It is always difficult to spot a speculative bubble in advance, but in the case of Canadian housing the weight of evidence is clear in our view:
- Price level: The IMF highlighted recently that Canada tops the list of the most expensive homes in the world, based on the house-to-rent ratio.
- Broad Based: Real home prices have surged in every major Canadian city since 2000, not just in Toronto and Vancouver.
- Over-Investment: Residential investment has risen to 7% of GDP, above the peak in the U.S. and far outpacing population growth.
- High Debt: Household debt now stands at nearly 100% of GDP, on par with the U.S. at the peak of its housing boom. The increase in household debt as a percent of GDP since 2006 has been faster in Canada than anywhere else in the world, according to the World Bank.
- Excessive Consumption: The readiness of Canadian households to take on new debt by using their homes as collateral has fueled the consumption binge. Outstanding balances on home equity lines of credit amount to about 13% of GDP, eclipsing the U.S. where it peaked at 8% of GDP at the height of the bubble.
The IMF and the BoC have argued that the air can be let out of the market slowly. But, as the old cliché goes, bubbles seldom end with a whimper. What could spoil the party? Higher interest rates are a logical candidate for ending the housing boom.