Canadian Real Estate: Ready To Pop?

Some financial experts say that Canada has one of the most overvalued real estate markets in the world. Although, there are many others who remain in denial and have become numb to the thought that a correction in the market could ever surface. There are individuals who believe that the real estate market in Canada will continue to experience its never-ending success ride and that this bubble is never going to pop. Canada Mortgage and Housing Corp. announced just this week that an overvaluation had been detected within a number of different cities across Canada that it monitors.


“While we see weak evidence of problematic conditions for Canada, we do detect moderate evidence of overvaluation. This means that house prices are higher than levels that can be supported by fundamental factors such as income growth and population growth,” according to CMHC chief economist Bob Dugan.


Now a big U.S. bank is also warning that Canada's housing market is inching toward instability thanks to the ongoing low interest rates. The report came from Bank of America Merrill Lynch, by Emanuella Enenajor, but it didn't warn of a potential crash. “House prices have [accelerated] along with mortgage credit outstanding. This is a result of a low-rate policy both domestically and abroad,” said Enenajor. The artificially low interest rates are contributing to the problem because there isn't enough supply in the market in order to satisfy demand. No doubt there are many people who are likely locking themselves into mortgages and putting houses on credit that they probably cannot afford and possibly might not have made the decision to go with had the market not provided the low interest opportunity for them.


Enenajor predicts that as the Fed gradually exits its policy of low interest rates (if it ever does), then this could offer a correction in the market. However, she did say that the Bank of Canada would be unlikely to raise rates over the next few years and she expects that housing prices will continue to accelerate in the meantime. Currently the average price of a detached home in metro Vancouver is about $1.8 million and the prices are rising at a rate of roughly 23 per cent every year. This also makes it difficult for those who are on a fixed income and who will continue to see rising property tax rates as a result of the ongoing low-interest-rate-fueled-real-estate-bubble mania.


Financial experts Mike Maloney and Harry Dent predict that possible coming deflation in the market is likely going to kill real estate investors and contribute to a correction. As it stands now the Canadian market is being largely driven by artificial factors, rather than economic fundamentals, and so it's uncertain as to when or what exactly will trigger the correction.







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