The global housing market is going through headwinds as interest rates surge push mortgage rates to the highest level in decades. In Canada, there are fears that the housing bubble is happening, which could lead to a burst in the coming months.
Analyst warns on Canada housing bubble
In a recent interview, Phillip Colmar, an analyst at MRB Partners, warned that it will be inevitable for the bubble to burst. He cited the fact that the country was going through the biggest bubble of all time. Watch here: https://www.youtube.com/embed/iTpUHa4jUok?feature=oembed
He is not alone as observers have watched house prices surge in the past decade. This surge happened as the Bank of Canada (BoC) left interest rates at near zero after the Global Finance Crisis (GFC).
The most recent data shows that the national average home price was C$650,000 in August. According to Statista, the average house price in Canada peaked at C$703.8k in 2022.
While house prices have remained at an elevated level for years, analysts cite the average house price compared to real disposable income. This ratio has surged in the past few years, meaning that Canadians cannot afford homes.
Canada household debt
To be clear. House affordability is a major crisis around the world. The challenge for Canada is that the country’s households are burdened by high debt. Data shows that Canadian households are the most indebted in the G7, with most of this debt being tied to mortgages.
The household debt stands at 107% of the total GDP. In the US, that debt stood at 64.8%. Now, in a high-interest environment, there is a possibility of something breaking in the economy. For one, we are seeing the mortgage debt service ratio jump to historic highs while delinquency rates are low but rising.
So, the question is whether the housing bubble in Canada will burst as we saw in the US during the dot com bubble. This issue is further pronounced since there are zero chances that the Bank of Canada (BoC) will cut interest rates.
The most recent data showed that the country’s inflation jumped from 3.3% in August to 4.0% in September. I also don’t see the Bank of Canada hiking rates again.
I believe that Canada house prices will stabilise in the near term but I don’t expect the bubble to burst as we saw in 2008/9. For one, there is still demand for housing units in Canada even as housing starts dwindle. In a note, analysts at Moody’s said:
“Monthly mortgage payments have risen to unaffordable levels for millions of households, particularly first-time homebuyers. Additional mortgage rate increases would reduce the pool of qualified buyers, causing house prices to fall.”
A key risk for the Canadian housing market is that a recession could happen. Data shows that, like the United States, the yield curve has inverted to -68.1 basis points. In most periods, yield curve inversion is one of the most accurate predictors of a recession.
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