Canada's Housing Bubble

Analysis of the real estate bubble in Canada -- http://CanadaBubble.com

Have we learned anything? Print E-mail

wernerpatels.com

People are funny bunch.  One would think that after the economic disaster in the United States, which was triggered, primarily, by the much-talked about housing bubble, we and everyone else in the marketplace had learned our lesson.  But looking at this recent article from the Globe and Mail, it almost seems that Canada is now on its way to creating its own housing bubble.

Canadians are in the midst of a mortgage binge, taking out home loans at a pace that's nearly 8 per cent faster than a year ago. The point of a record-low borrowing rate and new fiscal incentives, such as allowing first-time home buyers to use a bigger chunk of their registered retirement savings plans as down payments, was to stir the animal spirits of consumers spooked by the financial crisis. But now, as the recession eases, officials in Ottawa and the analysts who advise large institutional investors on where to put their money are suddenly paying closer attention to the effect of all this stimulus on the longer-term prospects of Canadian consumers.

In fact, this development is quite alarming.  From the start of the crisis in the United States, Canadians prided themselves on not having been as foolish about their money and mortgages as their neighbours to the south.  And it’s true: with the subprime market in the U.S.  throwing good money after bad, enabling thousands of Americans to become home owners without qualifying for this status financially or otherwise, thus resulting in a fatal chain reaction of foreclosures across the United States, Canadians, so far, have been able to boast that their housing market has been built on much sturdier foundations.

In this latest newspaper article, however, we learn about this young couple in British Columbia who have bought an expensive home, primarily because of the mortgage rate offered to them, a paltry 1.5%.  This may sound like a great deal, but there will be a rude awakening.  Mortgages are usually locked in for five years, at which point the terms and conditions will be renegotiated and the interest rate reset.

Some of the experts quoted in the article have said that interest rates will eventually be increased quite dramatically in the near future.  So, while this couple in the article may be rejoicing right now, there could be serious trouble down the road when their interest rate is jacked up by several percentage points just a few years from now.  Both of them are currently working, but between now and the next five years one of them might become unemployed.  And then what?  Will they still be able to afford the tremendous mortgage?

No doubt, the current deal they got on the mortgage is virtually unprecedented, and for now they have every reason to be happy.  But, as everyone knows, circumstances change, and this couple in British Columbia might have bitten off more than they can chew.

More alarming, perhaps, is the fact that more and more Canadians are plunging themselves into mortgage debt, with mortgages now accounting for something like 96% of their personal disposable income.  At this rate, Canada is rushing headlong into a housing bubble of its own, which is being inflated right now and could possibly burst over the next 3 to 5 years.

This is downright scary.  With unemployment still rising in Canada, or at least not abating, and less than promising GDP projections, one has to wonder where such a housing bubble might lead in Canada.  But it stands to reason that such a bubble, once it has burst, could send Canada into a recession all of its own making.  Canada is certainly not one of the big major players in the world, so any housing market crisis in this country would be very unlikely to trigger a global recession, but it would be enough to cause serious harm to Canada’s financial and economic health.

Canadians should learn from and heed the lessons from the American mortgage disaster.  Granted, there are a lot of good deals out there right now.  Some of the most expensive housing markets have suddenly become quite affordable for a lot of people, and interest rates are at an all time low.  But that doesn’t mean that people should switch off common sense and reason and live beyond their means.

Nov 03, 2009
 
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