What happens when Canada’s housing bubble pops?

If it’s any consolation, we won’t be going down by ourselves


A few days ago, Bank of Canada governor Mark Carney released another alarming, albeit muted, warning shot about the state of the Canadian real estate market. Some properties in Canada are “probably overvalued,” the central banker said during an interview with CTV. Last week Finance Minister Jim Flaherty hinted he is also worried about housing: “We watch the housing market carefully and we are prepared to intervene if necessary,” he said.

So, are we literally living in a bubble? And when it bursts, will it get as ugly as it did south of the border? Here’s where the most recent speculation is pointing:

Yes, we’re in a bubble, and it will probably pop soon.

The signs of a bubble are unequivocal. At 13 years and counting, Canada’s current housing boom is one of the longest-lasting in the world, the Bank of Nova Scotia noted in a recent report. The real price of Canadian homes has increased by 85 per cent on average since 1998. Prices stagnated in 2008, at the height of the financial crisis, but they were back on the rise again as soon as 2009, when they grew by nearly 20 per cent, according to the Canadian Real Estate Association.

Meanwhile, Canadian household debt set a new record last year. On average, the debt burden of Canadian families stands at 153 per cent of their disposable income, according to Statistics Canada. That’s almost as much debt as American households had at the peak of their bubble.

The ratio of home prices to rents reflects returns that people can expect from homeownership–in terms of either rents earned by landlords or saved by owner-occupiers. Based on this measure, The Economist figures the Canadian market is overvalued by over 70 per cent. Last month, Merrill Lynch wrote in a report that our housing market is afflicted by “overvaluation, speculation and over supply.” No wonder a recent international survey of housing affordability found Vancouver to be the second-least affordable city in the world!

The scary part is that, by most accounts, 2012 is going to be the year when housing prices start heading south. The housing market is already showing signs of weakness. Despite a rebound in December, housing starts fell in the last quarter of 2011. And in some smaller markets on the west coast, condo prices have already declined 15 per cent, according to Merrill Lynch. The bank predicts that prices nationwide will slip by five per cent this year in the best-case scenario. A spike in unemployment could trigger a 10 per cent price drop.

Meantime, the economy is slowing, unemployment has been on the rise since September and it will probably continue to climb as Ottawa reins in public spending. CIBC noted this week that job creation hasvirtually stalled in the second half of 2011, and a growing number of Canadians are resorting to self-employment, where they’re likely to earn 10-15 per cent less than full-time employees. “The job market is currently weaker than any non- recessionary period,” the bank noted. The reason this is frightening is that, even if uncertainty about the global economy forces the Bank of Canada to keep rates at current lows, Canadian households have no room to take on additional debt. Many will probably struggle to keep up with what they already owe.

If it’s any consolation, we won’t be going down by ourselves. Canada’s pop will be part of a much bigger deflation of Western housing markets. The U.S., and Ireland were merely the beginning, says the Economist. The U.K. is getting there, and the next victims could include Australia, Belgium, France, New Zealand, Spain, Sweden–and, of course, us.










No, it won’t be “housemageddon.”

The good news is that, in all likelihood, our bubble won’t go KABOOM! Instead, we seem to be in for a painful but not devastating pop. That’s because only certain parts of Canada are in a bubble. Overcrowded markets in B.C. and Ontario may be close to busting, but many other areas of the country remain very affordable. The very same survey that ranked Vancouver most-unaffordable-city after Hong Kong rates Canada the third most affordable country, after the U.S. and Ireland.

Secondly, even in areas where there is a bubble, not all sectors of the market are equally inflated. Concerns about overvaluation and oversupply mostly regard the condo market, which has been the main engine driving the boom. Construction of single-family homes, on the other hand, “has already landed softly below its long-run average,” Merrill Lynch notes.

Most importantly, however, Canada’s pop won’t bring down the entire financial system, as it did in the U.S. That’s primarily because subprime mortgages are virtually non-existent in Canada, and government guarantees on mortgage insurance act as a buffer protecting the banking sector from housing market downturns. A whopping 75 per cent of mortgages in Canada are fully insured by Ottawa, according to the Financial Stability Board. Also, at the height of the crisis, the U.S. was grappling with severe unemployment, which kept fuelling the housing bust as more and more households became unable to afford mortgage payments. Though job creation is softening in Canada, there’s little reason to believe joblessness will rise to America’s level. Even economist Nouriel Roubini–famously dubbed Dr. Doom for accurately predicting the great recession–doesn’t think Canada is headed for disaster. He predicts a 10-per cent correction, but not a U.S. style meltdown.

Besides, Ottawa is keeping a close eye on the market. The government already cut the maximum length on federally insured mortgages from 35 to 30 years in early 2011, and Flaherty may have more of the same in mind–along with other cooling measures that aren’t tied to interest rates.

Most likely, then, the Canadian market will let the air out gradually. As inelegant as that sounds, it’s good news.


What happens when Canada’s housing bubble pops?

    • “We have a tradition in Irish journalism that we pursue issues …”

      Would that it were so here.

  1. I imagine that there will be some of the usual commentary here that we usually see elsewhere with doom, gloom, conspiracies, and the like. 

    However, I’d like to say that I’d have no problem with the prices demanded of condominium units take a good solid punch to the gut. Who knows? The prices of resale may lower to the point where they would actually become *affordable* rental units for the middle portion of the rental market (remember them? 30% still rent and supply of rental units has been …limited for nearly 30 years now). 

  2. I hear a lot of talk about air being let out of this bubble slowly kinda like how boats sink slowly or planes crash softly. When people want out of something that’s going down in value In my experience they tend to rush to the exits . The same heard mentality that bid the housing market up will apply on the downtick like a dear in the headlights

    • That’s right. There is no historical example of an orderly, gradual deflating of a bubble. All speculative frenzies (and that’s what homebuying has been in Canada since at least 2004) end suddenly and violently. 

    • Very apt and amusing analogies.  This won’t be any gentle deflation.  (And note that as recently as a few months ago, few were allowing that there was any chance of a housing correction at all – pop or deflation.)

  3. Call me a selfish prick if you want, but I’m rooting for a full-on collapse.

    Wouldn’t it be nice to, you know, be able to afford a place to live without being in debt well into retirement. 

    Remember when it was possible to live in a city without four roommates? No? Me neither. 

    I’ll feel bad for the people who bought a grossly overvalued home only to see its worth go down a few 100k, but that’s what you get for agreeing to pay ridiculous prices the market was asking for. 

    Hoping for economic hardship for my own benefit may make me a bad person, but I’m tired of working hard just so i can throw 80 percent of what i earn just to keep a roof over my head. 

    The rent is too damn high and the mortgages are too damn long. Something has got to give.

    • The article says Canada has no sub prime. How about zero down in the form of cash-back mortgages?

      • How about -2% down? Which is what RBC is offering right now? 5% down, and they give you 7% cash back immediately upon closing. Which is then clawed back through higher mortgage payments. Deliberately designed to get around CMHC’s already-meagre down payment requirements. We’re so screwed. 

        • They do that?  7% cash back? That’s nuts!

          • That’s just as bad or worse than any subprime mortgages.  If house prices decline sharply, then the buyer is immediately underwater.  Thanks to the cash back the buyer is also stuck with higher mortgage payments than for any conventional loan, and it would be very enticing for the buyer to just walk away.  If the buyer walks away and declares bankruptcy, the lender is on the hook for the loss on the house value, the cash back money, the cost of foreclosure and reselling the house!

            For example:
            house price 315k
            5% down is 15k
            Lender ponies up 300k plus the 7% cash back = 321k.
            Buyer spends or loses the cash back quickly on a vacation and investments.

            House prices drop 10%!  Value of house becomes 284.5K. 

            Buyer owes way more than the house is worth and walks away, declaring bankruptcy. Bank is on the hook for an immediate loss of up to 36.5k (321k – 284.5k) minus whatever payments the buyer has made. Bank also loses on the cost of foreclosure and reselling the home which is easily 10% of the home value, another 28.5k.  This is in addition to the loss of whatever interest payments on the loan were expected.

            So the bank is at risk of a loss of 65K (20% of the money lent) if house prices drop dramatically!

      • I think the US was suprised at how much sub-prime they had going on…of course it only came to light AFTER the bubble burst.  I think we also might be surprised at what mortgage brokers have been up to over the past few years…

    • i want prices lower but the consequences of this are dire.  lower prices equals lower confidence from the homeowner. i sell cars and homeowners use lines of credit to take cash discounts.  its a bubble , it will pop hard, and i wont have an income so i wont be able to take advantage of it…. what a mess. the stock market is a liar.

  4. A little more research is needed.  House prices started to decline in 2006 while unemployment was quite low in the US.  The decline in housing actually led to high unemployment which didn’t start going up significantly unitl 2008 (http://www.tradingeconomics.com/united-states/unemployment-rate).  A decline in house prices in Canada could lead to further unemployment as construction and FIRE jobs are impacted….a negative feedback cycle.    

  5. This comment was deleted.

    • The media family income in Calgary is $91000?  Wow!

  6. Canada is not IRELAND what’s that doing here?

  7. Yes, until, the job cuts come in March, Canadian services go down the drain, pension security becomes non-existent. Then, payments will be hard to make.. KABOOM.  Genius government policy we have going on. WIth no effective opposition. So no, it is not any consolation except for those of us who don’t have a mortgage.

  8. No there is never any panick in these sorts of senarios…….because after all what’s a little debt on

    your home when you have the blessing of your bank and government with these low rates.

    Really what’s wrong with using your home equity from the rapid rise in values as your own personal

    bank, to buy those all important new thingys and renos….i’m rich!!!

    It so nice of the Bank of Canada, J.F  and Mark C to be so concerned about our indebtedness, since

    really they had nothing to do with assisting Canadians overspending and inflated real estate prices.

    They must be really worried for us……..oh by the way, how  bout some cheaper money kids…..but

    go easy on the debt hey?!

    But we are Canadian and bad things never happen here,….our banks are solid ……..and we never

    will have to feel pain….ever boys and girls,  that only happens to the other bad countries.

    I smell cow dung in our Canadian air……..

    PS. Good luck with letting the air out slowly……..psssssssssssssssssssssssssssssssss MOOOOO!! 

  9. I actually dare the author of this article to cite a single example of a soft landing in a housing market, let alone half a dozen along with any kind of reasoning why Canada’s market will match. Care to take me up on the dare? Because there are none.

    And btw, banks lending borrowers their downpayment is subprime and that is widespread right now.

    What is the difference between the Canadian taxpayer backstopping the mortgage insurance and the Canadian taxpayer backstopping the banks directly to prevent a meltdown? Either way the taxpayers pay for the banks overlending. Why is this stated as a good thing? Does the author love bailing out banks?

  10.  “….government guarantees on mortgage insurance act as a buffer protecting the banking sector from housing market downturns. A whopping 75 per cent of mortgages in Canada are fully insured by Ottawa”

    It’s good to know the banking sector will be okay. Who is this “Ottawa” anyway?

  11. the graph for Ireland prices is wrong.
    check it out, that takes away from the credibility for information gatherer.

  12. Unfortunately, GREED and NEED are both require the market to get more sensible.  GREED because a lot of people stayed on the bandwagon so they wouldn’t get left behind in equity; NEED because a hell of a lot of people just can’t live in this market.  I hope the GREEDY get stung and the NEEDY get served. 

  13. I don’t think the government has any control over how slowly or quickly the bubble will deflate.  It’s wishful thinking that it can be predicted whether it will be a slow deflation or a sudden crash.

  14. I am a little on the brink of turning back to rentals myself.

    I’m young (31), purchased a condo right before the financial collapse of september 2008. I did search to find something affordable (Montreal subburb) and I found it for 110k. If I were to sell now, I’d have made a decent profit already. People are selling in the 130-140k already. It’s not a luxurious condo at these prices, but I figure it’s easier to sell back something in this range, than something in the 200k+ range… because it has an elevator and a gym or some such.

    Also, my rate went all the way down to 1.7% during that period. So I did naturally pay back a lot more capital than I would have if they remained at the rate of mid-2008 (4.3%).

    Quite a few economists seem to suggest that… well, the smart thing to do, even if this is what will lead to the housing market meltdown if we all do it, is to sell now, rent a few years and buy back when the price went way way down. You’ll make a very good profit that way.

    For those in Vancouver, imagine if tens of thousands of you sold your condos for 400k and went into rental units for a while. It’s not impossible then, that in a few years from now, you can buy back the same condo for 200-250k easy. That’s a huge profit, and all you’ll have done is pay rent for a few years.

    Home ownership is overvalued as an investment strategy now. But then, the stock market wasn’t too sexy in 2011 either. And even worst than that, banks will give you a nice fraction of a percent point for something “secure” (way less than inflation, so you are losing money investing your money there). So there is no good option really. For gold, you’re way too late now for this as well, that has got to collapse at some point too. If you invested a lot of money in gold in 2003, you’d have made tremendous profits by now. But no one had a crystal ball. So now, the suckers buy gold at a price that cannot keep going up forever. I mean, what’s an ounce of gold really worth? It was worth 35 dollars before Nixon got rid of the gold standard. Now, it’s suppose to be worth 2000$, that’s madness! Who would want to trade a few months worth of grocery for an ounce of this metal?

    I think that’s the main issue now. People keep making money alright, but there’s no clear indication what they should do with it. So what do we do with these interest rates? We spend it, because investing it seem to return in the negative… or at best, under the rate of inflation. So, that’s what is so absurd about our policies now. We can’t get on top, because the best thing to do with money now is simply to spend it, that’s the only way your money isn’t losing value. Some may say the stock market is bound to bounce back. And I’m wishing it will (by keeping my money there). But while it doesn’t… let say you did like many younger Canadians and invested a few thousand dollars (as I did last year) in the stock market. And all you got was a lost. I figure, if I had been smart, I’d have taken this money and buy long-lasting goods, like a washing machine and such, you know the kind of purchases which help the overall economy (not buy electronic baubles made in Asia, that doesn’t help the Western economic output much). It would have been a wiser investment than the stock market. I mean, at least I would hold something concrete, that has value, that I can keep for a long time.

    That’s the problem now. People keep their homes because it seem like the sensible investment, while other things aren’t performing at all. For right now, that’s where you make profits! I invested 110k in 2008 and now I could sell for 140k… That’s an amazing profit margin. My investment in the stock market since 2008 didn’t give me much of anything on average.

    Either way, the punditry in the medias are almost always wrong when it comes to the economy. It’s been a few years now that the collapse of the real estate market was bound to happen sooner than later. By all standards, that seem very likely. And overall, high value real estate is a real handicap to the middle class. Check Europe, people can’t even afford to buy homes in many markets now. It all works out to destroy the economy as a whole. Because people cannot buy homes, they do not have babies (no room for them). So we see the result now, net population decline all over the map. Population decline = tax revenue decline. So your welfare programs can’t ever be paid for, because there’s not enough young people to pay for them. So what’s the solution they found? Mass-immigration at a rate never seen before. Is that working out? Not at all. And when you think about it, it all make sense. Why would young muslims feel so hot to pay for the programs of old natives? That create societal tensions. But at the roots of it all is a declining birth rate. The real estate prices made it so people with average and low incomes couldn’t really buy a four bedrooms home. So they couldn’t have 3-4 children. That’s a vicious circle. And the idiots who talk about overpopulation. I’m sorry, we don’t live on one planet without borders. Canada is at best underpopulated. The problems of India or Pakistan are not our own.

    I live in Quebec now… and we have reached a serious breaking point now. There is more people over 65 than people under 15. So there won’t ever be enough taxpayers to pay for the retirees. Basically, the only way we’ll ever get out of this mess is if we start having babies. We’re screwed otherwise. Not only as a culture (I mean, a population in decline will be replaced overtime by others) but also as an economic powerhouse. We can always sell all our resources to China to delay the inevitable, but in the end, it just won’t add up. Not to mention, China need for our resources is also a vicious circle. They need our resources because the West still spend a lot (especially the US) for consumer goods. If the US collapse, China doesn’t need our resources as much. Most commodities are overvalues now. They can collapse too if demand plumet. It’s just not about the economy, it’s about the Western World in general, and how they aborted and birth-controlled themselves out of existence.

    • There is in fact an overpopulation problem…. we do NOT need more babies, there are enough, that can’t seem to be fed. We are not a sustainable society, and the anwser is not to keep producing offspring in the hopes that they can help pay for older generations. The reason of this Gap is due to the Baby boom…. you don’t fix a problem, with another problem… and I also think the new immigration allowances IS a problem… having 4 babies per home… is a problem (not even considering that lack of parenting that exists these days)

  15. Accountability is very important. They always talk down real estate market in deep winter, it is not season for people to buy houses. And after March, they always make some measure to boost real estate market.  
    Stephen Harper seems Prime Minister of Oil-sands, Jim Flaherty changed his position from Finance Minister to Real estate Minister, and no wonder, the governor of Bank of Canada’s only responsibility is mortgage rate. Canada is in a wrong direction so many years! 

  16. This discussion is so much more complex than is presented here. First, there is no “Canadian Real Estate Market” – it’s a fiction. The separation between Vancouver and Toronto with other parts of the country are every bit as great as between those two cities and far off parts of the world. Also, comparing the U.S. to Canada brings up a torrent of differences of which only a few are mentioned in this article. U.S. Mortgages valued at 100% of the property’s worth with interest-only payment plans (where people used that borrowed money to buy depreciating assets like new cars and boats), extremely irresponsible – even fraudulent – lending practices certain to cause defaults, and then foreclosure rules allowing banks to liquidate real estate assets at a fraction of their value driving down the entire market in the process. The experiences between our two countries are vastly different because of how the markets have been managed and in their underlying strengths as a result. Prices of real estate in certain Canadian markets are high, and in a few cases unsustainable, but even in cities like Toronto, most of the debt held can be afforded and will continued to be paid by the people who have borrowed. No doubt now is the time for highly indebted households to get on top of their exposure before interest rates rise, but the case for a cratering real estate market is far overblown when examining all the fundamentals of the Canadian economy. The years of 7% annual increases like clockwork in some markets are gone, but with a couple of high profile exceptions, the fundamentals of Canadian real estate are much more sound as is the nation’s economy relative to the comparable economies brought out by the doomsayers over and over again.

  17. I wasn’t aware there was such a thing as a “Canadian Housing Market”, doesn’t’ the housing market reflect local or regional economic realities? Hence why a house in Ft.Mac is twice the price as a house in Grande Prairie..

  18. I don’t know, this seems overly hyped to me.

    The practices in the U.S. that led to their housing bubble are practically non-existent in Canada.

    In the U.S. mortgage payments are tax deductible, which means people with less money there were able to get mortgages that Canadians in the exact same position here would be denied straight out.

    Secondly, in the U.S. you can declare bankruptcy and walk away from your mortgage if the value crashes. In Canada, you still owe the money. This makes people in Canada more cautious and less likely to default.

    In the U.S., not only were they able to offer mortgages on 100% of the inflated value, but they were also allowed to give introductory rates and use those to qualify people to the point where some people had mortgages representing 120% or more of the value!

    In Canada no such thing has ever existed. The most you can get is 80% of the value, you must have a 5% downpayment, and you have to qualify on the basis of a 5 year fixed rate, on top of the fact that putting down less than 25% requires mortgage insurance.

    Further more, this much touted “too much debt” statistic has been reported in a misleading way. The truth is that only a certain portion of the populace has too much debt, and it’s these same people piling on more! The majority however are in a much better position debtwise, and would act as a buffer if the rates spike and those over-indebted folks go under, i.e not the total crash we saw in the US.

    On top of all this, Canadian banks haven’t been able to repackage lousy mortgages to the degree they were able to in the US. The TRILLIONS in phoney value the US institutions were selling through Asset Backed Commercial Papers are in my opinion one of the key suspects in precipitating the 2008 downturn.

    So while I can agree that housing prices may drop in Canada to some degree, it is ridiculous to compare to what happened in the US. They couldn’t possibly have undermined themselves to a greater degree than they did.

    • Correct Phil, practices are different, but the end point no different. When a bank tells you that with your 70G annual salary you qualify for a 485G home, somethings wrong. Thats precisely what happened to me, two years ago yet. Now of course I said get real and refused, BUT I also walked out of that bank with no interest in pursuing a mtg any further. Now just how many young families in the same boat said “Yes!” and “Took advantage” of the lower rates? Just how many Canadians phone their telephone banking to hear at some point in the call “Are you currently paying down debt or in the process of saving? Oh really? Well, Mr. Smith, I see you have a variable rate mtg with us. When was the last time you had your house apraised? you know it’s quite likely we could get you the money you need for that trip, a new mercedes and renovations. Would that be of interest to you Mr Smith??”

      Fact is, it’s to late. The wheels have already been set in to motion. Interest rates have remained far to low for far to long. and Phil, whats this horse shite about Canadians not able to walk away from their mtgs?? That is WRONG. Canadians CAN declare bankruptcy, all they need is about 1200 dollars. Oh, sure, you are correct in a sense, after all it’s the TAXPAYER left on the hook for this “Insurance”.

      Canada is screwed, and I hope things pick up somewhere in the world when it hits, cause I’ll be damned that I’ll be paying for other peoples BS mistakes.

  19. “. . . the typical buyer is a woman with elementary-school kids whose husband is still in China.”Read more: http://www.theprovince.com/homes/time+curb+foreign+real+estate+buying+Vancouver/5703433/story.html#ixzz1lFzo4xK9

  20. No Erica, we are not literally living in a bubble.  Maybe you are though?

  21. “Most importantly, however, Canada’s pop won’t bring down the entire
    financial system, as it did in the U.S. That’s primarily because
    subprime mortgages are virtually non-existent in Canada, and government
    guarantees on mortgage insurance act as a buffer protecting the banking
    sector from housing market downturns. A whopping 75 per cent of
    mortgages in Canada are fully insured by
    Ottawa”   lol    this writer is retarded…. this just means that the banks wont have to go crying to the government because, the bad loans will automatically plop down on the tax payers.
    win .. win for the banks, plus you then have the government after you for the loan just like the student loans
    no wonder they do the %7 cash back they cant loose… money created out of nothing , just digits that throw real price discovery based on tangible assets in the toilet…. making every one a debt slave based on nothing /:

  22. Everyone should look in Edmonton Area right now and see how many forclosures there are there. Also, Baby Boomers are retiring, and that will have a impact on the economy.