Finances & Real Estate Why a U.S. Style Housing Nightmare Could Hit Canada

Neil Macdonald: Why a U.S.-style housing nightmare could hit Canada

How Canada resembles a slow-motion replay of the American crash
Neil Macdonald, CBC News, Sep 21, 2012

An expatriate always thinks about going home. The longer the time abroad, the stranger the prospect of re-entry feels.

But if you're a Canadian living abroad these days, the idea of returning home has become downright frightening. Stories are now routinely surfacing in the Canadian media suggesting collective madness when it comes to affordable living.

Our biggest real estate markets — Toronto and Vancouver — seem to have decided they're really London and Manhattan. Several of our smaller cities are wildly optimistic, too, with year after year after year of six-, seven-, even 10-per-cent increases in property values.

Friends and colleagues who own homes in Canada are the very pictures of smug. They seem convinced the markets in which they happily reside will keep rising forever. Or at the very least, never drop.

And any discussion of the subject usually involves condescending lectures about how Americans, who are only beginning to recover from a six-year nightmare of foreclosures, could have used a dose of Canadian common sense and prudence.

Well, I watched America's nightmare unfold, and it appears pretty evident to me that a sequel of some sort is coming to Canada.

So I ran that thesis past Robert Shiller, of Yale University, probably the foremost authority on real estate in America. He co-founded the Case-Shiller Home Price Index and predicted the American collapse in 2005, a year before it happened.

"I worry," he told me, "that what is happening in Canada is kind of a slow-motion version of what happened in the U.S."

Nosebleed levels of debt

What Shiller was getting at — and what is most alarming to economists and to the Bank of Canada — is the debt Canadians are carrying.

As was the case in America when I arrived here nine years ago, Canadians have for years been so desperate to avoid being left behind by a surging housing market that they've been stretching themselves beyond reasonable financial limits to jump in, thus of course ensuring continued surges.

In the process, household debt has doubled, going from a manageable 75 per cent of household income in the early 1990s to 150 per cent today.

That's just about exactly the nosebleed level Americans were at when everything imploded here in 2006.

Worse, as the Bank of Canada has been pointing out, Canadian debt is disproportionately concentrated in the most vulnerable households, defined as those devoting 40 per cent or more of household income to paying interest charges.

That means those households are extremely sensitive to any sort of shock — be it a rise in interest rates, a drop in home prices, or, worst of all, job loss.

The central bank's analysis suggests that if interest rates rise to 4.25 by mid-2015, fully one fifth of all Canadian debt would be held by those households least able to finance it.

"That is rather scary," says Don Drummond, a former federal mandarin who also spent many years as the chief economist of the TD Bank.

Drummond says an interest rate of 4.25 by 2015 would not be out of the question, given the levels of economic stimulus in recent years. He also says the bubble in Canada is bursting right now.

"My base case expectation would be that most markets in Canada over the next two years would see a pullback of housing prices of 10 to 15 per cent."

More

 

IMF (International Monetary Fund) weighs in on Canadian housing market in their report. Warns against climbing debt levels: http://www.cbc.ca/news/world/story/2012/10/09/imf-canada-outlook.html

 

A lot of people will be in trouble if the bubble do burst.

 

I hope the market crashes drastically! People are nuts to have paid $900K for a shack!

People should stop buying period! Then prices will be forced to decline. Simple!