Will Canada be American Housing Collapse the Sequel?

By: Justin Leung on September 21, 2012

The short answer to that question is yes and no; a short answer but a complicated one. The mentality of Canadians is one fueled by government spin that Canada is doing relatively well compared to the global economy; and with government insured mortgages through the Canadian Mortgage and Housing Corp., the mentality is Canada could never end up in a disastrous housing collapse that plagued our southern neighbours a few years ago.

While it’s true that Canada is unlikely to end up in as big of a bubble burst as the U.S was highly due to our stronger banking system for financial protection, there are still similar signs. Yale University professor Robert Shiller who co-founded the Case-Shiller Home Price Index and predicted the American collapse a year before it happened, worries that Canada is falling in line with many of the early stages of the U.S. collapse.

“I worry that what is happening in Canada is kind of a slow motion version of what happened in the U.S.”

What he points to most alarmingly is what Canadians have been hearing for months now; the household debt levels in Canada are far too high and a slight adjustment in interest rates which is inevitable could burst those budgets at the seams. The average level of debt has peaked over 150 percent of disposable household income; and more alarming than that is this fits the point where the American collapse began from high debt.

Don Drummond formerly of TD Bank, who wrote the Drummond Report for Ontario’s last provincial budget calling for tighter spending, agrees with Shiller that the Bank of Canada’s prediction for a 4.25 percent interest rate by 2015 would mean one fifth of Canada’s total household debt would be at risk of not being paid.

“My best case expectation would be that most markets in Canada over the next two years would see a pullback of housing prices of 10 to 15 percent.”

Their predictions are beginning to show signs of being more than just a prediction as the number of housing sales for August finally started dropping; and they dropped big at 8.9 percent. Home prices still saw a bit of an increase but the amount of the increase slowed to its lowest point in over a year showing signs the market is cooling off.

Shiller says that as most people invest in real estate thinking it will add to their wealth, they become deluded during a housing boom that prices will always continue to rise; then when they stop rising, people back off from buying and the bubble collapses. This is the mentality that crushed America during their crisis and Canada could be heading down the same road.