For some time, there has been talk of a growing housing bubble in Canada.
Robert Shiller, the economist who famously predicted the U.S. housing bubble, has toldCBC News’ Neil Macdonald, “I worry that what is happening in Canada is kind of a slow-motion version of what happened in the U.S.”
Macdonald writes that Shiller and other economists are most worried about household debt, which has ballooned from 75% of household income in 1990, to 150% today.
And most of this debt is held by the most “vulnerable households—defined as those devoting 40 percent or more of household income to paying interest charges.”
While these debt levels are said to be about the same level of U.S. household debt around the time of its bubble, Shiller does clarify that if the Canadian housing bubble were to burst, Canada’s experience would be quite different from America’s.
This is in part because Canadian banks aren’t neck-deep in a subprime lending debacle, and because the mortgages are insured by the government via the Canadian Mortgage Housing Corp.
Gluskin Sheff’s David Rosenberg has previously warned “Canada is carving out a top, while the United States is seemingly carving out a bottom.”
Rosenberg doesn’t think Canadian home prices are sustainable.
The IMF has also warned that Canadian home prices are due for a correction.
The Canadian government has been enacting measures to cool house prices but the real concern is that a rise in interest rates or job losses could cause the bubble to pop.Macdonald explains:
“Canadians seem to think that stricter government regulation in Canada protects them. But they are in some ways more vulnerable than Americans.
Americans at least have the option of lifetime payment stability. The gold standard here is the 25- or 30-year fixed mortgage. The interest rate can be locked in for the life of the loan.
In Canada, most mortgages “renew” every few months, or years, and payments can spike by hundreds of dollars a month if rates rise even slightly.”
Canada’s housing bubble has the characteristics of most housing bubbles, according to Shiller in that people think home prices will keep appreciating. When home prices stop rising the bubble collapses. They “always have their end built into them.”