The Canadian Housing Bubble

Canada is a developed western nation. It does not get nearly as much attention in the world media as it should. This is the reason why Canadian housing market is not being displayed in the news by the mainstream media.

Right now the market is going through an incredible bull run. The prices are rising as high as 33% in many cities in a single year! This can be compared with the relatively dull housing markets all across the world and understand why it is a problem.

Most of the people buying the houses are not paying cash. They are taking out mortgages, and as a result, the Canadian economy has mortgages worth $2.2 trillion outstanding even though the entire GDP is only $1.6 trillion.

A mortgage debt worth 150% of the GDP is not a sign of prosperity. Instead, it is a sign of crippling debt that can cause the entire economy of the nation to collapse.

In this article, we will study the Canadian housing market in greater detail. We will also understand the cause behind this bubble and also some of the effects that it is having.

Causes behind the Canadian Housing Bubble

• Immigration: Immigration is probably the biggest reason behind the Canadian housing market bubble.

  The Canadian government is allowing 3.6 million immigrants to come into Canada every single year. A lot of these are coming in via the paid immigration program wherein people can invest $1.6 million in Canadian bonds and obtain the citizenship of Canada. Hence, Canada is attracting very wealthy immigrants as a result.

  Also, a lot of these immigrants are coming in from countries like China. The problem is that China has an estimated corruption of $86 billion per annum. The problem with keeping this money in China is that it is likely to be confiscated by the government.

  Hence, a lot of corrupt officials are simply pumping money into the Canadian economy. They have no regards to the fundamentals of the local housing market. Instead, they are driven by the need to simply send their money to a safe haven.

  The problem is that local Canadians are not able to compete with them and are getting displaced as a result. Even the immigrants who are not wealthy are adding to the housing market woes. This is because they are renting in large numbers which are indirectly driving up the prices of real estate.

• Government Support: The Canadian government also has agencies that buy mortgage debt from banks. This is very similar to Freddie Mac and Fannie Mae in the United States. These companies guarantee the debt on behalf of the borrowers. They provide these assurances with the backing of the taxpayer money.

  The problem here is that a lot of these loans are given to unstable borrowers who have put down very little in the form of down payments. Hence there is a chance that these borrowers might simply walk away from the deal if the prices go south. This has already happened in the United States, and it is appalling that Canada has not learned from their neighbors’ mistakes.

• Low Interest Rates: Canada is the only country in the world that is keeping its interest rates very low. All other countries including the United States are raising interest rates.

  There is always a direct correlation between lower interest rates and property bubbles. This is because lower interest rates allow users to borrow more than they possibly could have in a high interest rate environment. Since everybody has more purchasing power, this ultimately leads to a pricing bubble.

Effects of the Canadian Housing Bubble

• Loss of Competitiveness: The problem with high housing prices is that it causes the city and even the country to become less competitive.

  People have stopped accepting job offers in countries like Vancouver and Toronto. This is because even a $70,000 salary is considered mediocre in these places whereas even a $30,000 salary is good enough to lead a good life in rural Canada. This is causing countries to locate to the countryside if possible. If it isn’t possible, many companies are choosing to skip setting up any office in Canada whatsoever.

  High real estate prices drive both workers and corporations out and encourage them to do business with competing economies.

• Generational Wealth Gap: The housing bubble is driving the poor generation further into debt. They already have student loans to take care off. Since they are buying at high prices, they also have to pay a mortgage. This leaves very little of their salary for other purposes.

  Also, the sellers of these properties are usually retired people with no mortgages. They are simply riding into the sunset with a pocketful of cash as they relocate to much cheaper houses in rural areas. These massive loans to young people are going to have an impact on the economy as debt-strapped consumers will not be able to spend much bringing the economy to a grinding halt.

To sum it up, the Canadian real estate bubble is causing a lot of damage even before it has gone bust. Once the prices go under people are likely to lose their life savings like they did in countries like Japan.

Authorship/Referencing - About the Author(s)

The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.