I kind of enjoy reading the blog of former MP Garth Turner, called Greater Fool. The message is pretty consistent, Garth is convinced that Canada is in a real estate bubble. When I first started reading the blog, I have to admit, I thought Garth was kind of a crackpot. Canada is different than our American neighbors. We didn’t give out as many risky subprime loans. Our underlying economy is better. Our banking system has regulations that don’t let them get as over levered as the Americans. Things are better in Canada.
According to this report from Demographia, (go to page 11) Canada has 5 markets that the authors deem as severely unaffordable. They are Vancouver, Victoria, Abbotsford, Kelowna and Toronto. We also have 5 markets the authors deem as “seriously unaffordable” and 13 that are “moderately unaffordable”. We only have 3 markets the report deems affordable.
Meanwhile the U.S. has 156 out of 175 of their markets listed as either affordable or moderately unaffordable. When you compare the two markets, it’s pretty clear which one is cheaper. Yet what about the rest of the world?
Nationally, Canada’s real estate market is downright cheap compared to other parts of the world. As a country, Canada is much more affordable than Australia, UK, or New Zealand and is equally as affordable as Ireland. Sure, we’re more expensive than the U.S., but the world is larger than just North America. Granted, the report I found doesn’t look at the whole world, so the source could be better.
Saying that, Garth does bring up some points that make you go hmm. Debt to income levels have risen to 145%. Even though the government has recently tightened mortgage rules a bit, record low interest rates and extended amortization periods have let people qualify for more mortgage than ever before. The combining of the GST and PST in Ontario and BC will increase the tax hit when someone buys a new home there. When you look at charts for some of Canada’s more frothy markets, they look an awful lot like the U.S. charts circa 2006. Real estate prices across the country rose almost 20% in 2009, during one of the worst recessions in memory.
I don’t know about you guys, but I’m a little scared. Whenever markets move to an irrational high, it’s only a matter of time before they sell off. I certainly wouldn’t be buying in any of Canada’s major markets right now. Best case scenario is that we have a period of stagnant growth in prices to let incomes catch up. Worst case? Just look across the border.