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Is U.S.-style housing crash a foreshadowing of Canada’s future?

OTTAWA — Is the U.S.-style housing meltdown in Canada’s future?

cp_logo.JPG With more and more Canadians taking on record levels of debt to enter the red hot housing market, some analysts are beginning to see some of the practices that led to the U.S. housing crash last year developing in Canada.

At the moment, there is no sign that the Canadian housing market – which has seen the price of homes rise between nine and 11 per cent annually for several years – going down the disastrous road of the U.S.

But as this week’s Royal Bank report showing the cost of owning a home in Canada at the highest level since 1990 suggests, it wouldn’t take much of a downturn in the economy for sky-high house prices in Canada to come tumbling down, and the wealth many Canadians had built into their homes vanish.

“Definitely the fundamentals are not great. There are a lot of families who are stretched,” said Roger Sauve, a consultant who last month wrote a report on Canadians’ finances for the Vanier Institute of the Family.

The study found that debt had risen to 131 per cent of household income, or $80,000 per household, from 91 per cent in 1990.

“Just like in the U.S., everybody is feeling good right now. They are taking on debt, but they are not worried because the prices of their homes are going up. But it would be easy to see house prices going down five or 10 per cent.”

Liberal MP Garth Turner, a business journalist and author whose recent book “Greater Fool: The Troubled Future of Real Estate,” is among the most pessimistic forecasters of Canada’s housing market, saying a loss of consumer confidence, mixed with aging population, could see the edifice come crashing down.

“We’ve got this delusional situation where the American housing market is going through the worst crisis since the 1930s and we think we’ll continue to buy houses from each other for more and more money,” Turner said.

Turner believes that cities like Vancouver, where a typical two-storey fetches $650,000, could see a price drop of up to 20 per cent in the near future. For Toronto, where a similar home costs about $476,000, he says prices could flatten this year and perhaps drop 10 or 15 per cent in the next few years.

With 83 per cent of Canadian’s net worth tied to real estate, even such modest reductions could spell disaster for many, he said.

“We have so many people buying real estate with basically no equity, that even if real-estate flatlines or go down a little bit, that’s a pretty serious situation for them.”

Article continues here.


#1 Drachen on 03.20.08 at 2:37 pm

“At the moment, there is no sign that the Canadian housing market – which has seen the price of homes rise between nine and 11 per cent annually for several years – going down the disastrous road of the U.S.”

Wow, just wow. We are in almost exactly the same position the US was 2 years ago with the added bonus of an essential trading partner entering a serious economic crisis. What exactly qualifies as a sign? The only thing people like this will accept is historic proof. ie. they will only admit to a crash when it’s already happened (and even then they’ll probably wait a year or two just to be sure).

It’s exactly this kind of press that breeds the ignorance necessary for the kind of insane bubble we’re seeing in Vancouver right now. This kind of qualifier statement is there only so that readers can choose to avoid the truth. It’s like an intellectual loophole which allows people to go on believing as they want to believe. Notice how that statement comes right near the beginning so that if the reader is getting disheartened later on in the story they can just quit once they’ve reached their tolerance for painful truths.

#2 Rob on 03.21.08 at 12:23 pm

Wow, I can’t believe someone is finally publicly telling the truth about real estate in Canada. Thank you Garth Turner, always a straight shooter from the old Mulroney days.

40 year mortgages and no money down mortgages are Canada’s version of subprime. Housing prices have risen in a way detached from wage growth and the underlying economy. Prices are set to stagnate or tumble.

#3 Jeff on 03.23.08 at 4:53 pm

I am a REALTOR in the downtown Vancouver market and we’re seeing inventory build here, and sales slowing down a bit.
People are still talking about new construction projects selling for $800, $900, $1000 per square foot… but then resales are going for $650 foot on average.
1-bedroom condos (600 sqft) sell for $400k and are still in demand; however, 2-bedrooms (900 sqft) pushing $600k are sitting on the market.
Couples here are deciding to live in 500 and 600 sqft condos just so that they can “get into the market before it’s late”… before it goes even higher.
How quickly do you see this changing… we’ve been saying the market is crazily overpriced for 2 years now?

The change is at hand, actually. Those young couples jumping into units just to get one which they are still ‘affordable’ will have a hard time selling for the same price. The 500-square-foot condo will prove to be as much of a disaster as lofts in the next five years. As prices correct, who would choose to live in a closet? — Garth

#4 Mike on 03.24.08 at 7:17 am

Garth what are your thoughts on the Montreal Real Estate market?

In general, more insulated from the swirl of continental events than most cities. Montreal has been economically stagnant for a while, compared with Toronto, Calgary and Vancouver, with less real estate speculation and a cheaper housing stock. I expect the market to grow far quieter than it has been, but it will not take the hit Toronto and Vancouver should brace for. — Garth