The Economist analysis of Canada’s housing market spooks everyone


A recent report in The Economist about Canada’s overvalued housing market has spooked analysts and observers because their analysis may unfortunately just be right.
If one goes by the Economist’s figures, Canada could be facing the kind of devastation the U.S. went through when its housing bubble burst in 2006.
Earlier this month Bank of Canada warned of an impending correction in three of the country’s largest housing markets as home values continue to soar in Toronto and Vancouver even as they fall across Alberta.bubble_apr23
Before that the ratings agency Fitch and the International Monetary Fund also warned about overvaluation of Canadian properties.
Talk to many real estate agents and they will scoff at these warnings saying that such warnings have been sounded for years but the boom continues and prices continue to soar. And while prices soar, interest rates have fallen leading to prices to inch up even higher.
Analysts believe that a correction is in order and a 50 per cent drop in house prices to match current income levels.
Those in the best position to weather a possible market correction would be debt-free millennials — those between the ages of 18 and 34 , if they manage to save for a good downpayment they could end up with an affordable house. Baby boomers who are mortgage-free or are have small mortgages remaining won’t be affected by any interest rate hike or a market correction that could see the values of their homes drop. The group likely to be most impacted by interest hikes that will go hand in hand with an erosion in home value will be those between 31 and 54 who constitute Generation X who’ve either stretched themselves thin or are banking on turning a big profit on their homes.
What is clear is that if and when a housing market correction happens, it could have an impact on the booming construction industry that employs thousands. Massive job losses could be a major drain on the economy which is already reeling from falling oil revenue.

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