Canada Housing Market Bubble Becomes Scarier
Alright, you may or may not have heard about it, but there’s a bubble like behavior happening in the Canadian housing market. More specifically, in major cities like Toronto and Vancouver.
What’s a bubble? A ‘bubble’ is essentially when asset prices increase rapidly, in a very short period of time. At some point when prices get too expensive, and no investors/individual want to buy, it causes the bubble to deflate – referred to as a bust. In other words, bubbles (rapid increasing prices) are followed by extreme price corrections (rapid decline in prices).
One of the most recent examples of a bubble was the U.S. housing market. This housing market bubble went bust in 2007 when homeowners could not afford to pay their mortgages, and there weren’t as many investors out there willing to invest in homes in the U.S.
You can read all about it here: United States housing bubble (Use this link as a starting point only. If you want to research this in detail, make sure you look at other sources too.)
Home Price Escalation In Toronto And Vancouver
Now back to the bubble forming in the Canadian housing market.
Over the past few years, home prices in Canada have been, in the nicest words possible: crazy. They are increasing in double digits – especially in major cities like Toronto and Vancouver.
For example, if you live in Toronto, the average home price was very close to $900,000 in February.
In Vancouver, the average price of a detached home stands at well over $1.0 million.
Remember how we said earlier that bubbles are followed by busts.
We question really hard if Canadians are getting nervous, and if housing market could face some problems.
It must be made very clear here: home prices, at their core, are a function of income, interest rates, and economic growth.
As it stands, incomes in Canada are increasing. But, they are nowhere close to the way the housing market is moving.
Not too long ago, even the International Monetary Fund (IMF) showed concerns about spiking home prices in Canada and advised on what could be done.
Canadian GDP growth isn’t that great either.
Yes, interest rates are low, but if home prices are ridiculously high, do low interest rates really matter to a person who doesn’t have enough money saved up, and her/his job doesn’t pay well?
3 Charts Everyone Must Pay Attention To
Here’s another thing; over the past few years, Canadians weren’t that concerned about skyrocketing home prices. Now, we see them turning slightly concerned, and it should be taken very seriously.
One of the ways, to see what Canadians are feeling about the housing market, is to pay attention to Google searches, Even though, this may not be a great indicator, but it provides some perspective.
We searched “Canada Housing Market,” and this is the chart we got.
Know that 100 on the chart means peak popularity.
We searched for “Toronto Housing Market,” and this is what we got.
Notice the spike?
To spice things a bit, we searched “Toronto Housing Bubble,” and we saw something similar.
That’s a massive spike in search volumes regarding the Canadian housing market and Toronto housing market.
Where’s The Next Big Trade?
Hey, know this; bubbles can go on for a while and so can the Canadian housing market continue for a while, too.
But, if it does bust, know that it’s going to end very badly.
It will not be a shock to us if Canadian banks like the Royal Bank of Canada (NYSE:RY) , Bank of Montreal (NYSE:BMO) , TD (NYSE:TD), and Canadian Imperial Bank of Commerce (NYSE:CM), plunge in value once the Canadian housing market busts.
Also, watch out for the Canadian dollar as well. It could drop severely.
P.S. we know what we covered here is not enough. We just wanted to keep it short, simple and easy to read. We will be touching on this subject in near future.