For years there have been predictions of a collapse in Canadian house prices. But the market just keeps chugging along: in August, sales of existing homes climbed 11% and prices rose 8% on a year-over-year basis, according to the Canadian Real Estate Association. The sales/listing ratio tightened to 54.6 from 51. As Gluskin Sheff economist David Rosenberg asks: “Where’s the housing collapse?”
I have a pretty good idea why the housing market has refused to follow the bears’ script—having penned numerous Canadian Business Online articles over the past two years outlining weaknesses in that narrative. A key point has been is that it’s hard to have a crash when central bankers are more concerned about keeping the party going than taking the punch bowl away. (For additional explanations, see here and here.)
The feeling that house prices are a bubble about to burst has always been around. In 1948, when U.S. house prices were $8,000, a journalist wrote in Harper’s magazine: “Nearly everyone is agreed that today’s housing values are inflated and that the collapse will have to come someday.”
During the 1970s, conventional wisdom depicted housing as—to use the recurring metaphor—“a bubble about to burst.” BusinessWeek said: “All such obsessions have ended in crashes.” “No boom lasts forever,” opined Forbes. “Why should this one be different [than the 1929 crash in the stock market]?” Barron’s chimed in. Similar comments can be found in the Wall Street Journal, Money, Financial World, and other U.S. media.
If our historical horizon extends beyond the past five or six years, we can see there is a great deal of resiliency in housing prices. In Paper Money, Adam Smith tells us that housing prices were unaffected by the panics of 1893 and 1907 or the mini-depressions of 1913-14 and 1920-21. They did drop in the U.S. between 1930 and 1933, when half the banking system went under. Thereafter, they went into a secular upward trend for the next 75 years. Severe credit crunches, stock market downturns and economic recessions, such as those in 1966, 1970 and 1974, had little impact.
Why have house prices gone on such an extended uptrend? One reason is that in a world of fiat currencies, central bankers are free to stimulate economies by manipulating the money supply and interest rates. Also, governments are backstopping the housing market with supportive programs.
This framework remains in place. Central banks are still going strong, as are the government programs (albeit some excesses are now being trimmed). The takeaway? It appears the long-term upward trend in house prices will be with us for some time yet.
Larry MacDonald is a former economist who manages his own portfolio and writes on investment topics. He is the author of several business books.
