Foreign Affairs

Canada’s Housing Bubble May Have Just Popped

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A housing bubble that has been causing pain for Canadian homeowners and buyers alike may have started to pop as housing prices plummeted at a historic rate in August.

Housing prices fell 2.4% in August as compared to July, the largest monthly decline since the data was first tracked in 1999, according to management firm Teranet and the National Bank of Canada, who compute the index jointly. As of July, prices had risen almost 42% faster than wages since 2015, making housing less affordable to purchase, while spiking interest rates made houses more expensive to own, financial advice company The Motley Fool reported in July.

The price crash comes as new housing projects in 2021 were rented at the highest rates since the 1960s, according to Statistics Canada, the Canadian government’s statistical analysis arm. While prices remain nearly 9% above what they were one year ago, the Teranet-national bank data tracks closings, which usually lags behind realtor data by three to five months, Reuters reported.

Through the end of 2023, Goldman Sachs, $GS, predicts a drop in home prices in:

– New Zealand (-21%)
– Australia (-18%)
– Canada (-13%)

For comparison, the U.S. housing bubble saw home prices drop 27% between 2006 and 2012.

— unusual_whales (@unusual_whales) September 14, 2022

Heritage Foundation economist EJ Antoni, speaking to the Daily Caller News Foundation, noted that there were similarities between the housing bubble in Canada and the current elevated housing costs in the U.S.

“Canada’s housing market, like ours in the U.S. and many others around the world, became severely overheated by excess liquidity infusions from central banks,” said Antoni. “That money creation drove down interest rates, making borrowing costs cheap and made larger mortgages more affordable. That goosed demand and sent home prices to unsustainable levels.”

Antoni also noted that the Federal Reserve owns a significant portfolio of bonds backed by mortgages, a key difference between the Canadian and American housing markets. Purchasing a large quantity of these so-called Mortgage-Backed Securities (MBS) drove demand for the underlying asset, namely mortgages, said Antoni.

However, since the Fed has been raising interest rates, if it sold these MBS holdings, it would stand to lose more than half a trillion dollars, according to Antoni. The Fed could certainly do this and offset the loss with stimulus, but doing so would certainly drive inflation, said Antoni.

“This bizarre circumstance is conspiring to keep home prices in the U.S. artificially high,” Antoni told the DCNF. “Canada’s crash is another datum point that the U.S. housing market is not in good shape, but it is not yet indicative of a collapse in U.S. home prices.”