We recently editorialised the looming crisis in the Canadian real estate markets. A renowned economist reaffirmed it and warned that the crisis would adversely affect the prime Canadian housing markets, particularly, in Toronto and Vancouver.
The telltale signs of a looming crisis signal that it would be as same as the US subprime mortgage crisis two decades ago or even more than that in terms of its magnitude. Bay Street veteran David Rosenberg stated that he’s seeing signs of troubles brewing in some of Canada’s hottest housing markets are worse than, when he first sounded the alarm over the U.S. subprime mortgage crisis nearly two decades ago.
Rosenberg, the chief economist and strategist at Rosenberg Research, said that by almost any metric he watches, financial conditions in the Toronto and Vancouver housing markets have worsened to the point where policymakers should take the worsening conditions into consideration.
“I’m taking a look at all the metrics I had in my hands when I called the housing bubble in 2005 and 2006 in the United States. I was looking at home price-to-rent ratios, I was looking at home price-to-income ratios, I was looking at the extent to which the household sector was overexposed to residential real estate on their balance sheet,” he said.
“I’ve got news for you: the numbers in Canada, on all the metrics, are higher now than they were at the peak of the U.S. housing bubble 13 years ago.”
Surge in house prices
What is noteworthy is that Rosenberg’s repeated warnings come against the backdrop of mix bag of issues in the Canadian prime housing markets including record –low interest rates and sky-rocketing demand for detached homes during the pandemic.
This led to sudden surge in real estate prices in Canada’s two largest housing markets; the average home price in Toronto was shot up to 15 per cent year-over-year, hitting $1,045,488 in February, while Vancouver home prices increased nearly seven per cent in the same period, averaging home selling price at $1,084,000.
This trend extended up to outer communities of Toronto suburbs like Brampton and Oshawa which saw a double-digit price gains as buyers expanded their reach for more space during work-from-home pandemic arrangement under locked down.
Given the economic shock of COVID-19, initially it was thought that housing market would behave in a different manner, plunging itself into all-time-low housing prices.
The market behavior was misjudged even by Canada’s own housing watchdog, Canada Mortgage and Housing Corp. which forecasted a nine to 18 per cent decline in prices in mid-2020.
Market in a bubble
Against that backdrop, Rosenberg identified that the market is in a bubble , although he did not give an exact time when the bubble would burst, stating that the prevailing condition may last years before it crashed.
Although the Bank of Canada’s view that rock-bottom interest rates would help Canadian economic recovery. Sings in the bond market indicate that it may not subscribe to that stance on the part of the bank of Canada and that yields on a Canadian five-year bond – which reinforces fixed-term mortgage rates – have been on the rise steadily, reaching their highest level since February 2020.
As Rosenberg warns, any downward movement in the housing market could have a domino effect and serious consequences on the Canadian economy as it heavily depends on this sector.
Canadian economy’s over dependency on this sector is so great that a potential downwards trend in prices in the prime housing markets could severely affect its balance sheets and the second-round impact would lead the country into recession.
