Canada's Housing Bubble - An Accident Waiting to Happen

The Canadian Centre for Policy Alternatives (CCPA) has just released its study "Canada's Housing Bubble: An Accident Waiting to Happen". This paper is certainly worth the read as it runs over a variety of potential scenarios we may be facing in the next few weeks, months and years.

My critisism of this study is the fact that the author is "predicting" one of these scenarios to happen in future. The over inflated prices HAVE happened in Calgary peaking in mid-2007. The question is - are we in the midst of one of these "bubbles" or about to enter one? Without a doubt, I believe we have been in this "correcting" mode for over three years. As that is the case, the next series of questions to address would pertain to understanding where we are within this price correction. Are we in the beginning, the middle or the end?

The Canadian housing market has shown remarkable resilience through the worldwide economic downturn and the recession of 2008, quickly regaining ground over the past year creating possible price bubbles in several Canadian hot zones, including Calgary. The study points out that the recent U.S. housing crash provides a stark example of what can go horribly wrong when housing prices are outside their historical norms. Although the Canadian and American banking and mortgage situations are very different, it is important to note what happened, and how it happened south of our border, "a similar crisis could potentially occur."

Canada is experiencing, for the first time in the last 30 years, a synchronized housing bubble across its six largest residential real estate markets. The paper puts together a variety of price adjustment scenarios wondering the odds of the bubble bursting, flaming out fast or slow, versus a slow price moderation - or market correction. Regardless of the road we take, this study certainly leads to the conclusion that we WILL see adjustments, whether fast or moderate changes.

Whether the crash is orderly, protracted, or sudden, seniors and new home buyers will certainly feel the effect of the changes the most. Those who purchased homes through high-ratio mortgages while prices were at their highest will find that they owe more on their homes than the value the market permits. Seniors who will be counting on selling their homes to make their retirement plans viable and can't wait a decade or so for prices to recover will be the most effected.

While the outlook seems dim, it is pointed out that those who hold real estate through the entire boom and bust would still see their property appreciate significantly despite the declines in the final years of these various scenarios. Often the process is quite lengthy, requiring a decade or more from beginning to end. In all of the bubbles examined in the paper, the new average price after the bubble burst is always higher than the initial starting point.