Canadian Housing Bubble About to Burst Too ???

We began this week by talking about some disturbing signs that the Chinese housing bubble is perhaps about to burst.

We began this week by talking about some disturbing signs that the Chinese housing bubble is perhaps about to burst.

And apparently we’re going to end this week by considering the possibility of the same thing happening in Canada.

This bums us out in many ways.

The Americans among us adore the Canadian health care system, whatever its “flaws” may be.

And we really appreciate how strict regulation make it possible for Canada to avoid the worldwide financial disaster of Black September 2008.

So it would really be a drag if the Canadian housing market – despite not being bled by a dysfunctional, if admittedly greedy, financial sector – also collapsed.

But that is the view of some informed observers of the Canadian scene, notably Eric Jackson, founder and president of San Francisco-based boutique investment bank Ironfire Capital.

In an article published on the investment news and analysis website TheStreet, this article in Canada’s Financial Post points out,

Jackson notes that real estate prices in Canada have increased by an average of 40% over the last year while average incomes have dropped.

Add to that record-high levels of Canadian household debt – even higher than in Greece – and he might just have a point.

Canadian experts have been debating the bubble or no bubble housing argument for months now.

Stephen Jarislowsky of Montreal-based investment adviser Jarislowsky Fraser Ltd., said back in February he was “convinced” there’s a bubble in Canada’s housing market.

Mr. Jarislowsky’s firm owns shares in Canada’s four largest banks and is himself one of the country’s wealthiest investors, making his opinion worth hearing.

Canadians are spending more and more of their disposable income on housing.

In Toronto, 44% of disposable income goes to housing,

and in Vancouver the figure is a whopping 68%.

The trend is likely not sustainable.

The Canada Mortgage and Housing Corporation, the crown-owned business that owns a large proportion of Canadian mortgages,

has seen the value of mortgages it holds on its books (appropriately called ‘liabilities’) rise from $80-billion to $400-billion over the last five years.

Jackson rightly notes, “any time you see a business increase its liabilities by that amount, it’s intriguing.”

Some say intriguing, others say worrying.

The federal government imposed tighter mortgage restrictions months ago specifically to avoid causing a housing bubble.

That might have helped, but keeping interest rates at historic lows for so long has flooded the market with buyers anyway.

The Bank of Canada raised interest rates on June 1st, which should do something to reduce buyer demand in the housing market.

But whether that will facilitate the expected drop in average home prices while avoiding a steep decline in the short term, still remains to be seen.