IS CANADA FACING A HOUSING BUBBLE?
By Walter Kurtz, Sober Look
As discussed before, risk management, whether in banking or among regulators and consumers tends to “fight the last war“. The “riskiest” asset class in people’s minds is generally the one that got the most attention in the previous down cycle.
In the 2007 recession, the US residential property market was the hardest hit among the various asset classes. As a reaction to that event, lenders in the US are being fairly conservative in providing residential mortgages. Home buyers on the other hand are in no rush to buy properties. The risks associated with real estate markets are still on everyone’s mind and will probably be for some time. That type of risk aversion keeps asset bubbles from forming.
Canada on the other hand did not experience the same level of housing bubble nor the correction that followed as did the US (see chart below). Therefore housing in Canada does not tend to conjure up the same connotation of risk as it does in the US. At least not yet.
Canadian home prices have been growing quite rapidly, particularly as compared to the US. Some may argue that this is justified because Canada’s unemployment rate is lower. 8.1% in the US vs. 7.4% in Canada. Is that enough to justify such a divergence in housing prices, particularly when the GDP growth rates in the two countries is fairly similar?
In addition, construction in Canada is booming. The chart below compares construction jobs as a percentage of total jobs for the US and for Canada. The divergence is quite striking.
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| Source: Bloomberg |
Canadians have also been growing household debt levels. The chart below, though a bit dated, includes mortgage debt (total debt as percentage of net worth).
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| Canadian consumer credit plus mortgage debt as % of household net worth |
Economists are becoming concerned.
Edmonton Journal: – …OECD economist Peter Jarrett … described the housing market as the “biggest story in Canada.” Home prices, which corrected about 10% during the recession, have surged again, “making household balance sheets look increasingly fragile, he said.
Given the global economic backdrop, and in particular the sharp correction in energy prices to which Canada is highly exposed, the risks of a Canadian housing correction are rising. Watch the BBC video below to get a feel for the situation on the ground.
8 Comments
How long did it Mr. Kurtz to figure this out ?
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I think if we want to look at housing bubbles, Australia might be more interesting to look at than Canada. The debt levels are higher, and with Australia’s economy tied to commodity exports to China, one wonders how the real estate will hold up.
Just had a Vancouver hedge fund manager in the office this week talking about a housing bubble in Canada. He definetly thinks there’s a bubble and Vancouver home prices have already dropped 10% in the last 30 days… Once everyone starts heading for the exits, look out below!
So its a housing bubble you’re looking for?.. try this from downunder…
http://brontecapital.blogspot.com.au/2012/05/that-is-not-bubble-this-is-bubble.html
The answer is: yes. But only in certain areas, certain markets. Here in Montreal, the condo market is insane. Government programs and immigrants, combined with incredibly low mortgage rates, have people paying ridiculously high prices for tiny, low quality, poor location condos. Most of these people can’t afford them. If interest rates tick up, or prices fall, the bubble will burst. Unlike in the USA, you cannot just hand the keys back to the lender (i.e. they are not non-recourse loans). You are on the hook “forever”. There is also the best kept secret of the CMHC, i.e. the government is on the hook for the riskiest “top” part of the loan, for those who did not qualify with a 20% down payment.
I have no idea if this bubble will pop/crash. But it’s certainly not a healthy thing for Canada.
I totally agree with Mike Bell. The situation in Montreal is not sustainable in Montreal long term.
So funny that those who think they are so trained in economics are so smart as to see a bubble.
Open your eyes.
Canada is being sold out by the boomers to China, Mexico and India. This is an outrage.
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