Canada’s housing market is on fire. Prices continue to rise as sales are falling, The Real Deal Magazine reports in a recent study. Over the past year, Canadian prices have gone up 18 percent, making the U.S. mid-2000s real estate bubble look small. This worrisome trend has experts talking about the imminence of a housing market crash, which could send the Canadian economy into a downward spiral. Recovery after a burst housing bubble can be lengthy and difficult, and no one understands this better than U.S. homeowners.
Using housing price data from the Federal Reserve Bank of Dallas, The Real Deal compared real estate trends in Canada and the Unites States from 1975 through the end of 2015. Aside from an imbalance during the 1980s, both housing markets had a similar evolution until 2006, when there was a massive shift in housing trends.
Source: Dallas Federal Reserve via The Real Deal
Overall, the Canadian real estate market escaped unbruised during the financial crisis, unlike its neighbors to the south. Aside from an insignificant 7 percent drop in 2009, prices have been increasing. A booming housing market might benefit the economy in the short-term, but experts know that this upward trend can’t go on forever.
While U.S. housing prices began to decline, the boom continued strongly in Canada. After the peak recorded in 2006, U.S. housing prices remained down almost 13 percent through the end of 2016. Over the same period, Canadian prices increased by 56 percent. After reaching new lows in 2012, the U.S. real estate market went into recovery mode, managing to reclaim 19 percent out of a 27 percent drawdown.
By contrast, Canada’s housing market maintained its upward trend. After a short-lived 7 percent decline, Canadian house prices quickly recovered all losses, seeing a 30 percent gain since 2012.
What does this mean for homebuyers?
This is bad news for homeowners, who, according to housing expert and historian Robert Shiller, are in for some rough times. Shiller argues, that, on the long-term, home ownership is not the best investment, especially considering that many homebuyers are assisted by loans.
Returns on an investment are only possible if prices keep increasing, but further growth is unrealistic. Ultimately, a downturn in the market will affect not only homeowners, but also financing businesses, leaving them bankrupt.
Also, if you take into account that maintenance and improvement costs claim a large chunk of homeowners’ incomes, it becomes even clearer that home ownership acts as a double-edged sword.
Many people overlook these very important aspects, as home-buying is often an emotional decision, partially made under the influence of herd mentality, The Real Deal notes in their study. As long as home ownership mania is in full swing, prices are expected to keep going up. In downtown Toronto, a detached home now sells for an average of $1,191,052, thus widening the housing affordability gap in the Canadian market.
No one can know for sure when or how Canada’s housing bubble will come to an end. Some are predicting a soft landing, while others warn of a total collapse. Concerns are fueled by the housing fiasco in the U.S., but this doesn’t necessarily mean that Canada is heading in the same direction, as history has shown.
Do you think the Canadian real estate market will follow in the footsteps of the U.S. this time around?