Canadian housing market may be headed for a crash

The troubles of the US housing market have been well documented and now it looks like the Canadian housing market may also be headed in the same direction:

A housing correction—or, possibly, a crash—is no longer coming. It’s here. And you don’t have to own a tiny $500,000 condo in downtown Toronto or a $1.3-million bungalow in Vancouver to get hurt. With few exceptions, the impact will be indiscriminate as the euphoria of rising house prices is replaced by fear. The only question now is how bad things will get. If the decline picks up speed, as many believe it will, there could be a nasty snowball effect. Construction jobs will be lost. Homeowners will end up underwater. Consumers may stop spending. “I’m getting very nervous,” says David Madani, an economist at Capital Economics, who has been predicting a drop in housing prices of up to 25 per cent in Canada. “I know I’m a bear, but the housing market itself has the potential to put us in a recession, let alone what’s happening in Europe and the U.S.”

Canada could be setting itself up for a devastating one-two punch: a painful domestic housing slump just as Canada’s export and resource-driven economy is hit with falling global demand. The most acute threat is the U.S. debt crisis, which, if handled poorly, could tip the world’s largest economy back into recession, taking Canada along with it. Meanwhile, Europe remains mired in a recession and concerns about China’s growth persist. “I feel like Canada is in the path of a perfect storm here,” Madani says. Other than housing, “the key pillar of strength is our booming resource sector,” says Madani. “If you take that away, it’s just going to knock the lights out.”…

Eight months later, the story has been reversed. And not just in Toronto and Vancouver. In Victoria, existing home sales were down by 22 per cent in November from a year earlier. In Montreal, sales were down 19 per cent last month. Ottawa’s sales were down nine per cent and Edmonton’s were down six per cent. With all those houses lingering on the market, prices dipped in 10 of 11 big cities across the country between October and November, according to the Teranet-National Bank index. It was the first such drop since 2009.

The weakness is also evident in new home construction. The Canada Mortgage and Housing Corporation reported a third straight month of falling housing starts in November. The trend is expected to continue next year.

I wonder if anyone will ask whether the Canadian housing market should have applied more lessons from watching the travails of the US housing market. This article suggests there are some similarities and differences in the two situations: a similar overextension of credit and the involvement of speculators alongside a market more insulated from a collapse since more mortgages are guaranteed by taxpayers and a glut of urban condos. But, it would be helpful to have more comparison points: what are the differences in government policies regarding mortgages and homeownership? What are the policies about encouraging sprawl versus urban residences? What percentage of the economy is tied up in construction, housing starts, and real estate sales? Of course, there is also the difference in having a significantly smaller economy (Canadian GDP of $1.4 trillion, just over $15 trillion GDP in the US) and population (over 34 million in Canada, over 311 million in the US).

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