Is Canada in a housing bubble?

Toronto house

According to a well respected Canadian economist, David Rosenberg, Canada is in a housing bubble that is due to burst to the effect of 20% or more. He was one of the first economists to predict a housing crisis in the U.S. and at the time he did so, most people said he was nuts. However, this prediction does not seem that far fetched, especially if you look at his reasoning.

Canada only recently bounced out of a recession and Rosenberg says that it was actually the housing market and related industries that led the country to this bounce. He even went as far as to say that if you removed the housing sector and sectors related to it, the rest of the economy was basically flat and would not have bounced back at all. He sees similarities between Canada today and the U.S. before the housing crisis. He points to the exceedingly low interest rates and new policies that let people get a mortgage with no down payment and until recently, let them increase the length of the mortgage to 40 years.

He says that Canada’s housing sector bubble may begin to burst once interest rates begin to increase and the home owners who just barely afford their mortgage now with the help of easy terms will no longer be able to make the payments. In addition to the eventual interest rate rise, the province of Ontario, which is the heart and engine of Canada, will soon see a new tax in the form of the awful HST policy that will come in to effect on July 1, 2010. This will essentially put an 8% tax on home purchases.

Another reason this economist gives for his prediction is what he sees as an over supply of homes for sale. He says that most of the major markets have seen double digit increases in home listings last March which puts downward pressure on prices.

David Rosenberg makes a lot of good points and many of them are the same as what I have been saying for a few years now. As a resident of Toronto, it has seemed to me for the last 3-4 years that home prices have been too high and unsustainable. Prices have only gone up and never really dipped during this recession. If they had dipped, perhaps it would have actually been a positive result because it would make Canada less susceptible to a potential bubble that may have formed.

It is very difficult to tell if this prediction has a good chance to come to fruition and even more tough to know if it will be as bad as he suggests. However, it does seem that eventually home prices will go down somewhat because the incredibly low interest rates will surely rise at some point. Perhaps after July 1, 2010 when Ontarians get hammered with a new tax (which by the way is a terrible move by an incompetent provincial government, but that is a topic for another day) the market will change as it will be that much more expensive for people to buy homes.

Hopefully, this economist is wrong and if that is too much to ask for, then hopefully he is wrong in the extent of the bubble burst that the housing sector will see.