Canada could be sitting on the biggest housing bubble of all time, a strategist says, and once it bursts the nation could be propelled into a deeper recession than economists have originally forecast.
Phillip Colmar, managing partner and global strategist at research firm MRB Partners — which has offices in Montreal, New York, and London, U.K. — has analyzed housing bubbles across the globe and flagged Canada as potentially having the most concerning one.
A housing bubble is a sharp run-up in prices fuelled by demand, speculation and limited supply. At some point, the unsustainable prices eventually collapse, causing the bubble to burst.
“Canada has some of the most problematic characteristics, which has resulted in it potentially sitting on one of the biggest housing bubbles of all time,” he said. “First, house prices are really outstripping incomes in Canada.”
Prices have seen a significant rise since the 1980s, while incomes haven’t been able to keep up. And since the 2008 financial crisis, Canada has grown accustom to low interest rates, he added.
The Bank of Canada has raised interest rates by almost five percentage points since March 2022, to combat soaring inflation. Before the campaign, the overnight rate sat at 0.25 per cent. Now, it’s at five per cent, its highest rate in 22 years.
“After the housing bust in the U.S. and Europe in 2008, Canada piggybacked on low interest rates for a long time,” he said. “That’s problematic, because it seduced Canadians to take on more and more debt, and as a result Canadians are heavily over-leveraged.”
The average Canadian household now owes about $1.87 for every dollar of disposable income they have, whereas the U.S. owes $1.01, according to the Organization for Economic Co-operation and Development. The high debt in Canada largely stems from ever-growing home prices, driven by greater population growth here compared to the U.S. as well as less scarring from the 2008 financial crisis, resulting in greater mortgage debt.
“It’s very concerning, Canada has a huge amount of credit and mortgage debt due to low interest and increasing home prices,” Colmar said. “And now that interest rates have risen considerably, servicing that debt in Canada has become much worse compared to other G7 countries.”
The pandemic has also saddled Canadians with even more debt, as interest rates sat at historic lows for two years, incentivizing tens of thousands of people to jump into the housing market, even though home prices had skyrocketed. As a result, people who bought in the pandemic are carrying massive mortgages and homeowners will be adjusting to much higher interest rates when they need to renew on a five-year cycle — with some households unable to afford their new mortgages, he said.
“Every year we’ll see more Canadians under financial stress and the banks are scrambling and nervous about it,” Colmar said. “We can even see the duration of mortgages is longer than ever before. There’s clear risk in the system.”
The housing bubble will likely burst when Canada enters a recession and there’s sizable job loss, he said. Already, cracks are beginning to show as consumer spending slows and unemployment gradually rises. In May, the Canada Mortgage and Housing Corp. warned that Canadians would not be able to weather a recession because of the high amount of debt they owe.
“We won’t escape the recession forever. When the housing market busts, there will be a significant price correction to bring it back to more normal levels,” he said. “We will see the better part of the decade deleveraging and there will be weak economic growth.”
Canada also has more of its economic activity wrapped up in housing, he said, meaning that jobs in the housing sector, such as real estate agents and housing construction, will take a hit.
“Often bubbles go on for longer than they should, but what we have in Canada is unsustainable. If the housing market falls, it might put Canada in a deeper recession,” Colmar said. “But one silver lining is it could create more affordable housing, helping prospective buyers who have been locked out of the market for years.”
