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Neighbourly advice

U.S. observers warn Canada’s housing market is due for a crash


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Most Canadians don’t seem overly concerned with our seemingly unstoppable, red-hot housing market. But our American neighbours are increasingly skeptical.

In an article on the investment news website The Street, Eric Jackson warned of some “eye-raising” facts: Canada’s real estate prices have gone up 40 per cent in the last year, while incomes have plummeted (a recent CIBC report says 17 per cent of homes are overvalued). We’ve racked up huge debt, and personal bankruptcies are at record levels: our debt-to-income ratio now ranks first among the OECD countries. It’s not hard to see why. In Vancouver, people spend 68 per cent of their disposable income on housing.

U.S. financial blogger Mike Shedlock argues stats like that suggest the market is set for a spectacular burst. “A Canadian housing crash is a given. Timing it is the only issue,” he writes. “Furthermore, the bigger the bubble the bigger the crash. Only fools believe it’s different in Canada.”

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Neighbourly advice

  1. When everybody is living off of fantasy wealth created by massive debt, how could there be anything but a painful crash?

  2. We've seen this movie before. We've seen real estate crashes in the 1980s in Alberta, in the 1990s in Ontario and yet people always keep thinking that maybe this time it's different. I respectfully submit that it's ALWAYS different, it's just the ending that's the same.

  3. In physics they call this a "state function". The pain will either be gradual and spread out, or sudden and horrific, but we can't get back to where we started in terms of debt and income without going through the pain.

  4. I dont listen to the US, given they led this recession.

  5. Canada's situation is quite a bit different than the US, but that's not going to help much. On the plus side, the housing boom is, in many ways, contained to the large cities – Toronto and Vancouver especially. On the negative side, our housing market, having never collapsed, is still heating up, meaning we could make our situation that much worse, even without the troubles of subprime mortgages.

    I see three potential scenarios playing out here. The first is that we get a crash in the near future, bringing housing prices down. If the economy is doing reasonably well, we might be able to withstand that collapse. Short-term pain, but hopefully not that bad, or that widespread.

    The second, and most preferable, is that the federal, provincial and municipal governments take action to reduce the incentives to buy or build houses, especially in trouble areas and particularly for people buying properties besides their primary residence. The Harper government took some initial, but meaningful steps in this direction already, and I'd like to see more of it. This is the slow-pain method, which, if done correctly, would be easier on both the economy and individuals, as it gives everyone time to deal with lowered house prices, and, since it would likely occur over a period of growth, would be less likely to retard growth in the wider economy. Good policies could also prevent, or lessen, future real-estate bubbles too.

    The third, economically catastrophic scenario, is that housing prices never reach collapse phase, but also don't come down appreciably, for the next decade or more. At that point, retiring boomers, who have much of their savings in their homes, would start to need to exploit their home equity to pay for their retirement, either through sale or loans. This market-flood won't be met with new buyers – there aren't enough young adults to buy much, for one, and as real wages have been stagnant and look to be in the future, what potential buyers there are won't be able to afford houses at these inflated prices. So, housing prices will collapse, right at the time when homeowners are least able to handle it, especially since such a collapse would likely be triggered by, or result in, a recession.

    • I would suggest that whatever it is that Canadians have in their homes it is not "savings". Savings are cash you set aside for yourself from your paycheque. Savings are a hard number verified every month by a bank statement, legally owing to you by your bank, enforceable in court and insurable through CDIC.

      What Canucks have in their homes I would call "equity", a very different thing from savings. Equity is based on an opinion on what your house might fetch if you were to sell it and, as such, equity is an opinion and nothing more. Equity, as we have seen in the housing crash in the US and in housing crashes in Ontario in the 1990s and in Alberta in the 1980s, can disappear like smoke. But savings can be debased over time by irresponsible central bank monetary policy such as we've seen for more than a decade in the US and in Canada.

  6. "… the market is set for a spectacular burst"
    Nope, don't believe that silly prediction, maybe a downturn but it won't be 'spectacular'.

    One of the reasons why the USA experienced such a shock is due to the perk that the mortgage interest is tax deductible which encourages the ATM mentality with regards to homes. When one loses their job, that is not much of a perk anymore.