Canadian housing market on the ropes?

By Leith van Onselen

For the past few years I have watched with interest the Canadian housing market’s continued rise in value. Whereas most other housing markets, including Australia’s, have taken a breather, Canada’s has powered-on, rising in value by 26% nationally since its April 2009 low, according to the Teranet house price index (see next chart).

The surge in Canadian home values has been fueled by a big reduction in mortgage rates. The official cash rate in Canada currently sits at just 1%, with average five year mortgage rates sitting at 60-year lows of just 4.15%, according to the Bank of Canada (see next chart).

Canadian household debt, too, is at all-time highs, having recently surpassed the United Kingdom and the United States (see next chart).

There are tentative signs that Canada’s housing market may finally have peaked, with the Teranet national index recording four consecutive monthly falls (down -1.3% since August 2012), which is the longest consecutive number of monthly falls since the 2008 recession.

And as shown below, the latest issues of Canada’s two major business magazines – Macleans and Canadian Business – have run front-page articles prognosticating about impending doom for Canada’s housing market (admittedly they did run similar stories this time last year):

Seemingly worried about the frothiness of the housing market, Canada’s Finance Minister, Jim Flaherty, last week signalled that he would like Canadian house prices to come down “a bit” from current levels.

Indeed, in July 2012, Flaherty moved to cool the Canadian housing market by capping the maximum mortgage amortisation period at 25 years for people with deposits of less than 20%. The impact of this move to date has been somewhat negative, with house sales falling by 17% in December on a year-on-year basis and prices down marginally since the new rules were introduced.

That said, the rule change represents the fourth time in as many years that Flaherty has changed the mortgage rules in order to make it harder to get a mortgage, and on each previous occassion Canadian home prices took an immediate hit before rebounding strongly thanks to low interest rates.

The Canadian central bank, the Bank of Canada, has for a long time warned that the next move in interest rates is up, although just yesterday it left the official cash rate untouched at 1% (for the 19th consecutive month) and suggested that interest rates would remain on hold for the foreseeable future:

“The slowdown in the second half of 2012 was more pronounced than the Bank had anticipated”…

“Some modest withdrawal of monetary policy stimulus will likely be required over time … [but] the timing of any such withdrawal is less imminent than previously anticipated”.

The Bank of Canada has also become increasingly worried about the level of household debt and the unbalanced nature of Canada’s economy. Earlier this month it published an interesting report, entitled Regearing our economic growth, which contained the following warnings for the Canadian economy:

Today, the balance sheets of households are stretched. After 11 consecutive years with household outlays exceeding disposable income, household debt burdens have increased substantially. Household debt as a percentage of disposable income has risen by almost 60 percentage points to 165 per cent today, and Canadians are now more indebted than the Americans or the British.
Housing activity in Canada is at a near record share of GDP, and there are indications of overbuilding and overvaluation in some segments of the housing market. Reflecting the strength in spending relative to income, Canada’s current account has been in deficit for the past four years.
These trends are not sustainable… [S]omething needs to take the place of increasingly leveraged household spending or economic growth in Canada will slow…
The strength in housing activity has also been reflected in rising house prices. Over the past decade, the price of the average home has risen from 3.5 times disposable income to more than 5 times (Chart 14), and the house price-to-rent ratio has increased from 1.3 to 2.3 (Chart 15). Both of these measures are now well above their historical averages.
Restoring sustainable levels of borrowing and housing activity is a shared responsibility… In the past six months, the growth of household credit has continued to moderate, with total household credit growth slowing to slightly below 4 per cent in recent months (Chart 16). If this is sustained, the ratio of household debt to disposable income can be expected to stabilize later this year…
Housing activity has also moderated recently. Sales of existing houses have softened, falling below their 10-year average in the third quarter. More recently, housing starts have also fallen from very high levels, [but] even with this decline, housing construction remains above demographic demand…
These are encouraging signs of a stabilization of household imbalances and a more sustainable housing market. But after a decade of buildup, it is too early to be sure.
It looks to me like the Canadian housing market is facing some sort of correction. It’s just a question of whether it will unwind gradually or in a disorderly manner.
Leith van Onselen
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  1. What impact would this have on other local and international markets if it did crash, for example could to cause the US to go back into more of a recession direction. If it didn’t crash but deflated would this still cause significant market disruption in Canada. I am assuming a lot of GDP is derived from the realestate market.

  2. When it comes to Canadian real estate assessment, I always turn to Garth Turner of The Greater Fool.

    Hear him discuss the Canadian RE market a few weeks ago here:


    • I must say I am also a follower.. his blog is up there with the best.. the regular takedowns of Realtors is also enjoyable. I would also like to know where he gets his blog post images from

    • Here’s what Garth had to say about Australia in 2011 (take note – if you get a plug from Garth, you are in a VERY select crowd):

      “Suddenly, buying something costing hundreds of thousands of dollars with 5% down (or less), which consumes most of their disposable income, with a debt you can’t get your parents to fix, and is falling in value, would look idiotic. Like it does in the US right now. Or Britain. Or much of Europe. Or, soon, Australia.

      Days ago I told you about a nascent movement in that country – with a Canada-style housing bubble – urging hormonal young property virgins to go on strike. The logic’s simple: reduced buyer demand will hasten lower prices. It will also give the kids some much-needed social reinforcement that refusing to buy a crappy houses from a greedy seller with a crushing debt, is cool.

      Here’s an update: Since then the Buyer’s Strike has gained traction. This past week it was discovered by the MSM, and started blazing through the key social media sites. There’s now momentum behind it, as this television interview shows. The only question that remains: will Canadian kids grow a set?”

      Conclusion: Garth thinks young, house-horny Ozzies should cease barring up/wetting their panties over 500K renovation rescues, grow a set of ironclad testicles and heed the message: ‘Don’t Buy Now!’

      These are wise words for those hormonal prey gyrating in their couches over the prospect of a quarter century of divine suffering for postage-sized stamps of land. Why willingly subject yourself to the special and twisted torture which is debt-servitude’s nine levels of hell? Even ‘Jigsaw’ never reached the depraved levels of the banks, let me tell you.

      Why willingly go into bondage with the financial overlords? Unless it is of course you cannot live an independent life, unkept by the poisonous directions of authority figures in the form of your clueless baby boomer parents, vicious corporations, plundering plutocrats & pontificating politicians partial to personal puffery…

    • UE, you could have put this post up without naming countries (Canada) and I would have sworn I was looking at Australian real estate.
      Op8 – same for your BofC household credit series – UE, a comparo of their data to Aus would reveal the similarities. Househhold debt to income around 150-160%, mortgage credit decelerating to around 4% y-o-y growth – lowest in decades, same as consumer credit growth.
      Downward shift in interest rates, with new lower highs in the cycle – heading to ZIRP forever… same here? Remember the squeals when rates headed up a little after the GFC?

      • GunnamattaMEMBER

        +1 Its reached the stage where I just mentally switch countries every time I read about Australia or Canada. We should just go the whole hog and call it Austanada or Canalia.

        If you are in touch with things Candian though one thing you may notice is that the uber spruik that you get in the MSM is not as strong as here, and there is a greater sense of ‘we need to head this off at the pass’ – not the blind denial we see.

        • True about the Canadian MSM.

          It might also be because they are much closer to America and they saw the biggest world economy brought to its knees.

          • Mining BoganMEMBER

            I don’t know about that. I reckon the spruik was just as strong over there but now that the writing is on the wall they’ve changed their tune to save some face.

        • Actually, Canada more resembles the “US” house price bubble than the Aussie one.

          Canada does have a reasonable percentage of its cities that ARE still affordable; less than the US had, but still significant. Vancouver is Canada’s “California” skewing the aggregate statistics upwards (and is itself concealed in the aggregate statistics).

          Australia has NO affordable cities of the kind that Canada still has several of.

          I find it interesting to consider, what makes a “national” bubble more volatile: having a few uber-volatile markets (a la USA), or having all the markets in the entire country “not quite so uber” volatile (a la UK)?

  3. They have been underpinned by a lot of Asian money flow. I can recall the 1997 property crash in HK down 70%. If there ever was a sustainable argument that things here are different , it was surely the HK story it looked so convincing,all the Chinese money fleeing into the safety of HK. Yet it was a bubble and it crashed.

  4. I agree Chinese money is fuelling property bubbles in Canada & Australia. Bloody dumb regulations in both countries allowing this to happen. Low interest rates fuelling further speculation. The edge of the cliff in nigh.

    • Once the crash gains pace and unemployment rises, I hope the government see’s the light and send alot of the temp’s home and then shuts the door behind them.

  5. Canada has been running along the knifes edge ever since their dollar hit parity with the USD.

    Everything from resources to tourism has been hit. Much of the winter ski tourism is lost as its now cheaper to go to Aspen or Steamboat.

    I have been expecting it to crash in Canada for at least five years, our properties there have plateaued for a while now. I’ve also been expecting a crash in OZ but that, like Canada, is defying the laws of logic and economics.

    • Canadians are much more used to and expecting of property crashes than Australians. Durng my time there I saw a number of property crashes and nobody has the opinion that prices only ever go up. They rely on the US for most of their exports which has put a bit of a damper on things. Will be moving back in a few weeks to reunite with a lady friend and will help her fix up her house for sale. A bit of a crash in prices will be a good thing as we will be trading up and my share of the cost will be smaller. Also things are much cheaper there. eg, electricity at 9 cents a KW.