasers without taking any risk. In the event that things go bad, the CMHC, which is a government organization, is left holding the bag.
This policy if passing the buck to the government will eventually harm all Canadians, from the most conservative savers to the the most extravagant debt and credit card fiends. We will all suffer the burden of a ballooning government deficit and debt as the housing bubble bursts. This will lead to deflation, a weak dollar (this is not a good thing since Canada is becoming a net importer), and increased taxes.
While it is almost impossible to call when a bubble is set to burst, I do think that May 2010 marked a turning point in Canadian real estate. We are seeing an strong increase in listing volume and a sharp drop in purchases. While prices still remain strong, these will soon start a downward trend. May is showing a reversal from other months in 2010 and will soon be showing year over year declines in sale volume and numbers.
Also, today, I organized, and participated in, a mass protest against the OACIQ, which is the equivalent of the Quebec real estate association governing body. The organization has just increased broker licensing fees by over 100% and they have ushered in new regulations and procedures to drastically chance the way real estate is sold in Quebec. These kind of protests and changes frequently occur at market peaks, and more often than not are excellent contrarian indicators. It is when the governing bodies become most emboldened that the crumbling starts.
So today, I stick my neck out and call the top. The Canadian real estate market has peaked and the bubble popped, today, May 26, 2010.