Saturday, March 19, 2011

The Canadian Real Estate Bubble?

Up, Up and Away!
"Canadian real estate is hot!"

"Canadian housing prices only go one way, so get in now!"

"Mortgage rates have never been lower, it's a great time to buy!"

I had to add the exclamation marks because people say these statements with such conviction. And given the direction of chart 1, they have been right. However as Warren Buffett says, "If past history is all there was to the game, the richest people would be librarians." 

Out of Whack With History
First off, Canadian real estate is not cheap. My main argument is that the house price to income ratio is near its peak and is 40% above its long term average (ie. Our houses are too expensive relative to our incomes).  The United States had a similar spike only to have this ratio fall back to normalized levels and I expect Canada will be no different.

Critics will correctly point out that Canada did not have the same reckless standards as US lenders, but that doesn't mean we didn't get tempted by record low interest rates and volatile stock markets. Not all bubbles have to be exotic!
Rising House Prices and Rising Debt

But what could have caused this large jump? Has there been a massive increase in the population? A homebuilder’s strike? What seems most likely is that record low interest rates have caused Canadians to take on as much debt as possible.

When will this bubble burst? I don’t know, but like all bubbles, it will. 

Disclosure: I rent. 

Follow Up: Canadian Real Estate Bubble Part 2
Follow Up: Canada's Mortgage Mess

Sources: Canada Economic Focus, Statistics Canada, OECD

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hardcore value said...

Great detailed article on the real estate market in Edmonton, Canada.

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Maia Dobson said...

This post is very informative and it stirred my interest with mortgage rates Long Island NY because I'm planning to have housing loans. I hope America would also have the same standards like Canada's.

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