No I’m not talking about a pot fueled housing tour (although there’s an idea…), I want to discuss the impact of fear on the housing market.
If you’ve been tuned into the news, hardly a day goes by without a high profile warning about our national housing prices. Obviously the focus is on Vancouver prices that amazingly seem to have returned to growth, and Toronto prices that increased 33% last year. No matter how important we think we are in Victoria, on a national scale we’re about as interesting as Hamilton: just another town caught up in the maelstrom of a bigger bubble.
There is no doubt that various levels of government are hyper focused on the problem right now because the anger it is creating has the potential to unseat them from power. So what happens if the legs get swept out from under the Toronto and Vancouver markets? How might it affect us here in Victoria?
If a policy change is introduced it could take out foreign buyers or first timers or speculators. But what if Vancouver and Toronto simply collapse under their own weight? It won’t change the fundamentals in Victoria but it will radically alter market sentiment. Suddenly the belief that housing only appreciates goes up in smoke. Greed turns to fear. And fear can have a powerful effect on the housing market.
We last saw this in 2008 during the financial crisis. Despite the financial crisis not having a big effect on local employment, the market completely dried up as the double digit daily declines in the stock market hit the news. In the end all that was left were those sellers that had no choice but to sell becoming ever more desperate to unload their houses in an environment that felt like the end of the world. Over 8 months the median detached house lost some $70,000 (12%) of it’s value while the median condo lost $50,000 (16%).
Of course it bounced back just as quickly as it dropped, once the market realized that nothing had actually changed in Victoria, and now mortgages could be had for half price. This is as close as the housing market gets to a flash crash, and it played out over 18 months. Plenty of time for a brave investor to recognize the opportunity and be greedy while others were fearful.
I believe that when Toronto and Vancouver turn downwards dramatically (I’ll avoid the word crash), it will be felt here in Victoria. Will it be enough to change the rosy perception of housing as an investment for longer, or will it be another blip? Will it be another opportunity for investors with foresight, or will it be a bull trap now that the world is weary of quantitative easing? I only know it’ll be entertaining to watch.
Happy Easter everyone.