In Fortress Real Developments’ recent report on the Canadian housing market, author Ben Myers, senior vice-president of market research and analytics, wrote: “With the high price growth in 2016, there is much debate regarding the market dynamics that are pushing up values and whether the housing market is a bubble waiting to burst. This report differentiates fact from fiction and anticipates where the housing market is headed in 2017, especially in the red hot Toronto market.”
Myers wrote that for years people have “falsely claimed that the Canadian housing market is in a bubble ...”
According to Myers, the biggest problem “stems from the fact that most people don’t have the foggiest idea what a housing bubble is, how you would identify it, and why it is something a country or metro area should avoid.”
There are actually numerous definitions of a housing bubble, but the Institute for Fiscal Studies (IFS) out of the United Kingdom has probably the best definition: “The idea of a ‘bubble’ is that asset prices are driven by expectations of future price increases rather than by the intrinsic value of the assets involved.”
The IFS identified three key elements of a bubble: speculative buying for capital gain, speculative lending to non-credit-worthy clients, and a trajectory of explosive price increases (typically followed by an equally spectacular collapse).
The second element has been thoroughly dealt with by the federal government through changes to Canadian Mortgage and Housing Corporation-insured down payment regulations, and a credit worthiness test for home buyers. It was the second element — a subprime mortgage debacle — that contributed to the massive housing collapse in the U.S. and the deep recession that followed across the globe, starting in 2007.
It’s true there has been evidence of the third element in Vancouver and Toronto. Still, the Vancouver market, through federal regulations and provincial government intervention, including a new tax on foreign home buyers, has cooled. On the other hand, the Toronto market remains hot due to a lack of listings. It’s a housing supply problem primarily brought about by urban containment policies — good for keeping green spaces, but bad for people who need land for homes. Myers said the vast majority of people want to buy homes for a place to live rather than as an investment.
And by no stretch of the imagination can any of these key elements be attributed to today’s housing market in Winnipeg. There were price gains in 2016, but at manageable levels. And Winnipeg has one of the most affordable housing markets in Canada. The common refrain about the market is “slow but steady.”
According to the International Monetary Fund, there are shortcomings to the typical measures used to detect the presence of a housing bubble, such as the price-to-income ratio and the price-to-rent ratio. “Judgements about housing valuation require supplementary information, such as credit growth, household indebtedness, lender characteristics, and the method of financing.”
Evidence of the elements mentioned by the IFS have an historical context in Winnipeg, which provides the strong evidence of how speculation for capital gains can lead to disastrous consequences.
During the real estate boom from June 1881 to mid-April 1882, newspapers across North America and in Europe proclaimed that Winnipeg and Manitoba were thriving as a real-estate bonanza for quick-buck artists. What prompted the real estate boom was the arrival of the Canadian Pacific Railway in 1881. With the railway came the inevitable opportunists — Ontarians first, followed by Americans and Europeans.
“Winnipeg was the centre of a boom, from which the evil radiated in all directions,” Alexander Begg, a local merchant, wrote in his History of the North West. “Towns were surveyed all over the Province and Territories, and lots in them were disposed of at auction at fabulous prices. The town site mania was aptly described by a railway conductor ... Asked how the country was progressing, he said: ‘Well it’s the greatest country I ever struck ... there’s a new town about every three miles from Winnipeg to Moose Jaw. Where there’s a siding, that’s a town, and where there’s a tank and a siding that’s a city.’”
Although Winnipeg lots quickly changed hands at rapidly increasing prices, Jim Coolican, Winnipeg’s “Real Estate King,” in bold-type advertisements proclaimed: “Cartwright Leads Them All. Unquestionably the Best Situated Rising Town in the Province.”
In his Winnipeg auction house, Coolican managed to move Cartwright lots to the tune of $20,000 each. Yet today, Cartwright is merely a tiny village near the North Dakota border with a population of about 345 people.
Coolican auctioned lots from the real estate exchange at Portage and Main, and in a two-week period was said to have sold $1 million worth of property.
“I doubt if to-day any other city on the continent, according to its population, can boast of so many wealthy young and middle-aged men,” said a reporter for the Toronto Globe in March 1882.
“Thousands of dollars were made by operators in a few minutes,” wrote J. Macoun in his book, Manitoba and the Great Northwest, published in 1882. “The excitement spread like wildfire all over the country.”
Col. Kennedy, Winnipeg’s registrar of deeds, estimated in 1882 that the year’s real estate transactions would total between $10 million and $12 million. “Most of the large transactions were in Main Street property,” he said. “The Hub corner changed hands several times. A few years ago a portion of that was purchased for $15,000, and the purchaser was considered to be crazy ... now it has sold for $ 115,000.”
On April 12, 1882, A. W. Ross began to advertise lots in Edmonton. At first, people flocked to his Winnipeg office snapping up the lots. Speculators felt profits were just around the corner, but they couldn’t find anyone willing to buy the propertiess they had only the day before purchased.
Coolican attempted to revive the faltering market by taking fellow speculators down to St. Paul, Minnesota, to sell lots, but Mother Nature played a dastardly trick — the Red River flooded and Winnipeg was cut off. Coolican eventually got back to Winnipeg on April 28 and took out a front page ad announcing, “Coolican’s Return! and the Boom Returns Also!” But, there were no takers.
“The boom was purely speculative,” said Ross. “The floods came, and the whole thing then collapsed.”
It is estimated that only about five per cent of those who speculated in property made money. Many bought property with small down payments and were left with large debts they couldn’t repay and became destitute.
What happened back then is a true definition of a real estate bubble doomed to collapse. But the speculative conditions evident in 1881-82 Winnipeg are not as yet present in the Canadian real estate market of 2017. People aren’t buying houses for speculative purposes, but as a place to call home.