Canadians have watched the foolishness of the southern neighbor’s housing market, and many have congratulated themselves on having more sense than to allow their housing to bubble. There are those, however, who claim that in actuality, Canada has the world’s largest housing bubble, and it’s about to pop.
How could Canada have the world’s largest housing bubble? For one thing, Canada’s house prices are expensive.
The average sale price of a Canadian home is about $350,000–75% higher than in America. To be sure, Canada is a rich country, on a per-capita basis, and its population tends to be clustered along the border. Nonetheless. America’s hottest real estate markets are propped up by global capital and a handful of very-high-margin businesses (finance in New York, Hollywood in LA, tech in the Bay). They’re augmented by globetrotters who want second and third homes in world-class cities. While I understand that there is some of this on Canada’s west coast, the country is an almost aggressively middle class place with some rather disheartening weather.
What’s really amazing, and fuels the “world’s biggest bubble” claim, is the price-to-rent ratio. The Atlantic said:
The distinction between higher prices and bubbly prices isn’t as subjective as it might sound. Like any other financial asset, there should be a fairly steady relationship between the price of housing and the stream of income — rent — it produces. Should be.
Then there’s this chart from the Economist:
So if there’s a bubble, how long before it pops? Some say it’s popping now.
A housing correction—or, possibly, a crash—is no longer coming. It’s here. And you don’t have to own a tiny $500,000 condo in downtown Toronto or a $1.3-million bungalow in Vancouver to get hurt. With few exceptions, the impact will be indiscriminate as the euphoria of rising house prices is replaced by fear. The only question now is how bad things will get. If the decline picks up speed, as many believe it will, there could be a nasty snowball effect. Construction jobs will be lost. Homeowners will end up underwater. Consumers may stop spending. “I’m getting very nervous,” says David Madani, an economist at Capital Economics, who has been predicting a drop in housing prices of up to 25 per cent in Canada. “I know I’m a bear, but the housing market itself has the potential to put us in a recession, let alone what’s happening in Europe and the U.S.”
What will this mean for Canada?
Flaherty is still going to have a dilemma on his hands. Falling house prices don’t win votes. And there are already calls from the real estate industry to roll back the most recent mortgage rule changes. But most economists agree a correction is both necessary and long overdue. The average debt-to-income ratio of a Canadian household is now 164 per cent, higher than the pre-crash levels in the U.S. A recent survey by BMO found that one-third of Canadians have cut back on spending to make their mortgage payments. Seventeen per cent dipped into savings.
Sorry Canada. Welcome to the club.