MoneyWeek UK: Canada’s house price bubble is set to burst

[stockholmer]

http://www.moneyweek.com/investments/property/rest-of-the-world/canada-house-price-bubble-20700

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And in fact, the final figure looks set to be even better than official forecasts. Compared with the near-double-digit deficits that seem the norm these days, that’s quite remarkable. There’s just one problem. The country has been inflating its own massive housing bubble. This could undo all the good work done elsewhere – and present smart investors with some profit opportunities… House price mania has been a major feature of the global economy over the last ten to 15 years. Canadians joined the party several years later than their counterparts in other Western countries. The early-1990s recession was still taking its toll on the country’s dole queues, and also on its domestic property market, right through to the middle of the decade.

But as interest rates tumbled, Canada caught the bug just like everywhere else. And how. The ‘real’, ie inflation-adjusted, price of the country’s homes has increased by an average of 85% since 1998. Sure, house values stagnated at the height of the financial crisis in 2008. But by 2009, property prices were back on a roll, rising by almost 20%. Canada’s current housing boom has now become one of the longest lasting in the world, says the Bank of Nova Scotia.

Indeed, Vancouver is the second-least affordable city anywhere on the planet, according to the annual report from the Demographia International Housing Affordability Survey 2012. Like every other housing bubble, it’s been inflated by loose credit. Canadian household debt hit a new high last year. The average borrowing burden of Canadian families now stands at 153% of disposable incomes, according to Statistics Canada. To put that in context, that’s almost as much debt as US households had taken on at the peak of their own housing bubble.

In other words, the warning signs are everywhere. Canada’s housing market is plagued by “overvaluation, speculation and over supply”, says Merrill Lynch. The Economist conducts a survey that compares house prices with the rents that property owners can charge. On this basis, Canadian residential property is overvalued by more than 70%. Even the central bank admits there’s a problem. In short, the country’s property prices won’t be able to defy gravity for much longer. Canadian lenders, including Toronto-Dominion Bank last week, are already lifting home loan rates to try to cool off the housing market. That’s seen prices start to drop in some areas – and there’ll be plenty more of that to come.

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[laundry_queen]

1. They've been predicting this for the last 2 years

that the bubble here in Canada will burst. I don't think it will be as dramatic as in the US - we have much stricter lending rules for mortgages so most people have enough equity to bring them through a bubble burst - plus our unemployment rates are lower so there will be less people who can't pay their mortgage because they can't find work. There will probably be a few if interest rates do rise and payments go up.

I do agree that the home prices are way inflated in Vancouver. A million bucks for a 1000 sq ft bungalow is ridiculous. It's not as expensive as that where I am, but the prices have skyrocketed over the last few years because of the huge amount of growth (I live in a town that's grown 48% since the last census 5 yrs ago). I'd like to see prices come down hard so I can buy a house in the next couple of years, but it's probably not going to happen - maybe in some markets but I think overall Canada's not going to go through a huge 30% drop like our neighbours to the south.