Canadian Housing Bubble to Burst in 2012?

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Canada has weathered the financial crisis quite well, especially in comparison with its southern neighbor. Perhaps it has been even too successful when it comes to house prices.

After Australia’s prices began sliding, is Canada the next market to drop? Some fear that prices are bloated beyond the peak seen in the US.

Canada enjoys various factors of late: tensions in the Middle East boost oil prices which Canada exports, and more importantly, the signs of improvement in the US economy also help the huge northern country.

Also the booming housing sector supports the economy, but it could turn against it. A recent research shows:

Canada’s housing prices are overvalued by 29 per cent relative to income, and by 71 per cent relative to rental rates…

Prices can float above value or under value for long periods of time, and income can adjust to house prices, yet this is part of toxic mix that is similar to what the US experienced, and is still experiencing:

The Economist also noted that Canadians are now carrying a larger debt burden, relative to income, than Americans were in 2007 when the housing collapse began.

Bank of America Merill Lynch predicts a drop of 5% in prices during 2012 stating that Canada is seeing “classic signs of a bubble”.

As aforementioned, the situation in Canada is quite good, and unemployment is relatively low. If the US economy continues advancing, house prices could tick lower in Canada, and meet higher income, somewhere in the middle.

Yet if the global recession hits both Canada and the US, house prices in Canada can drop sharply, and Canada may experience a long downturn in this sector, following the United States, just lagging by a few years.

Further reading: Canada sees more job losses

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About Author

Yohay Elam – Founder, Writer and Editor I have been into forex trading for over 5 years, and I share the experience that I have and the knowledge that I’ve accumulated. After taking a short course about forex. Like many forex traders, I’ve earned the significant share of my knowledge the hard way. Macroeconomics, the impact of news on the ever-moving currency markets and trading psychology have always fascinated me. Before founding Forex Crunch, I’ve worked as a programmer in various hi-tech companies. I have a B. Sc. in Computer Science from Ben Gurion University. Given this background, forex software has a relatively bigger share in the posts.

3 Comments

  1. A bubble burst is a possibility especially in regions like Vancouver and Toronto. Some other cities will mearly see a stabilization of prices for the next 2 years. For example, where the rental vacancy is extemely low like my city of Regina (0.6%) the pressure on housing prices to stay up is considerable. Mind you we also have very low unemployment (3.8%), high immigration and are just in the beginning stages of a prolonged boom in the ecomomy. My own house has gone up 18% in value in the last 2 years and nearly 100% in value since constructed 7 years ago. That rate of increase isn’t sustainable but I won’t see a price collapse anytime soon either.