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Mortgage calculatorCorrection in Toronto and Vancouver Real Estate Will Hurt Stocks

In sharp contrast to the U.S., the Canadian housing market has been on a tear over the last decade, especially in the Greater Toronto Area (GTA) and greater Vancouver area.

Unfortunately, many economists believe Canadian real estate has been growing too fast and created a bubble. If it bursts or even corrects, it could have a lasting, negative impact on the Canadian stock market.

While the broader Canadian economy has not been doing well, one of the bright spots has been the real estate market. Defying all odds, the Canadian housing market has been climbing higher and higher, reaching new sales and price records on an almost monthly basis.

To cool the red-hot growth, the federal government reduced the maximum amortization period from 35 years to 25 years, raised the minimum down payment for government-backed mortgages to 20%, and ensured the maximum insurable house price was limited to under $1.0 million. But that hasn’t helped much. Canadian housing prices continue to climb. The average price for a home in Canada climbed 5.4% year-over-year to $456,722.1

Much of that growth comes from two of Canada’s biggest metropolitan areas. In August, the average sale price for a property in Toronto increased 17.7% to $710,410.2 The average selling price for all residential properties in Vancouver soared 31.4% year-over-year to $933,100.3 To put those prices into context, it would take 23 years to save up for a down payment in Metro Vancouver.4

Suffice it to say, there are growing concerns about the health of Canada’s housing market. In fact, economic vulnerabilities caused by imbalances in Canada’s real estate market is one of the Bank of Canada’s greatest concerns. As it should be. You can tighten the mortgage rules all you like, but soaring property values and artificially low interest rates just lead to people borrowing more and taking on additional debt.

If the Canadian housing bubble pops or even corrects, it will seriously undermine Canada’s big banks, which are heavily exposed to the residential property market. Plunging real estate prices will be felt far beyond the financial sector. It will also impact home improvement stores and retailers. As we learned when the U.S. housing bubble burst in 2008, the ripples are felt everywhere.

With the oil market getting squeezed and the economy being propped up by real estate, a correction in housing prices could cripple Canadian households. While Canadian housing prices are at record highs, so too are Canadian debt loads.

A real estate correction means the average Canadian’s net worth would tank, but their debt level is fixed. The value of your house will drop but what you owe will stay the same. Falling housing prices would lead to a spike in loan losses from unsecured household debt and household loans secured by other collateral.

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There is more to the Canadian housing market than real estate. And when it comes to a correction, there is more to consider than just Canada’s big banks. In fact, if Canada’s real estate market pops or even experiences a serious correction, the country’s stock market will take a major hit.

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Sources:

  1. “Canadian home sales decline further in August” crea.ca, September 15, 2016; https://creastats.crea.ca/natl/index.htm.
  2. “GTA Realtors Release Monthly Resale Housing Market Figures,” Toronto Real Estate Board web site, September 7, 2016; https://www.trebhome.com/market_news/release_market_updates/news2016/nr_market_watch_0816.htm.
  3. “Metro Vancouver home sales return to typical August levels,” Real Estate Board of Greater Vancouver web site, September 2, 2016; https://www.rebgv.org/sites/default/files/8.%20REBGV%20Stats%20Pkg%20August%202016_0.pdf.
  4. Kershaw, P. and Minh, A., “Code Red: Rethinking Canadian Housing Policy,” Generation Squeeze web site, May 25, 2016; https://d3n8a8pro7vhmx.cloudfront.net/gensqueeze/pages/107/attachments/original/1464150906/Code_Red_Rethinking_Canadian_Housing_Policy_Final_2016-05-24.pdf?1464150906.