TORONTO—Canada could be heading into a rapid drop in housing prices according to a report issued by the Canadian Centre for Policy Alternatives on Tuesday.
The left-leaning think tank says that Canada’s big cities—Vancouver, Edmonton, Calgary, Toronto, Ottawa, and Montreal—are all running hot and could be heading for a massive correction in real estate prices.
Others disagree.
“Canada is experiencing, for the first time in the last 30 years, a synchronized housing bubble across the six largest residential real estate markets in Canada,” says the report.
On average, housing prices in those markets, which account for around 40 percent of all real estate sales in Canada, are over $300,000. Historically, prices have held stable between $150,000 and $200,000 when adjusted for inflation, according to the report.
But while prices have risen, income has not kept up.
“Housing prices for 20 years, prior to 2000, stayed in a narrow range of between 3 and 4 times provincial annual median income. Today, however, housing prices adjusted for income are out of their historical range, costing 4.7 to 11.3 times Canadians’ annual income,” the report says.
That skew explains in part why Canadians have such high debt levels. The report points to consumers who have entered the housing market during historically low mortgage rates with some of the highest consumer debt to financial asset ratios in the world. The OECD puts Canadians at the top of 20 OECD countries for how much debt they carry versus the assets they have to cover it.
High debt and easy mortgages mean homebuyers are often stretched to the limit and especially vulnerable to mortgage rate increases.
“The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen,” says the report’s author, David Macdonald, a CCPA research associate.
The CCPA says that Canadians could be heading for trouble as mortgage rates rise from their current unprecedented lows.
“As house prices rise outside of their historical range, they become much more susceptible to mortgage rate changes,” says Macdonald.
“The hottest six real estate markets could be in for a correction at best or, at worst, a bubble burst. Rate setters at the big banks are in the driver’s seat now as mortgage rates inch up. They need to hit the brakes lightly.”
But while the CCPA is raising an alarm, others are not so concerned. Ted Tsiakopoulos, a regional economist with the Canadian Housing and Mortgage Corporation, says that with Canada’s steady labour market and relative lack of speculative housing purchases, there is little indication that high prices reflect a housing bubble.
“There isn’t convincing evidence that a housing price bubble exists,” says Tsiakopoulos.
He says the CMHC and many others are expecting an adjustment next year, but it won’t be dramatic and is more reflective of the cyclical nature of demand and supply in housing markets than anything else.
“This adjustment is not an adjustment driven by market that is juiced up and is correcting,” he says.
He discounts any suggestion that Canadian housing prices are above true market levels.
“We’ve done some work that suggests that we haven’t seen that kind of over valuation in the Canadian market place.... What we are seeing here is a cyclical adjustment in housing activity.”
That price adjustment, he adds, will be “quite orderly” because of Canada’s strong labour market and solid mortgage financing system.
Tsiakopoulos says changes to mortgage rates are expected to be quite measured, according to statements from the Bank of Canada, and that with two-thirds of Canadians in fixed mortgages, even those changes will have little impact on many homeowners.
He also said many homeowners are already paying above their monthly payments in an effort to pay off their principal more quickly.
“The effect is, if rates go up, they are already prepared and won’t feel the impact as much.”
Canada has only had three housing bubbles burst, twice in Vancouver and once in Toronto, notes the CCPA report. The study simulates the conditions of the two most recent bubbles, as well as the 2006 housing market collapse in the U.S., and predicts homeowners in Edmonton and Montreal could lose 38 percent to 34 percent respectively of their property value in under three years in a worst-case scenario.
Vancouverites would be worst hit, in dollar value, losing almost $200,000, said the report.
Economists from Canada’s major banks, including CIBC and Bank of Montreal, have also said in media reports that the market has not reached the kind of pricing that would indicate a bubble and that while an adjustment is evident, it will not be so dramatic as the CCPA’s report suggests.
The left-leaning think tank says that Canada’s big cities—Vancouver, Edmonton, Calgary, Toronto, Ottawa, and Montreal—are all running hot and could be heading for a massive correction in real estate prices.
Others disagree.
“Canada is experiencing, for the first time in the last 30 years, a synchronized housing bubble across the six largest residential real estate markets in Canada,” says the report.
On average, housing prices in those markets, which account for around 40 percent of all real estate sales in Canada, are over $300,000. Historically, prices have held stable between $150,000 and $200,000 when adjusted for inflation, according to the report.
But while prices have risen, income has not kept up.
“Housing prices for 20 years, prior to 2000, stayed in a narrow range of between 3 and 4 times provincial annual median income. Today, however, housing prices adjusted for income are out of their historical range, costing 4.7 to 11.3 times Canadians’ annual income,” the report says.
That skew explains in part why Canadians have such high debt levels. The report points to consumers who have entered the housing market during historically low mortgage rates with some of the highest consumer debt to financial asset ratios in the world. The OECD puts Canadians at the top of 20 OECD countries for how much debt they carry versus the assets they have to cover it.
High debt and easy mortgages mean homebuyers are often stretched to the limit and especially vulnerable to mortgage rate increases.
“The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen,” says the report’s author, David Macdonald, a CCPA research associate.
The CCPA says that Canadians could be heading for trouble as mortgage rates rise from their current unprecedented lows.
“As house prices rise outside of their historical range, they become much more susceptible to mortgage rate changes,” says Macdonald.
“The hottest six real estate markets could be in for a correction at best or, at worst, a bubble burst. Rate setters at the big banks are in the driver’s seat now as mortgage rates inch up. They need to hit the brakes lightly.”
But while the CCPA is raising an alarm, others are not so concerned. Ted Tsiakopoulos, a regional economist with the Canadian Housing and Mortgage Corporation, says that with Canada’s steady labour market and relative lack of speculative housing purchases, there is little indication that high prices reflect a housing bubble.
“There isn’t convincing evidence that a housing price bubble exists,” says Tsiakopoulos.
He says the CMHC and many others are expecting an adjustment next year, but it won’t be dramatic and is more reflective of the cyclical nature of demand and supply in housing markets than anything else.
“This adjustment is not an adjustment driven by market that is juiced up and is correcting,” he says.
He discounts any suggestion that Canadian housing prices are above true market levels.
“We’ve done some work that suggests that we haven’t seen that kind of over valuation in the Canadian market place.... What we are seeing here is a cyclical adjustment in housing activity.”
That price adjustment, he adds, will be “quite orderly” because of Canada’s strong labour market and solid mortgage financing system.
Tsiakopoulos says changes to mortgage rates are expected to be quite measured, according to statements from the Bank of Canada, and that with two-thirds of Canadians in fixed mortgages, even those changes will have little impact on many homeowners.
He also said many homeowners are already paying above their monthly payments in an effort to pay off their principal more quickly.
“The effect is, if rates go up, they are already prepared and won’t feel the impact as much.”
Canada has only had three housing bubbles burst, twice in Vancouver and once in Toronto, notes the CCPA report. The study simulates the conditions of the two most recent bubbles, as well as the 2006 housing market collapse in the U.S., and predicts homeowners in Edmonton and Montreal could lose 38 percent to 34 percent respectively of their property value in under three years in a worst-case scenario.
Vancouverites would be worst hit, in dollar value, losing almost $200,000, said the report.
Economists from Canada’s major banks, including CIBC and Bank of Montreal, have also said in media reports that the market has not reached the kind of pricing that would indicate a bubble and that while an adjustment is evident, it will not be so dramatic as the CCPA’s report suggests.
