While various quarters have argued that the Canadian real estate sector’s current situation is nothing like the instability that characterized the U.S. housing industry prior to last decade’s crash, a commodities analyst warned that the two markets are more alike—and face more similar risks—than consumers are willing to admit.
In a contribution for Maclean’s, freelance journalist and financial observer Andrew Hepburn expressed bafflement at the chorus of voices (such as Moody’s and other specialists) declaring that the Canadian market will not fall into a U.S.-style recession any time soon.
Hepburn cited figures from the International House Price Database by the Federal Reserve Bank of Dallas, which found that, adjusted for inflation, Canadian home prices as of Q2 2016 are far more inflated compared to prices in the U.S. during the peak of its bubble in 2008.
Another factor that merits consideration is household debt, now at all-time highs in Canada and fuelled by steady sales volumes in the country’s hottest metropolitan markets.
“As with the U.S. bubble, a surge in household indebtedness (principally via mortgages) has provided the fuel to send prices soaring. If we examine U.S. and Canadian household debt-to-GDP ratios, we see that Canada recently exceeded the level reached by American households in the first quarter of 2008,” Hepburn explained.
“Turn on Canadian radio and television these days, or browse the Internet and social media, and you’ll encounter a near-constant barrage of pitches for condos, mortgages (as well as second mortgages) and real estate seminars, promising the secrets of easy real estate riches as taught by self-professed experts,” he added.
Hepburn cautioned that many observers have a misplaced—and dangerous—sense of the Canadian economy’s robustness against global pressures, and that these suppositions should not be taken as gospel truth.
“When the U.S. housing market collapsed, it kneecapped the global economy, and yet Canada emerged largely unscathed, with observers praising the health of Canada’s banks… Now as global growth slows, yet more observers are singing Canada’s praise for its embrace of fiscal stimulus, trade and newcomers, a stark contrast to the presidential candidacy of Donald Trump.”
“Canada better hope all this housing confidence is justified,” the analyst concluded “If there’s one thing the U.S. crash reminded us, it’s that housing bubbles can have very serious and long-lasting consequences—property values crater, mortgages become millstones, consumer spending plummets, and unemployment soars.”
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