Here is a stat to ponder: the Canadian housing market has appreciated 44% since 2006, while the US housing market has declined 32% on average over the same time period.
For those who think this means Canada has decoupled or escaped the inevitable force of gravity dominating other real estate markets on planet earth– I suggest we think again. To the contrary, this suggests that Canadian real estate is over-priced and vulnerable to the downside. And with Canadians heavily over-invested in real estate and over-indebted today like never before, this presents a major risk to the Canadian economy, Canadian banks, and Canadian tax payers thanks to our exposure to losses underwritten by the government-backed Canada Mortgage and Housing Corp, to wit:
The Canadian housing agency’s vulnerability to mortgage defaults has soared nine-fold in 20 years, approaching levels reached by Fannie Mae and Freddie Mac in the U.S. at the height of the housing boom…
Government-owned CMHC insured C$541 billion ($546 billion) in mortgages as of Sept. 30, an amount equal to 31 percent of Canada’s annual gross domestic output, as home prices climb and construction expands. In 2006, when U.S. home prices peaked, the combined exposure of the government-backed agencies to potential defaults was slightly more than a third the size of the economy, according to Bloomberg calculations based on U.S. Federal Reserve data. Fannie and Freddie were bailed out in 2008. See: Ghost of Fannie Mae haunts Canada
It is important to realize that real estate cycles historically move in approximately 10 year spans. Property prices have been rising at above average rates in Canada now since 2001. The present up-cycle was elongated by easy money policies that billowed the global credit bubble. Consumer de-leveraging (the urge to get out of debt), aging boomers all looking to downsize their costs and upkeep, while 20 to 40 somethings struggle to find good jobs, and pay off student loans, (not to mention eventually increasing mortgage rates) are all likely to keep downward pressure on housing prices for the next decade. S/he who is looking (or needing) to downsize their Canadian real estate is probably wise to act sooner than later.
Source: Juggling Dynamite
