This spring there was a city in North America where the average price for a detached house was $1.2 million, and that was in … Canada?
Last month, the insane housing prices in Toronto slowed, which had Canadian national news outlets leading with headlines such as, “Toronto Housing Bubble ‘Has Expired And Gone To Meet Its Maker’”. Still, the numbers show that in the greater Toronto area housing sales of all types were down last month (a dramatic 40.7% in July), but prices were still 5.1% higher than this time one year ago (1). The drop in housing sales–again a dramatic one–has Canadians concerned that a nation-wide bubble burst is a lot closer (read: happening now) than previously anticipated.
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*The numbers in this section are based on real housing prices, which take into account incomes, mortgage rates and inflation.
Through the end of last year, housing prices in the U.S. were still around 13% away from the peak experienced in 2006. Having hit the bottom in 2012 (a bottom that took 6 years to reach), the average U.S. home price dropped 27% after the bubble burst (2). That period marked a long and painful decrease in U.S. housing prices. While the U.S. housing price bubble exploded in 2006 and fell for 6 years, Canada’s housing prices dropped only 7% and found the bottom in less than a year. Needless to say, Canadian housing was not as affected by the U.S. recession as was U.S. housing. With a macro view of the recession, you could make links between U.S. houses as assets and the financial institutions that relied on them before going belly up and unraveling the worst downturn the U.S. had seen since the Great Depression. With that view, no one would expect Canadian housing to have experienced a pricing drop as drastic (and as long) as what happened in the U.S. However, while the U.S. has failed to reach real prices equal to the peak in 2006, Canadian housing prices have climbed from 2006 numbers by a staggering 56%. Since 2006, Canadian housing prices took a short-lived dip and then climbed and climbed and climbed. The bubble expanded and expanded and expanded. To add to the uneasiness of a looming burst, a Reuters article this summer pointed out, “Canada household debt-to-income ratio hovers near record highs.” Yikes.
All signs point to an eventual bubble burst in the Canadian housing prices. August brought about July housing numbers that are showing the out-of-control rises in prices and sales in Canadian markets may be petering out and the bubble may be reaching its elasticity limit.