Canadian housing bubble? Brokers disagree with new report

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While most reports and forecasts maintain the Canadian housing market will remain stable for the next year, reports are still surfacing that call into question whether the country will experience a housing bubble.

A new study of global housing markets by The Economist warns that markets in Canada and some other countries still appear ”uncomfortably overvalued.”

Overall, the report shows prices falling in eight of 16 countries studied in terms of a price-to-income ratio, which measures affordability, and a price-to-rent ratio.

By averaging the two readings, The Economist warns that prices are overvalued by 25 per cent or more in Canada, Australia, Belgium, France, New Zealand, Britain, the Netherlands, Sweden and the ever-unfortunate Spain.

Here’s a really troubling bit: For Canada, Australia, Belgium and France, housing “looks more overvalued than it was in America at the peak of its bubble.”

The magazine notes that some economists dismiss its measures, citing the fact that lower interest rates – Canada is such an example – can justify fatter prices because they allow heftier mortgages. The magazine responds to that just as Bank of Canada Governor Mark Carney and others have: It will not always be thus, and rates will inevitably rise.

Blair Anderson, broker/owner of Anderson Associate Mortgage Brokers in Burlington, Ont., thinks the comparisons to U.S. mortgage holders doesn’t hold water. “I find it hard to believe their assertion that Canada has higher household-debt burdens in relation to income than America did at the peak of its bubble,” he told “Having worked for an American finance company, I know the average American holds 10 credit cards compared to an average of five for Canadians.  Americans are also encouraged to mortgage their homes to reduce income tax.  This assertion might have more to do with the decrease in wages, and the increase in unemployment south of the border.”

He also says that while prices may drop in markets such as Vancouver, overall affordability levels in Canada are “quite good and pose little threat to the overall demand for housing and this bodes well for property values remaining level.”

David Larock, a mortgage planner with Integrated Mortgage Planners-TMG in Toronto, concurs with Anderson’s assessment about comparing Canada to other countries. “I would reject comparisons between Canada and the U.S. or U.K. property bubbles because those countries were rife with bad lending practices that led to mass foreclosures,” he told “Their property values have been pummelled to an extent that would be unlikely in countries which have maintained more prudent underwriting. Record-high Canadian debt levels are nothing to sniff at, but at least that debt is the hands of people who have proven that they have ability to actually pay it back.”

But he does think home prices are over-valued. “Is Canadian housing over-valued? Probably. There is no denying that our house price appreciation has primarily been fuelled by lower interest rates over the last several years. Incomes have not kept pace with rising values, and while house price growth has historically tracked pretty closely with the rate of inflation, that has certainly not been the case for some time. I think that we will not see anywhere near the level of house price appreciation over the next 10 years that we have seen over the last 10 years. If we’re lucky, we’ll get slowing price appreciation, but if we’re not, prices could certainly correct from current levels.”

Ian Tenggardjaja, a mortgage agent with The Mortgage Professionals-The Mortgage Centre in Toronto feels the article is an oversimplification.

“To state that the Canadian housing market is overvalued by 25 per cent, is like saying the temperature in Canada is 20 degrees Celsius all across the country in December,” he told  “This is one of the limitations that one runs into when using national housing and income stats for one of the largest land masses in the world, which encompasses so many diverse regional economies. Another limitation being, a price-to-income and price-to-rent ratio, does not take into consideration other major factors that impact real estate prices such as; savings and investments that could be used for real estate, foreign investments into Canada, population growth and immigration. So while the analysis is perhaps interesting to read, it is of little or no use to determining our respective market conditions.”

Larock believes that the positive momentum of the real estate market should continue for the foreseeable future for several reasons. “Mortgage rates look like they will stay low for some time yet, our unemployment rates are at record low levels, our immigration rates are at record high levels, and Canadians are, on average, paying off their mortgages more quickly than is required by their contract terms. Furthermore, every recent study I have seen shows that Canadians have capacity to pay higher rates, so it’s not like our borrowers can’t handle some bumps along the way.”



  • Lior on 2011-11-29 4:04:42 AM

    >>>“Mortgage rates look like they will stay low for some time yet, our unemployment rates are at record low levels, our immigration rates are at record high levels, and Canadians are, on average, paying off their mortgages more quickly than is required by their contract terms. Furthermore, every recent study I have seen shows that Canadians have capacity to pay higher rates, so it’s not like our borrowers can’t handle some bumps along the way.”<<<

    First, the unemployment rate is not at record low and recent indicators from StatCan are showing that unemployment is actually on the rise.

    Second, mortgage rates may stay low but short-term borrowing rates may spike as a result of all the volatility that's coming from Europe. Just head to a couple of personal finance forums and you'll find numerous reports of RBC customers seeing their personal LOC rates increase from prime + 3% and prime + 5.5/6%. Some CIBC customers have complained of similar hikes. Variable mortgage rates have increased from prime - .90% to prime + .10% within about six weeks.

    If the debt crisis in Europe morphs into another credit crisis where interbank lending rates surge (in fact, these rates have already increased, hence the increase in variable mortgage rates and ULOCs), what are the odds that HELOC rates are set to rise? Of course, that in itself is a worrying development given that recent research shows that respondents who claimed they had a good understanding of how a HELOC works answered less than half of the basic questions correctly and 10% indicated they never even reviewed any of the documents. And people are saying we are conservative with our finances and our underwriting standards are better than the U.S. or the U.K.?

    Third, just because Canada has strong immigration doesn't mean that everyone who comes here is going to hop on the ownership bandwagon when housing prices in many metropolitan areas like Vancouver and the GTA, where many immigrants head when they land in Canada, are so overvalued. A weak job market is going to further impede new immigrants from buying homes at least in the immediate future.

    Finally, the problem with low rates hanging around for a few years is that people get used to low rates as the new norm. A 5-year fixed at 3.3%, while incredibly attractive, is not a normal rate for this type of mortgage. If rates climb to more normal levels 5 years from now, homeowners would not only see their payment amount increase but also, potentially, the value of their home decrease as higher rates would undoubtedly cool off housing prices.

    And so, in my view, the picture isn't necessarily as rosy as some would like to believe. People think that just because Canada fared better than other countries during the last financial crisis that it would do so again should another recession hit. But they're casually forgetting that if we're indeed heading into another recession, we're heading there in a position worst off than we did in 2007. Housing prices in certain areas continue to rise to the point where affordability is definitely a problem, it's just that it's masked by very low interest rates. Consumers are also heading into another recession with higher levels of debt than they did 4 years ago. I would be more worried now than a few years ago.

  • Ron Butler on 2011-11-29 4:57:46 AM

    It seems reasonable to me that the real estate market is just that: "a market". In any market, by definition, prices do not only go up. It is also based on regions and we have seen prices in some regions of the country move down as well as up in the recent past.

    I think if prices in a given region have been on a steady rise that far exceeds inflation for a long time it is only rational to expect an eventual reversal. How much of a reversal I don't know.

    We can site as many reasons as we want to suggest it the new normal for prices in key regions to double or triple every 8 or 9 years but I think we are just kidding ourselves.

    Those of us who were in Toronto in 1989 - 1990 must clearly recall many professionals telling us that property prices were just fine prior to them briskly dropping 25% to 35%.

  • Matt on 2011-11-29 6:26:14 AM

    I love this quote precisely becasue it adds no value:

    "Canadians are, on average, paying off their mortgages more quickly than is required by their contract terms"

    If Canadians were paying off their mortgages, on average, slower than their mortgage contracts, we'd have a very serious problem. The fact is it is a minority of Canadians that pay more than they are contractually obligated to each month.

    What's scary is that the Certified General Accountants Associaton of Canada reported this summer that 20% of Canadians would not be able to afford a $5,000 unexpected expense - not even by putting it on a line of credit or credit card, or borrowing from friends or family.

    It wasn't the average borrower that caused the drop in house prices in the US. The fall started with the people at the bottom.

  • BC Brokerage Owner on 2011-11-29 7:53:19 AM

    Regarding the Vancouver market, Firstline, in it's most recent weekly update, stated the average mortgage in Vancouver is approximately $300,000. It's been this amount for well over 5 years. Prices in Vancouver are rising due to net in-migration of around 50,000 per year.

    The geographical layout of Vancouver causes a shortage of land and means new housing is getting smaller and smaller. Having said this, the average Vancouver home owner is not increasing their mortgage level of debt but is getting used to smaller accommodations. The debt level and therefor interest rates, while important to the market, may not have as much of an impact as it may appear on the surface.

    Lastly, Canada's relatively stronger economy should allow for lower rates in comparison to other G20 countries as our currency should remain strong, especially once money ceases to flow to the US when they announce bad economic news!

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