Canada sitting on "one of the largest housing bubbles of all time": analyst

Homes in Vancouver (Shutterstock)

Housing market fundamentals in Canada continue to deteriorate to levels that were previously unimaginable even a year ago.

This has led one strategist to believe Canada is now “sitting on probably one of the largest housing bubbles of all time.”

“I’ve analyzed housing bubbles in the world, and Canada really has got a unique one to its own,” said Phillip Colmar, the managing partner of New York City-based independent global research firm The Macro Research Board (MRB), in an interview on BNN Bloomberg TV last week.

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The country sits on a “double-edged sword” with “home price-to-income ratios that are off the charts, and affordability that is very weak.”

There was some stabilization after the Bank of Canada’s consecutive policy rate increases last year, but Colmar says the problem now is bond yields are back on the rise, which is in essence a worrying sign of the increasing probability of default for companies. This is being led by the United States, which is impacting the bond yield in Canada, and in turn this has led to higher mortgage rates.

“We’ve reviewed Canada as a weak link to the global economy on interest rates,” he added, unlike the United States and Eurozone, which are now much less interest rate-sensitive economies through policy actions over the past 15 years. He said the Canadian market conditions are two decades in the making, with historically low interest rates for more than the past decade.

The “worst part for the housing bubble is when you have a credit bubble underneath it, and the amount of Canadian leverage into the system versus income is pretty astronomical,” he reiterated, with debt servicing dramatically increasing.

“If mortgage rates go higher or unemployment were to rise, when we hit the next recession then this thing does end up in a deleveraging cycle.”

In May 2023, Canada Mortgage and Housing Corporation (CMHC) reported Canada now has the highest level of household debt amongst G7 countries, making the economy more vulnerable to any global economic crisis.

Household debt in Canada was about 80% of the size of the country’s economy during the 2008 financial crisis, and it grew to 95% in 2010.

By 2021, Canadian households owed more than the entire size of Canada’s economy, based on total GDP. Mortgages account for roughly 75% of the country’s household debt.

In June 2023, Statistics Canada data showed mortgage interest payments grew by 12.6% from the fourth quarter of 2022 to the first quarter of 2023, which continues the escalating pattern experienced since early 2022 due to the consecutive rate hikes. Mortgage interest payments were almost 70% higher in the first quarter of 2023 compared to the first quarter of 2022.

Moreover, there was $1.85 in credit market debt for every dollar of household disposable income in the first quarter of 2023. Like many other indicators, this figure has been increasing, too.

A new report by RBC earlier this month shows Canadians experiencing debt between the ages of 35 to 44 had total debt-to-disposable income in 2019 — up from 150% in 1999. Of course, this age group, the millennials, are amongst those who are most likely to be prospective first-time homebuyers.

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