It's been almost a decade since the American real estate market collapsed, triggering a world wide recession. Unfortunately, we tend to track the United States -- with about a ten year lag. And now, Alan Freeman writes, the Canadian real estate bubble is about to burst:
For years, this bubble has been carefully nurtured by governments desperate for economic growth, realtors who will do anything for a sale and financial institutions happy to plow billions into housing, knowing Ottawa would always backstop their losses.
And as more and more people, particularly in Vancouver and Toronto, find themselves shut out of the housing market, those who had the good fortune to get in early sit in self-satisfied silence, content in the knowledge that their modest bungalows have turned them into millionaires — on paper, at least.
As was the case in the United States, people who look at the data straight on can see the storm that is coming:
The Canada Mortgage and Housing Corp. (CMHC) reported this week growing signs of “problematic conditions” in the housing market, particularly in Vancouver and Toronto, where there is “a combination of price acceleration and over-valuation.” An overheated price climate was a problem in nine cities; over-building was a problem in seven.
“CMHC assesses that there is now strong evidence of overvaluation across Canada: house prices across Canada remain higher than levels consistent with personal disposable income, population growth and other fundamental factors,” the agency said. In other words, there’s no rational reason justifying current prices.
The Office of Superintendent of Financial Institutions (OSFI) has an even grimmer assessment of the situation. It has imposed harsher criteria on stress tests for smaller lenders, forcing them to evaluate how their balance sheets would be affected by a decline of at least 50 per cent in house values for Greater Vancouver and at least 40 per cent for Greater Toronto.
The problem is that governments have encouraged people who don't have the capital to buy homes. And those who have capital to burn -- particularly in Vancouver -- have made home ownership unaffordable.
When the storm hits, the aftermath won't be pretty.