Rosenberg says Canada’s housing market conditions are worse than in the U.S. before its previous crisis

Bay Street expert David Rosenberg points to signs that conditions in certain hottest real estate markets in Canada are even worse than when he warned about the U.S. subprime mortgage crisis almost 20 years ago.

According to the chief economist and strategist at Rosenberg Research, by almost any metric he monitors, financial conditions in case of Toronto and Vancouver housing markets should be strong reasons for policymakers to ring the alarm.

“I’m looking at all the metrics reported when I warned about the housing bubble in 2005 and 2006 in the U.S.: home price-to-rent ratios, home price-to-income ratios, the level of exposure for the household sector to residential real estate on their balance sheet,” – he noted.

“And I see that the results in Canada, on all the metrics, are even higher today than they were at the peak of the U.S. bubble 13 years ago.”

Such warnings followed a recent report showing that a combination of extremely low interest rates and a strong demand for detached houses during the pandemic pushed home prices in Canada’s two largest markets significantly higher. The average housing price in Toronto saw an annual increase by 15% to $1,045,488 last month. Meanwhile, Vancouver reported an almost 7% gain to $1,084,000.

The increased activity was also seen in outlying areas, with Toronto suburbs like Brampton and Oshawa showing double-digit price increases, as buyers searched for larger properties in order to work from home during the pandemic.

The significant market activity was inconsistent with the forecasts of falling prices caused by the economic damage from COVID-19. Recently, Canada Mortgage and Housing Corp. tried to explain how it missed the signs and predicted a 9-18% prices drop in mid-2020.

Rosenberg has been quite sure that the market is in a bubble. He compares it to the time when he warned the Americans about a similar crisis more than 15 years ago.

“It’s like I’m back in 2006, listening to former Federal Reserve Chair Ben Bernanke once again, when he told everyone not to worry. He said the prices would not go down nationally. When I was a chief economist at Merrill Lynch at that moment, I was laughed out of meetings warning about a housing bubble”, – he added.

However, Rosenberg can’t specify when exactly the bubble may burst, saying such conditions could persist for years before bursting.

“We are in a housing bubble. Some might ask what can make it burst or whether it will burst at all. Well, at some point, it will,” – he said.

“Bubbles can remain here for years. Just take a look at the dot-com bubble or 1929 for the stock market. Nevertheless, we are in a very unstable position, when home prices are growing much faster than the underlying fundamentals.”

Although historically low interest rates helped support the real estate market pushing the Canadian economy through the recovery, the bond market may not be so eager to follow the central bank’s supportive approach. Yields on a Canadian five-year bond, which affect fixed mortgage rates directly, have been growing and reaching their highest level since February 2020.

All prices declines in the sector of residential housing may lead to drastic consequences for the economy, Rosenberg says. He warns that a prices drop could push Canada into recession.

“In case real estate prices go down, the influence on Canadian balance sheets would be so terrible that the second-round effect on spending would lead us into that recession that Stephen Poloz said we were avoiding by letting this bubble appear,” – he said.

And again and again – we are warning our readers that we are watching real estate and mortgage market very closely for more than 20 years and publishing all sorts of opinions and predictions from reliable sources, but we encourage our readers to take all forecasts with the grain of salt, since situation might change and predictions get adjusted. If you need a place to live (not an investment property, which is totally different ball game) and mentally and financially ready – it is always a good time to purchase a home!