August 10, 2010, 5:00 am

Next Bubble To Collapse; The Canadian Housing Market?

by: The Financial Blogger    Category: Properties
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To burst or not to burst, that is the question! I recently had this conversation about the supposed housing bubble in Canada with my best friend (and partner in my online adventure). He was explaining that he believed that there was a housing bubble in Canada and that it wasn’t normal that the US housing market tumbled while ours barely bent its growth curve for a few months.

I must admit that he is a big follower of the US economy and while I think that Canada is in a enviable economic position for the next 10 years (solid banks, solid economy and full of natural resources).

In my opinion, we don’t have a housing bubble in Canada since our mortgage criteria are way stricter than our southern neighbours. Therefore, both the CHMC and Canadians banks are following severe debt servicing ratio guidelines to the dot (trust me, trying to qualify for a mortgage when you are 1% over the accepted TDSR is becoming a challenge these days!).

Another point to take into consideration, we never had 100% mortgages, interest only mortgages or 125% mortgages on our properties. In fact, the Canadian Government also forced new buyers to have at least 5% cash down and they can’t count on a 40 year amortization anymore. This is why I think our housing market is under control.

On the other hand, my friend is also strong willed and wanted to prove his point. This is why he forwarded me the following graph:

As you can see, this is the indicator of both the US and Canadian housing markets. They both start at 100 points and fluctuate according to the average price of houses over time. This means that when the index reaches 200 points, a house that used to sell for 100K back in 2000 will now sell for 200K.

The 2 indices are the most used references to demonstrate housing prices over time. They are well known and I can’t question the validity of the data.

What the graph shows is that the US market hit a summit back in 2006 at almost 210 points and then suffered a huge drop back to 140-150 points in 2010.

What concerns me about this graph is the Canadian Housing index. As you can see, we are dangerously approaching the 210 points mark as we are around 200 points right now.

While I still don’t believe that we will enter into housing down market, I am a bit concerned about this graph. One thing is for sure, I am pretty happy to have bought my house since I think I will live in it for a while. In fact, if you don’t expect to sell your house in the next 5 years, you don’t really have to care about a housing bubble that may burst, right?

What are your thoughts about the Canadian housing market?

What will happen when the housing market reaches the US peak? Will it tumble? Is our economy is built on the same housing bubble model as the US was?

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Comments

@Sean

Thanks for bumping the thread. It was interesting to read the crystal ball theories from 2 years ago :) None of it happened.

Interestingly enough, after 2 years, interest rates are still low but we have stricter mortgage rules for new home buyers. Prices are adjusting in the Greater Vancouver Area but they aren’t crashing. New developments have lower prices but they don’t drop much, builders add better quality items to the houses to entice buyers. Prices had to adjust simply because it was pricing out too many buyers.

I think it’s the first year that houses are selling below their city assessment in some regions. It definitely highlights an adjustment and there are many properties in the markets.

In my view, the fear effect you highlight is the only potential catalyst that can create a worst situation. Defaults are really low and since new buyers have stricter rules, previous new buyers have time to adjust. Retired families in my neighbourhood have not even moved out to cash out at the peak.

I would favor an increase in rates at any time just to show that rates will increase. Unfortunately, it has an impact on currency and consequently importing which translates into job losses … It is a very interesting situation we are in.

I’d love to hear some intuitions 2 years later.