Danger Looms for the Canadian Real Estate Market

The Canadian real estate market was relatively unaffected by the implosion of the U.S. housing market, and has more or less been on a tear since 2000. There are warning signs that this might soon reverse, however, and Canada may also experience issues with its real estate market.

Let’s take a look at some of the ominous conditions currently present in the Canadian real estate. Many of these issues were discussed in a recent blog post on RealEstate.com concerning the outlook of the U.S. and Canadian real estate markets; you can find more information on all of the below topics there.

Swollen Inventory

A housing glut, although good news for homebuyers, is just one sign of a changing housing market. 

Contributing to the glut is the massive volume of new housing starts – great for the Canadian economy, but potentially wreaking havoc on the housing market in the long term. This has some economists concerned. “We caution that this pace of homebuilding is unsustainable,'' said TD Bank Financial Group economist Diana Petramala.

The concern is based on several factors, including the worry that the weak job market, with unemployment at 7.6 percent, may dissuade many from entering the housing market. With less demand for homes, the glut will grow.

Rising Home Prices

Low rates fueled buyer frenzy, jacking up home prices accordingly. Canadian home prices are over-inflated by 26 percent on average and by 26 percent in British Columbia and Quebec alone, according to Fitch Ratings.

For example, the Calgary real estate market saw February home prices up 7.46 percent from last year, according to the Calgary Real Estate Board, with an average sale price of $457,127. 

Canadian forecasters worry about just how much further the price bubble can continue to inflate before bursting. 

Consumer Debt

Government officials have expressed concern that Canadians are taking on too much debt, leaving them vulnerable to changes, much like Americans were prior to the crash of the U.S. real estate market. 

In fact, the Wall Street Journal reports that “household debt is now 163.4 [percent] of disposable income in Canada, close to the U.S. level at the height of the subprime crisis.”

Rising home prices coupled with the escalation in consumer debt prompted Moody’s to raise “a cautionary flag,” according to the Los Angeles Times, warning that banks face huge problems if the Canadian economy hits a snag. Although Canadian banks still hold excellent credit ratings, Moody’s downgraded six of them.

Evolving Mortgage Rules

New mortgage rules were announced last summer, affecting government-backed loans. The maximum term has been reduced from 30 years to 25, in the hopes of cooling the overheated housing market. Their hope is to see home sales drop slightly and with them housing prices, as homes languish on the market.

It seems that there is no question that Canada’s housing market is coming in for a landing. The real question, according to Time Business reporter Christopher Matthews, is will it be a soft landing or a crash and burn?

In an attempt to answer that question, consider the similarities between what is happening in Canada and what Americans experienced in 2007. The proliferation of so-called liar loans enabled millions of Americans to purchase real estate with little to no down payment and (initially) low adjustable rate loans.

With mortgage loan insurance from CHMC (similar to the FHA in the U.S.), Canadians pay only 5 percent down. Again, like the situation in the U.S., these buyers have no equity – no soft landing if they face the need to sell while home prices are dropping. It also puts Canadian banks in the same situation American banks faced, forced to sell foreclosed homes at a loss.

The saving grace in this is that, as mentioned earlier, Canadian banks have excellent ratings, which was not the case in the U.S where lenders weren’t able to absorb the huge losses due to soaring mortgage delinquencies. In fact, four of Canada’s banks sit in the top 10 on Bloomberg Markets’ ranking of the world’s strongest banks.

Matthews feels that what eventually happens in the Canadian real estate market hinges on the solvency of government-owned Canada Mortgage and Housing Corp., or CMHC. The agency’s assurances about its health are eerily similar to what Fannie Mae was claiming prior to the subprime mortgage meltdown in the United States.

Canadian real estate agents: What do you think about the ominous signs about the direction of the Canadian real estate market?

Are you experiencing a slow down in transactions and new construction starts in your local market?

If you feel as if the Great White North's real estate market is heading downhill, do you think it will fare as poorly as the U.S. market did in its recent housing market collapse?

Please share your thoughts in the comments!