Canada’s housing bubble makes America’s look tiny

Comparing Canada’s infatuation with real estate against the peak of the U.S. housing bubble yields some disturbing insights


Calgary Real Estate 20150514

It’s been just over a decade since the U.S. housing market peaked, and rarely a day goes by without stories exploring the hot real estate market in Canada. Whether it’s warnings about elevated levels of household debt, government regulations to cool prices or the influx of foreign money, residential real estate generates sustained discussion and debate. After witnessing the housing crash south of the border, and the carnage it wrought, this is to be expected.

For all the attention, it’s notable that most analysts don’t see Canada facing a U.S.-style housing crash. For instance, Moody’s Analytics argued this month that even though price growth will decelerate, there is not likely to be a hard landing. Some observers are a bit more pessimistic, such as TD Bank, which predicts a 10 per cent fall in Vancouver house prices. Still, if there is a consensus view among professional forecasters about the Canadian housing market, it’s that prices will plateau or suffer only a minor dip. For a variety of reasons, most people do not see a U.S.-style crash on the horizon for Canada.

Yet when it comes to our respective housing bubbles, comparing Canada’s current infatuation with real estate with the peak of property mania in the U.S. yields some disturbing insights. We may not be as different as we like to think.

MORE: Hands off my housing bubble!

When looking at housing markets, the most obvious comparison is price. How does the level and trajectory of Canadian house prices stack up against the U.S.?

The following chart is drawn from the Federal Reserve Bank of Dallas’s International House Price Database. It’s an index (100 = prices in 2005) of real, or inflation-adjusted house prices, and it drives home just how much more inflated Canadian house prices are than at the U.S. bubble’s peak. The chart also includes Japan and its mammoth housing bubble of the 1980s—which is more akin to what’s gone on in Canada.

Here’s another way to look at the astonishing price gap between Canada now and when the U.S. bubble peaked. BMO economist Sal Guatieri put together the following chart in May, showing average house prices for Canada and the U.S. since the year 2000 but with both housing markets denominated in U.S. dollars in order to show relative valuations. It reveals just how expensive our housing market has become relative to the U.S. bubble’s peak.


As has been pointed out many times, two cities in particular are driving Canada’s real estate boom: Vancouver and Toronto. Here are how those two cities compare against four American cities that saw rapid house inflation during the U.S. boom. Vancouver’s market quite clearly leads the pack, with prices going parabolic. Toronto comes in second, with its price appreciation since 1998 eclipsing the mid-2000 bubbles in all four American cities on the graph—even the hyper-charged markets of Miami and Las Vegas.

Of course, prices are not the only way to look at the evolution of a housing market. Another important consideration is the level and change in household debt. As with the U.S. bubble, a surge in household indebtedness (principally via mortgages) has provided the fuel to send prices soaring. If we examine U.S. and Canadian household debt-to-GDP ratios, we see that Canada recently exceeded the level reached by American households in the first quarter of 2008.

Perhaps a more telling comparison, however, is household debt to disposable income for the two countries. Indeed, that’s the ratio more often cited by economists, because it measures the debt burden of households against the income they have available to repay it. When Canada’s debt and income data is adjusted to reflect how the U.S. measures them, Canada’s debt-to-income ratio now sits just shy of the U.S. peak reached in the wake of the housing crash. (It should be noted, though, that among industrialized countries, Canada is not the most indebted using this ratio. Norway and the Netherlands have household debt to disposable income ratios well in excess of 200 per cent, while Denmark’s households owe just over 300 per cent.)

Some critics have in the past argued that household debt to disposable income is a misleading metric, when what really matters is not the debt burned itself but the ability of households to manage it. And for a long time, Statistics Canada’s debt-service ratio—the amount of disposable income required to cover debt payments—showed Canadian households in a far better position than American households were at the time of the housing crash, with Canada’s ratio hitting record lows thanks to near-zero interest rates. But those claims were made when StatsCan only published the interest part of debt servicing. Now that StatsCan includes principal repayment in the calculation, bringing the measure in line with the U.S. methodology, the situation in Canada looks much grimmer and skeptics have stopped using it.

Another way to assess a housing market is to consider it relative to the size of the national economy. Again, both in the case of the U.S. at the time of the bubble and in Canada now, residential construction represents a sizable share of GDP. Further, the following graph from investment bank Macquarie suggests that Canada is following the path of the U.S. when it comes to this sector. And crucially, using the U.S. bubble as a guide, Canadian residential investment may have recently peaked.

Hepburn-Canada-US-5Comparing the underlying data and trends in the two North American housing manias is interesting. But it’s in some of the softer, less quantifiable aspects of the Canadian bubble that we see echoes of the U.S. boom.

One obvious similarity between the Canadian and U.S. bubbles is the wall-to-wall coverage of all things real estate. Turn on Canadian radio and television these days, or browse the Internet and social media, and you’ll encounter a near-constant barrage of pitches for condos, mortgages (as well as second mortgages) and real estate seminars, promising the secrets of easy real estate riches as taught by self-professed experts. Also ubiquitous: ads for debt management and credit counselling.

As with the U.S., too, there are seemingly compelling arguments put forth as to why bubble fears are overblown. For example, in 2004, then-Federal Reserve chairman Alan Greenspan argued that U.S. households were actually in reasonably good shape, despite rising consumer debts. In painting a healthy picture, Greenspan pointed to rising household net worth, which of course was principally the result of the soaring real estate market. The problem was, when the market crashed, so too did the net worth of U.S. households. Similar arguments have been repeatedly made in Canada.

Given all these similarities, both statistical and anecdotal, why then do more people not believe Canada could suffer the sort of housing crash that the U.S. suffered?

In part, it may be related to how the respective bubbles formed. The U.S. bubble involved widespread use of complex products such as collateralized debt obligations and credit default swaps. That sort of financial engineering is not nearly as prevalent in Canada, and while there are signs of fraud in the mortgage industry, the causes of the Canadian bubble seem more straightforward: low interest rates and lots of bank lending (much of it insured by the taxpayer), with foreign investors also playing a role in certain areas (namely Vancouver). Oh, and old-fashioned greed, fuelled by ridiculously unrealistic expectations.

Another explanation for the lack of housing fear lies in Canada’s sense of its own economic exceptionalism. When the U.S. housing market collapsed, it kneecapped the global economy, and yet Canada emerged largely unscathed, with observers praising the health of Canada’s banks. Then when the European debt crisis and U.S. debt ceiling debates raged, observers again pointed to Canada for its sound government finances. Now as global growth slows, yet more observers are singing Canada’s praise for its embrace of fiscal stimulus, trade and newcomers, a stark contrast to the presidential candidacy of Donald Trump. It’s enough to make anyone smug.

Canada better hope all this housing confidence is justified. If there’s one thing the U.S. crash reminded us, it’s that housing bubbles can have very serious and long-lasting consequences—property values crater, mortgages become millstones, consumer spending plummets, and unemployment soars.

After all, with so many indicators suggesting Canada’s housing market has inflated well beyond what the U.S. experienced in the early 2000s, this chart showing what America’s 33 per cent house price decline would mean for the Canadian market is sobering.

But surely that can’t happen here. Right?

With files from Jason Kirby


Canada’s housing bubble makes America’s look tiny

  1. The issue which would cause a correction would be a significant rise in interest rates leaving many over extended households unable to make the resulting monthly mortgage payments. However, that is unlikely to happen. Canada stays relatively close to the US in terms of prime rate and currently sets it lower in an unsuccessful experiment to keep our dollar well discounted to the US $ to encourage manufacturing here.
    With the US, Canada and many of our provinces run by free spending Liberals who have incurred or are incurring unprecedented levels of debt, there is tremendous government pressure on the central banks not to raise interest rates. If rates rise substantially, a housing correction will be the least of our problem-the US, Canada and many of our provinces will be unable to service the interest payments on this massive debt and go bankrupt.

    • Yup, and then a U-Haul comes along and takes them away, right?

      Jeez Jerome…..of all the silly….

      • Another of your thoughtful replies. They won’t need U-hauls you ass because the central banks won’t raise the rates. Why don’t you read it again and see if your comprehension improves. That would be a first!!

        • I do this for a living, sweetie. Peddle your ignorance elsewhere.

          • Obviously you mean you make asinine comments for a living. I’ve noticed that.

          • Wow. You think you’re getting paid for this? Are you the same Emily who has been commenting here for years? I always knew you were a little unhinged, but not this bad. Are you passing secret codes in your posts back and forth with government officials too? It’s like The Beautiful Mind, minus the beautiful mind part.

          • Wow! You get paid to sing? The thumpers want me to do for free especially about the election to the south of us. Don’t know why because I can’t vote.

            I don’t think they like the songs I’ve been singing, have you darlins’?

            Hint to bloggers and reporters on whether your town is getting the lunar treatment. Take a look at the trees. They have definitive list towards the suspected thumping. No obstruction to cause the leanings. No other explanation. I also suspect they may be responsible for the surge in thyroid problems.

            The Evangelicals love being called out. I’ll get a kick to the head for pointing out the Creepy Christians. Won’t I Crew Cuts? You love hanging around the church and park don’t you? The kiddies get you excited don’t they?

            Could be me posting or one of my stalkers.

            I don’t speak Chinese, economics, German or stock market.

        • Well, I’ve noticed the Dunning-Kruger effect in you…which probably explains it

        • Well Jerome TD TD raised it’s prime mortgage rate today

        • Mudballer… I have explained a multitude of times, I work online….in global development.

          I drop in here to comment on occasion

          Pull yourself together.

          • People are not paying you for your “knowledge”. That is not possible. Or, it is possible, and the world is even more screwed up than I thought.

          • Yes Mudballer that’s exactly what people pay for……that’s why it’s called the knowledge age.

            People pay doctors for their knowledge….they pay lawyers for their knolege…..what the hell did you think it was all about??

  2. Like they said in the article the appreciation is mostly contained to the GTA and Vancouver. That alone makes what’s going on in Canada very different to what happened in the US. I think the biggest factor, which wasn’t even touched on is the housing supply and demand in these two cities. The supply side in Toronto just isn’t keeping up, the demographics clearly support this. Other factors also significantly contribute (interest rates for one) but until the supply dramatically increases because of a huge building boom (unlikely in my opinion), or demand decreases because millennials get fed-up with the prices, appreciation won’t go below 6%. In the long term millennials may simply outgrow 1 bedroom 650sq ft condos and flee to places like London ON, Windsor, Sudbury, Ottawa, Kingston, etc to raise families. The later seems most likely to me. Give it another 5 years and things will change. At that point millennials will all be about 30 or older and will to change their life style to have space for 3-4 in one home.

    • I’m using it now and it’s awesome! I’ve signed up for my account and have been bringing in fat paychecks. For real, my first week I made $306 and the second week I doubled it and then it kinda snowballed to $120 a day.H%1.

      Just follow the course>>>>>> MsTrends3.Tk

  3. Americans also have expensive healthcare. A few years back a coworker was paying $1200 a month on medical premiums for family. Some of them had to choose between mortgage payments and paying for healthcare for the family.

    • I guess they’ll keep warning until you get it. It’s been 12 years now sin e the bubble warnings first started in 2004-05, and people are still bidding up prices. You can tell a child to stop forcing air I to that balloon, but you can’t tell him exactly when it will b low up in his face. And if he doesn’t listen, the inevitable result is a known fact. Only the timing remains unknown.

      That’s where a lot of housing bears have made idiots of themselves, and destroyed their own credibility – putting precise timelines on the event. Next October. By next March. This summer. Those who do think they possess that forecasting ability are deserving of ridicule. I can’t tell you when the next storm is coming. But I can tell you with absolute certainty that a storm will come. Isn’t that enough reason to take a few precautions and avoid exessisive leverage in an overpriced asset class?

  4. I can’t go anywhere without people talking about home prices. Psychologically, as a non-home owner, I can’t live here any more. I am applying to jobs in USA. Day to day, here, it’s too difficult. They’re talking about immigration for skilled labour and entrepreneurial talent. But they just let me as a long-term Canadian fall through. The whole Kitchener tech scene is dying. Who wants to be in a startup. You’ll just get behind on owning a home.

    Prices will never go down
    My homes gone up.
    Man that’s expensive.
    I can get $700k for my semi-detached town in Milton
    I wish I bought two
    I can get $500K for my town in Guelph
    I have four homes
    I can get $450K for semi in Cambridge
    When are home prices going to fall?
    Interest rates will never rise

    This is water cooler talk for every Canadian now..

    And for us non-home owners who don’t want to buy into a bubble, we’re left waiting. And waiting. And waiting.

    And I’m throwing in the towel. I can’t stand this place. I hope you all go broke in the end, like you deserve.

    • wow this is exactly how I feel! I’m so fed up too!!

    • Good luck in your job search. I know a fellow who got a job with Linked In in San Francisco (bought out by Micro Soft). He is doing well. Lives in a very tiny suite with a microwave and hot plate for much more than a Canadian house mortgage payment but he is on his own and he is socking away his money. Things aren’t perfect anywhere. One has to ask why the Kitchener tech scene is dying. This government is supposedly throwing so much money at generating jobs…what about innovation?

  5. When you create a population of ‘foreign investors’ by allowing, encouraging them to become ‘landlords’, you’re just asking for a housing bubble in somewhere ‘first worldish’ like Canada. Geez where else could your ‘investment’ appreciate overnight – sometimes before its even built – and be protected by all the goodies and safety features provided by the government and insurance agencies.

    Especially when all that investment can lead to citizenship and the opportunity to bring family to share the dream.

    • Except the vast majority of buyers in Toronto are local, including the “investors”, who are borrowing against the equity in their primary homes to buy speculative properties and play landlord for a time.

  6. In 1998, I bought a 2-bedroom, 1-1/2 bath, 1130 square foot condo in the downtown neighbourhood of the Canadian city in which I live. Soon afterwards, I got a second job, worked really hard and paid off the mortgage within 3 years. Life was great, people were happier, the city was friendlier, and basic rents were more affordable for those who hadn’t purchased real estate, as I had.

    Within 5 years of paying off my mortgage, all of the freedoms I was enjoying as a young-ish Canadian were no longer available to young upcoming Canadians. In the first 6 months of 2007 in my Canadian city alone, real estate prices rose by 70%. Prices had been rising sharply in 2006, 2007 and 2008 and rents rose accordingly with it. Now, young people need 2 jobs just to keep a roof over their heads, let alone being able to afford to buy a home or pay off a mortgage, as those same old condos I bought are now well into the 6 figures. Having 2 jobs no longer provides the noticeable benefits it did just a few years earlier when I had 2 jobs and paid off my mortgage. Even with 2 jobs, many young Canadians in the present day cannot afford to live alone if they so choose, pay their bills and enjoy the same financial freedom that I enjoyed not so long ago.

    I feel really sad for the sudden and sharp loss of freedom (financial freedom=freedom) for Canadians (especially young Canadians), North Americans and others. I do believe this is a threat to democracy and our way of life as *everybody* needs to pay for a roof over their heads. Economic slaves to a mortgage are less likely to be able to stand up for themselves in many areas of their lives, i.e. they are less likely to be able to stand up for themselves if their human rights are being abused in the workplace (i.e. outsourcing their jobs to India, etc. – What is the point of having minimum wages in Canada if companies still doing business in Canada, i.e. banks such as RBC (2013) and CIBC (2017), who can lay off Canadian workers and outsource their jobs to those being paid 1/10 to 1/20 of Canadian wages overseas – yes, I have personally experienced this).

    Any minor “correction” that the media speaks of will not fix what has happened over the past 1-1/2 decades and continues to happen. As prices continue to rise and even skyrocket in some areas, average working people are definitely on our way to disaster, even if the bubble doesn’t pop.

    • I neglected to mention that my 2-bedroom downtown condo was purchased for about $65,000 and change. Whether the bubble pops or not, we are already on our way to disaster.