Canada’s housing bubble makes America’s look tiny

Here is an interesting analysis in Maclean’s magazine discussing the Canadian housing situation with respect to the continual call for a bubble-namely that housing prices will drop precipitously at some point or another.

The problem with all these analyses

There is, however, a problem with many of these analyses. Case in point that there are some institutional differences between Canada and the United Sates. Most importantly that the Government of Canada stands behind a large proportion of these mortgages. The risk here is that lenders loaded up with mortgages that when push comes to shove are of dubious quality. There are many stories of poorly documented mortgages (fake employments letters, deposits that are made for one day to cover off the cash on deposit required by the lender) and others. Who knows what other time bombs are ticking out there and how many of these mortgages will ultimately end up in CMHC’s hands.

The other unknown is how much financial stress the mortgage borrowers can handle in the event that there is an increase in mortgage rates. Most writers seem to feel that there is not much room out there. Only time will tell. But to the extent that it causes many to sell, housing prices can drop pretty quickly if a group of sellers comes to the market at the same time. Doesn’t take much.

Another factor is the “herd mentality” that exists in Canadian residential real estate markets. “I don’t want to miss the boat” is the cry of many buyers. If I wait, house prices will be 20% higher next month. This too will fuel the flames, even if there is nothing else going on. But that sentiment can reverse itself in an instant.

Real estate markets are illiquid

Selling a house is not like selling a hundred shares of the Royal Bank. Each house is a unique property and will attract different buyers at different prices. Although median and mean prices may reflect the overall market situation, it does not necessarily reflect the value on the market of YOUR house. You just never know.


Statistical analysis is not a substitute for common sense. There aren’t a whole lot of Canadians who can afford million dollar houses under any circumstances. They just don’t have the incomes to carry the debt.

The correction will come when everyone least expects it.