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Is Canada’s housing bubble about to burst?

Blog by Shaun Kimmins | May 30th, 2010

This article from The Financial Post:

At least one market expert definitely thinks so. Eric Jackson, founder and president of San Francisco-based boutique investment bank Ironfire Captial, has some pretty convincing reasons why Canadian home prices are headed for a crash.

In an article published yesterday on the investment news and analysis website TheStreet, Jackson points out that real estate prices in Canada have increased by an average of 40% over the last year while average incomes have dropped. Add to that record-high levels of Canadian household debt (even higher than in Greece), and he might just have a point.

Canadian experts have been debating the bubble or no bubble housing argument for months now. Stephen Jarislowsky of Montreal-based investment adviser Jarislowsky Fraser Ltd., said back in February he was “convinced” there’s a bubble in Canada’s housing market. Mr. Jarislowsky’s firm owns shares in Canada’s four largest banks and is himself one of the country’s wealthiest investors, making his opinion worth hearing.

Canadians are spending more and more of their disposable income on housing. In Toronto, 44% of disposable income goes to housing and in Vancouver the figure is a whopping 68%. The trend is likely not sustainable.

The Canada Mortgage and Housing Corporation, the crown-owned business that owns a large proportion of Canadian mortgages, has seen the value of mortgages it holds on it’s books (appropriately called ‘liabilities’) rise from $80-billion to $400-billion over the last five years. Jackson rightly notes, “any time you see a business increase its liabilities by that amount, it’s intriguing.” Some say intriguing, others say worrying.

The federal government imposed tighter mortgage restrictions months ago specifically to avoid causing a housing bubble. That might have helped, but keeping interest rates at historic lows for so long has flooded the market with buyers anyway. The Bank of Canada is expected to raise interest rates on June 1st, which should do something to reduce buyer demand in the housing market.

But whether that will facilitate the expected drop in average home prices while avoiding a steep decline in the short term, still remains to be seen.

Please contact Shaun directly shaun@shaunkimmins.com to discuss whether it's a good time for you to buy or sell and please feel free to comment on this or any of my other Blogs or visit me at my Century 21 In Town Realty website.