The title of a recent report by the Canadian Centre for Policy Alternatives (CCPA) sums up its findings succinctly: Canada's Housing Bubble: An Accident Waiting to Happen.
The report generated a lot of media and prompted several other economists to respond, with most disputing the idea that Canada is headed for a housing crash. Most believe that Canada's economic fundamentals and government policies will be enough to avoid a downturn like that seen in the United States, but those opinions are not unanimous.
"I think Canadians have come to expect that their houses will increase in value by five per cent to 10 per cent a year and the truth is, like the U.S., that kind of return on investment simply can't continue indefinitely," says David Macdonald, author of the CCPA report. "Record-low mortgage rates and deregulation of the Canadian housing market means that housing prices are getting far outside of their historical 'comfort zone'. My concern is that when we get outside of that zone, housing prices become much more volatile and can be affected quite dramatically by changes in mortgage rates."
Macdonald says that Edmonton, Montreal and Vancouver housing markets are "particularly at risk" of a housing crash. In the worst of three scenarios Macdonald says Edmonton house values would drop by 39 per cent in less than three years, while Montreal and Calgary would suffer losses of 30 per cent. Vancouver prices would also drop by 30 per cent ("a gut-wrenching $66,000 a year loss in property value over almost three years"), while Toronto values would drop by 20 per cent and Ottawa's by 14 per cent.
"The bursting of housing bubbles is a rare event in Canada, but the steep rise in house prices in so many cities displays all the hallmarks of an accident waiting to happen," says Macdonald.
But Mario Lefebvre of the Conference Board of Canada is one of many economists who disagree with Macdonald's view.
"Let's put things in perspective: the Canadian housing market has generally been booming for about a decade now (except for a slowdown during the recession), and the Conference Board of Canada has long claimed ... the market would have to come back to more normal levels of activity," says Lefebvre. "This is what's happening right now. It has to be stressed that 24 of 48 markets are currently showing a balanced stance in their existing home markets, a sign that the recent large declines in sales have more to do with a return to more normal levels of activity than the start of a steep downturn."
Lefebvre says, "We are not the U.S. The house price bubble in the United States came about due to elements that have less to do with economic fundamentals than with U.S.-specific laws…If anything, Canada will see a pause in home price growth with possible marginal declines in a few markets, but nothing near what the United States has been through."
Another report (https://www.cdhowe.org/index.cfm ) by Jim MacGee of the C.D. Howe Institute also concludes that "Canadian housing policies, which avoided the sharp decline in underwriting standards seen in the U.S., worked well in reducing the possibility of a housing bust in Canada during 2008-2009, and continue to mitigate the risk of a massive wave of defaults in the future."
Housing affordability is the "best indicator of underlying market tensions," says Robert Hogue, senior economist with RBC. Although affordability has deteriorated recently, it "remains much better than it was in the late 1980s and early 1990s when bubbles clearly caused the Canadian market to melt down in the years that followed," he says.
Affordability levels do not "flag any major misalignment with respect to prices. At most, it points to a moderate degree of over-stretching on the part of Canadian households – something that can be righted in time without causing a significant disruption in the market."
Hogue acknowledges that there are regional differences in the market and that the Vancouver and Montreal, in particular, are feeling more affordability stress and could see some value declines.
BMO Capital Market's Sal Guatieri says that house prices in Canada doubled in the last decade and rose five times faster than the consumer price index and more than twice as fast as per capital disposable income. "That said, the heady price gains follow a stagnant period when housing was underpriced for most of the 1990s (on a price-to-income basis)," says Guatieri. "Even a 10 per cent to 15 per cent correction (as in 2008) would hardly qualify as a bust. It would merely return prices to 2007 levels and probably not cause much collateral damage to the economy. Americans can only wish that home prices had 'crashed' by that much, rather than by one-third nationwide and by more than half in several cities like Las Vegas, Miami and Phoenix."
He says that in the decade before the U.S. crash, prices in that country rose by "an eye-popping 193 per cent, almost twice as fast as Canadian prices."
But Guatieri says "the real difference that sets Canada apart from a U.S.-style housing collapse is that the vast majority of homeowners north of the border can actually afford their mortgage, not just for a month or two but for the long run, even if interest rates return to normal levels.
"Instead of handwringing about a bubble, we should take some comfort in the recent softening in prices, as continued heady gains could well have given us something to fret about."