‘Scarily overpriced’: Outsiders fear for Canada’s housing markets

Alarm bells

Observers outside Canada are ringing (loud) alarm bells (again) over inflated house prices.

Both Moody’s Analytics and The Economist issued fresh warnings within days of each other, each citing swollen household debt.

Moody’s Analytics, the rating agency’s sister group, pointed fingers specifically at Vancouver and Toronto, which have long been the focus of angst.

“The risks are less around the rapid house price appreciation per se than the fact that, relative to incomes, homes in Toronto and Vancouver are increasingly becoming unaffordable either to own or to rent,” Moody’s economist Paul Matsiras said in his report.

“Canadian household debt has risen faster than disposable income since 2011, greatly increasing the debt burden for consumers and the risks of a pullback in spending as interest rates rise.”

He warned of difficulties as the key measure of household debt to disposable income rises, now standing at almost 165 per cent.

“The song I’m Forever Blowing Bubbles, popularized by English soccer team West Ham United F.C., describes how extravagant dreams fade away once reality sets in,” Mr. Matsiras added.

“Increasingly, it seems this is being felt in Canada, which has seen some of the fastest house price growth in the world over the past year in cities such as Toronto and Vancouver.”

As for The Economist, its big fear is that the uncertain economy “makes inflated debt and housing values more dangerous.”

Indeed, homes are overvalued to the tune of 34 per cent against disposable income, as measured by the magazine’s indicators, it said, saying Canadian housing now appears “scarily overpriced.”.

Canadians can juggle those debts now, but an economic shock would spell trouble.

Economists at home don’t fear a housing crash. Nor does the Bank of Canada, although it’s keeping a close eye on the market The Economist, too, said we shouldn’t fear a U.S.-style meltdown because, even amid all this, Canadians are still “relatively sober,” with only about 5 per cent of mortgages deemed subprime and two-thirds are insured either by Canada Mortgage and Housing Corp. or private firms.

Not only that, we don’t use our properties “as ATMs” to borrow for what we spend. And our banks know what we’re borrowing because they operate on both the mortgage and home equity line of credit sides of things.

But while any economic slump might not mean doom, it would be “very unpleasant.”

Published by The Globe and Mail on October 19, 2015