Canada Has Its Own Housing Bubble—And It’s About to Burst

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Photo-Illustration by Alexander Ho for TIME; Getty Images

Ever since the real estate bubble burst in the United States in 2007, observers have pointed to Canada as an example of a well-regulated financial system that has avoided many of the regulatory mistakes that helped lead to an American crash. But Canadians weren’t able to perch on their high horse for very long, as a bubble of their own has been inflating for the past couple years. And now many analysts are watching for that bubble to burst, and soon.

What has so many observers worried? A few things:

canadian debt

The above chart by Matt Barnes of the research firm BCA illustrates Canada’s debt problem. These huge debt loads could be a pose a serious threat if unemployment continues to rise due to a sharp pullback in the construction spending, or if interest rates begin to rise. Here’s Amna Asaf an economist with the macro research firm Capital Economics:

“Even a modest uptick in mortgage rates will translate into much higher homeownership costs, easily outpacing any expected increase in household incomes. This will price out some prospective home buyers, reinforcing the drop back in existing home sales that is already under way.”

This is the same dynamic that eventually sunk the U.S. economy and triggered a global financial crisis. Canada’s saving grace, however, may end up being its strict housing regulations–which encourage high down payments and government-backed insurance.

While the presence of government insurance means that Canada is unlikely to suffer a financial crisis similar to what we had in the U.S., it doens’t mean Canada will avoid any pain associated with a real estate bubble bursting. It just means the government will end up having to foot the bill. And if a housing bust leads to an uptick in unemployment plus the need for the government to cut back spending in other areas, we could be looking at a serious rough patch for the Canadian economy.

17 comments
RighteousCanadian
RighteousCanadian

I live in Toronto and made around C$120K last year. I am living in 3 bedroom modest high-rise condo which costs me about 18% of my annual income. In the last last year, I could just save around 8% of my annual income. If I decide to buy a house costing close to half of a million C$, I will spend about 35% of my annual income (with current prime minus 0.5 rate of interest). Should I consider moving in to a  bigger and nicer home so that I can downsize  later and use the money to survive in post-retirement days ? Can I afford it now? Do I need Suze Orman to advice? 

 

UlamaBinsaden
UlamaBinsaden

No matter how much the Government tries to regulate the housing market and no matter what the name of your beautiful Country is, at the end the price is determined by SUPPLY AND DEMAND. Sure, the government can artificially "create" more demand by lowering interest rates and/or lowering down payment requirements. Well, Canada has rock bottom interest rates (all dangerous ARM's!), so the government has artificially created demand for many years now. Yes, debt level has doubled, but interest rates have cut in half, therefore the payments are the same. With current interest rates (and currently being employed) Canadians are able to afford their sky high debt mountain. As long as everything stays just the way it is there will be no danger. The only question is what will happen next??? Will interest rates go lower? Will the job market improve?

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blackspiritstempe

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MarkLegault
MarkLegault

lol up here in our igloos we live a sheltered life but you are trying to say that all Canadians are in dept. mean while when the US was having there problems who was helping them out wow im not saying we cured your dept but neither did the people of usa & I think we really are a bit more stable now because of what happened in your country(not depending on your markets). and the other thing I m not sure if you checked your stats but before all that started to happen our banks started to recall lines of credit and loans to be paid or chopped in half. and to the children pesobill and yellow 2 the only reason that graph up there show s what it shows is because the banks haven t cut us  off yet! and the credit union didn t give up on us yet. and to show who is truly arrogant Windsor should be opening up another Chrysler plant.(across from Detroit) think about that for a second? what was that said before (the national priority of Canada to look down its nose at the US) my heart goes out to you guys but if you would stand up and look at us eye to eye it s possible to see what is really going on !

pesobill
pesobill

Christopher , well written . Yes the Canadians think arrogantly that a downturn in housing will never happen to them . Truth be told it will , just when the house of cards starts to fall is open to opinion .

The debt level is ridiculous , jobs not paying that well and an economy slowing to a trickle .... When it starts to fall will be uglier than the US for sure ....  

yellow2
yellow2

Canadian's, like Mark, below will never accept any news that they have things worse off than Americans as it is  the national priority of Canada to look down its nose at the US and triumphantly  tell the world how great they are in comparison. Despite the article (and there are plenty of similar articles in the Canadian news) pointing out the crazy amount of household debt Canadians are in, the simple response is "how's detroit doing?" lol



MarkLegault
MarkLegault

i found this article very interesting but i would like to mention a few things as a Canadian there are way more people in the US to level out those averages and with corporate downsizing yes everybody gets hurt but i might add that when the US was hit hard many Canadians lost jobs too and we found away to survive its not easy and wasn t easy to recover from but we held up. Hows Detroit doing by the way? theres many many states that the real estate market was hit really hard are they on the up and up yet?   

BrettEllis
BrettEllis

"Canada’s saving grace, however, may end up being its strict housing regulations–which encourage high down payments and government-backed insurance."

'encourage' being the keyword, 0% down 40 year amortization mortgages exist.  Only recently has regulation been imposed to limit it to 5% down payments 25 year amortization, and even then: banks will lend the 5% circumventing the rule.


Government backed, but not backing the lendee.  CMHC insurance has always been to protect the bank in case of default.  This removes risk from the banks and enabled sub prime lending in the first place.  Government should regulate, but keep their hand out of the market.  Even if they mean well: their size is cumbersome and they tend to knock things onto the floor.

uvicjames
uvicjames

@yellow2 


Agreed. There is a smug attitude of superiority, and a naive belief that the US housing bubble (and the UK housing bubble, and the Spanish housing bubble, etc etc) were in a different universe. Canadians cannot believe that perhaps the Economist, IMF, Deutsche Bank (etc) are on to something in pointing out the overvaluation of Canadian homes.


The Canadian employment scene is not looking good right now. Retailers report that Canadian consumers are not spending much, and the debt levels are through the roof. They had ample opportunity to learn from their southern neighbour, but chose not to.


malone
malone

Canadians are generally stupid, lazy and arrogant. They have no economy other than digging dirt and destroying their environment. They don't create, design, develop, manufacture, invent, produce, patent, engineer anything - just too dumb. Sad really. How is blackberry and nortel doing LOL

I am a Canadian who fled to America to find a job, as a mathematician it was impossible in brain dead and simpleton Canada. America respects and rewards intelligence unlike Canada

uvicjames
uvicjames

@MarkLegault 


Canada held up by keeping its housing sector inflated. It did NOT hold up in terms of jobs, income levels, personal debt, business spending and R+D. It is in dire straits.


Housing bubbles involve a severe malinvestment into non-productive industries. Tons of money goes into housing, when it should go into other areas (e.g., increasing productivity, research & development, investment, savings, etc).


I'm not sure how pointing out that some parts of the US are still in trouble implies that Canada is not.

j.villain1
j.villain1

@BrettEllis The part you leave out is that the 35 year mortgages were only around for a few  years before they were regulated out of existence. On top of that the banks weren't eager to hand them out even if they were legal. Not many people have them.

yellow2
yellow2

@uvicjames @yellow2 


Well, they've done in the housing department in the sense that the banks didn't just give mortgages away to anyone that walked in the door, but you're right.


I lived in Canada for 20 years and I know exactly why the average citizen has so much household debt. They pay a fortune for everything. Food, gas, beer, electricity, heating oil, water. More in income tax than most states, more in sales tax. 


The thing that irritates me about the attitude though is that the average Canadian thinks their sh*t doesnt stink in comparison to the average US citizen, but then..I wonder how Canada would look today if IT had over 300 million citizens. I'm sure it wouldn't paint the rosy picture most people would think.

BrettEllis
BrettEllis

@j.villain1

1999: CMHC changes downpayment requirements from 25% to 5%

2003: CMHC removes price ceiling limitations. 

2005/2006: CMHC begins insuring 30 & 35 year mortgages respectively.

2007: CMHC: insures no money down 40 year mortgages which is subsequently reversed back to 5% down 35 year amortization in 2008.

2012: Maximum amortization period has been reduced again to 25 years.

6 years of 35 year mortgages is more than enough.