Is There a Canadian Housing Bubble?

IRVINE, CA-Certain economic indicators show that Canada may be facing a housing bubble. GlobeSt.com spoke with Auction.com's senior associate and economist Chris Muoio to find out what those indicators are and how the situation compares to the recent US recession.

GlobeSt.com: What factors lead experts to think there may be a Canadian housing bubble?

Muoio: For us, the biggest sign there is a housing bubble is how far prices have appreciated without a corresponding rise in income. This means housing affordability is falling rapidly and will eventually reach a tipping point. Additionally, if lenders are underwriting against an expectation of rising prices, this could result in loosening standards and too much leverage in the system.

GlobeSt.com: How similar are these factors to what happened to the US housing market before the recession?

C.M.: Very similar. US home prices kept appreciating while incomes saw only modest growth in the final years before the bubble burst. This led to a situation where eventually housing just became entirely unaffordable and the market's liquidity completely dried up. With people over-levered due to the loose lending standards (which were enabled by the expectation of rising prices), this led to a massive unwind and foreclosure mess we are still working through. Additionally, Canada, just like us at the time, is building an extreme amount of homes that could lead to oversupply issues. There is a difference, however, in that Canada's housing market is smaller, and foreign cash flows into certain regions could be having an outsized effect and creating these price run-ups and persisting them longer than expected.

GlobeSt.com: How can Canada temper these factors and avoid a crash?

C.M.: Canada can try a few things. Raising interest rates or tightening mortgage standards would likely temper housing demand and cool prices. Canada is already building a lot of housing supply, and it seems to have no effect, and given our expectation of a market correction, building more supply could do more harm than good as the market would struggle with oversupply on the other side of a correction. Honestly, at this point Canada either needs to see large gains in incomes to make housing affordable again or a correction in prices.

GlobeSt.com: What else should we know about the Canadian housing bubble?

C.M.: Unlike the US, a Canadian housing correction should not take down the entire financial system. US mortgage assets had become considered so safe from a regulatory perspective that banks used it as capital to lend and operate against. When this capital started eroding, it eroded the very core of the global financial system. Canada is significantly smaller, and its housing assets do not appear to be as systemic from a regulatory perspective, so even if its housing market collapses, don't go looking for signs of the next financial apocalypse.