Canadian Real Estate: A Rapidly Inflating Bubble

I love Canada.

I say that without a hint of sarcasm.  I speak for a majority of Americans here – jokes about hockey, curling, and freezing temperatures aside, we really do want Canada to succeed.

Your neighbors to the south (The United States) recently went through some incredibly hard times in our real estate market – our real estate crash was quite difficult, and even today, in an environment of increasing home values, our prices are still 25% below the peak seven years back.

That’s why we read our friend Nelson’s (of Financial Uproar fame) post on the coming Canadian real estate crash and became increasingly nervous.

This Time It’s Different (The Canadian Real Estate Edition!)

Dow 40,000 anyone?

The phrase “this time it’s different” was finally converted to book title form in 2009, when [amazon-product text=”Carmen Reinhart and Kenneth Rogoff” type=”text”]0691152640[/amazon-product] wrote the eponymous book about bubbles over the previous 8 centuries. (Yes, that Reinhart and Rogoff!).  They, of course, didn’t coin the phrase – but the fact that it’s now immortalized in a book title doesn’t change the common thread running through every single example – the exhortation to buy now (or be priced out!).  Anyone who tried to dismiss asset prices running away from fundamentals would be told “this time is different – the game has changed” or “the fundamentals don’t matter”.

Well, Canadians may think that “this time is different”, but, speaking from the perspective of someone alive during 2005 in the United States (and a person deeply obsessed with teasing important data out of large data-sets!) allow me to state:

Canada, your current real estate statistics are even worse than the US at the 2006 peak.

Seriously – you’ll get a kick out of this September 2005 report on housing and the mortgage markets by the Mortgage Bankers Association.

Now read this list of Canadian articles.  (Or trust me: the summary: “this time it’s different!”).

Growing Signs of Mania in Real Estate Purchases

Yes, we get it – the plural of anecdotes is not ‘data’.  When you accidentally come across a lot of people behaving in a similar manner, there is usually some selection bias at hand.

Still, a large number of our Canadian blogger friends have recently purchased real estate – condos, town homes, and single family homes.  We imagine that the personal finance-sphere tends to be more conservative financially than the rest of Canada… so, at risk of losing all credibility in the anecdote/data wars – we feel that conservative personal finance types diving headfirst into a rapidly appreciating market doesn’t bode well for the market in general.

‘Mania’ though?  Again, I’m not Canadian (that’s a lie – I have distant roots in Newfoundland!).  All I can do is show you Canadian real estate stacked up against United States real estate of recent vintage.  Here’s that mania I was talking about (both indices have been normalized to January 2000 = 100, so ‘200’ means ‘doubled in price’).  Pay attention to the yellow line – that’s the maximum 2000-relative level American real estate hit.

Case Shiller 20 City versus Teranet 11 City US vs. Canada Housing Indices

Sources: Case-Shiller Seasonally Adjusted 20 City Composite from St. Louis Fed, Teranet 11 City Composite from Teranet and National Bank of Canada

For the record, the American high water mark was set in May 2006, at 205.4577 (105% increase from Jan 2000).  As of March, Canada is at 225.6550.

The Most Important Chart You’ll View Today – Consumer Debt vs. GDP in Canada and the United States

Yes, I get the knock on the United States – we stretched too far with our debt loads, and we bought way more house than we could afford.  I mean, we should have seen it coming… right?

For the record, we agree 100% with that assessment – and the United States has de-leveraged quite a bit since the bubble burst 7 years ago.  So, Canada – you’re right.  The United States was stretched too far, and we did have it coming.

So, can that teach us anything about Canada?  Well, not as simply as you would expect, unfortunately.  Using a combination of Statistics Canada data and US Data we pulled from FRED, we were able to synthesize some very interesting data on consumer debt as a percentage of GDP.  (If there was an easier way, please let your friend PK know!).

Since it took us 35 minutes to put it together, we’ve packaged it here to make your own number crunching more efficient: consumer_debt_to_gdp_us_canada

Consumer debt and mortgages to GDP in Canada and the United States

Sources: The US data is pretty straight forward, grab it from the New York Federal Reserve.  GDP can be found on FRED.  To make the Canada data, get GDP from Stats Canada, and get household debt to GDP.  For consumer mortgage debt, get that from this Statistics Canada table.

Again, note that I have plotted the US high water marks, in dark grey and black.  Note that Canada has blown through the worst excesses of the United States.  Finally… note how quickly the de-leveraging occurred to bring US debt ratios back to 2003/2004 levels.

Here are the highlights:

  • US High Water Household Debt to GDP: 89.99%
  • US High Water Household Mortgage Debt to GDP: 65.74%
  • Q4 2012 Canada Household Debt to GDP: 94.49%
  • Q4 2012 Canada Household Mortgage Debt to GDP: 66.93%

I agree the US was over-leveraged.  But look at those numbers – Canada has now surpassed the peak leverage ratios of the United States.

The Song Remains the Same

Been reading Don’t Quit Your Day Job for a while?  You probably know we’re not the biggest fans of John Maynard Keynes.  Still, the man is quotable!

“Markets can remain irrational a lot longer than you and I can remain solvent.” – JMK

Smart quote, but what does it mean?  Look at the quote by a far more famous man – Jesus, in Matthew 24:36 (hey, How I Met Your Mother did it!):

“But of that day and hour knows no man, no, not the angels of heaven, but my Father only.”

When will the bubble pop?  No one can give you an exact date, and the straw that breaks the Canadian camel’s back can only be found in retrospect.  No one can tell you how quickly it will deflate either – soft landing?  Flat for years?  Quick rebound?

If I knew, well… yes, I wouldn’t tell you about it.  Still, this looks very frothy to me (as does Bay Area Real Estate, as does the US Stock Market, but both not as bad as Canadian Real Estate).  If you are exposed to Canadian real estate in any capacity, please read our friend Nelson’s article.

And please be careful.  This time isn’t different.


  1. says

    Hey, I totally agree with you and Nelson. Even before all of this happened back around 2006 when I got a job and thought I might one day buy a condo or a home, I checked out prices and freaked out.

    Using the 2X my income factor (it would have been $120,000), there was no way I could have purchased any kind of home back when I first started working for $120K in Toronto.

    Most homes were at the $300,000 mark, and now they’ve risen to $500,000 or higher.

    People I know are telling me: I HAVE TO GET IN BEFORE IT GETS TOO EXPENSIVE!

    This kind of thinking leads to real estate frenzy and mania, and I’m becoming even more convinced that this bubble will burst spectacularly.

    • says

      Nah, don’t agree with me – I don’t know enough of the micro-situation to be very intelligent on this point. Take Nelson’s word – all I can do is compare Canada today and the US 7 years ago.

      But, yeah – “Buy before it’s too late!”. Once that frenzy is going on? People start buying because they assume some greater fool will be able to buy later. Never a good idea to assume a fool will make you whole, eh?

  2. says

    I’m not sure about whether there is really a bubble. I think when the
    market crashed, the prices went from too high to too low. The panic of
    the bubble popping caused prices to go from way overvalued to somewhat
    undervalued. Now, you’re seeing a frenzy because the market is
    returning to more normal levels. It will probably take some time to
    flush out and will likely see some ups and downs, but I think over the
    next few years, you’ll see things return to a more level market.

    • says

      You mean in the United States? Maybe – but even at current levels you’re detached from the long run “match inflation” value trend that real estate matches when you go back farther than 2000. Of course, 50% increases since 2000 are much better than 105% increases in 7 years, assuming 2000 was a fair value.

      The Bay Area, specifically, is right around its 2006 peak. I can’t speak too much towards the country in general, but Cameron should be able to write a few real estate articles soon.

    • says


      “And, in the news today, massive property value slides caused by a follow-up article from a marginally interesting blog. More at 10!”

  3. krantcents says

    The major contributing factor to the U.S. bubble was out of control credit. Real estate values were increasing because of demand from people who could only get the homes based on “no income verification” loans. Has Canada relaxed credit standards?

    • says

      Maybe so – certainly a combination of ill effects we’ll be arguing about for some time (and comparing it to other situations!). Canada has changed their standards quite a bit – believe it or not, for the better: requiring minimum 5% down payments and 25 year amortization maximum. I didn’t find, offhand, any loosening – you’d have to ask some of our Canadian guests.

  4. says

    It would be interesting to see how to make money from the bubble popping. I know some people made a lot of money when the U.S. bubble popped. Of course, if you bet on the bubble popping there is always the risk that the bubble will not pop soon enough.

    • says

      Definitely review Nelson’s article on that topic – near the end he goes into detail on his best methods to short the market, if you’re in agreement.

      You’re right on the timing – even if the bubble pops, we can’t possibly know when. If you agree with the theory, that’s a chance you take.

  5. says

    In reality most of the loosening/tightening these days comes from CMHC, the government mortgage insurer that along with 2 private insurers – which are themselves 90% government-guaranteed – dominate the origination market, outside of very subprime + very jumbo ($1m+, a recent limit which has hurt the out-of-control Vancouver market).

    Seems like the market has a good month in terms of volumes/pricing when CMHC tells banks “I will insure anything you can send my way” and not-so-good months when CMHC says “please only send me X number of mortgages this month.”

    The process of how that works is a bit murky to me vs., say, the process of U.S. banks selling conforming mortgages to the GSEs. In Canada, there is a “cap” on the amount of notional exposure at CMHC and even though CMHC is below that cap, I think it serves essentially as a way for politicians or bureaucrats in Canada to keep CMHC from doing massive volumes of loans every month. So the CMHC process of telling each bank how many mortgages to send over every month has something to do with the cap, but it gets opaque to anyone outside the industry exactly how this works.

    Also it is still common to get well up into the mid/high 90s in terms of true LTV at origination through a personal (bank) loan on top of the insured mortgage. Before the “tightening” you speak of, which hit last summer/fall, it was possible to obtain a home with very little house money down.

    Not-a-bubble proclaimers usually harp on a few things:

    1) Canadian net worths are not as levered as in the U.S. (true because of equity in housing due to the price runup and Canada’s stock market is even more frothy than its U.S. counterpart)

    2) tight supply/demand in major bubble areas (true but can reverse quickly if people anticipate falling prices)

    3) “reasonable” debt-service costs to incomes – implying that the regional Toronto/Vancouver economies are simply extremely strong so people can afford large mortgages. My problems with this argument: I don’t think debt-service cost to income of 35%+ is reasonable – and this is with Canadian interest rates at 1%. Unlike in the U.S. Canadian mortgages are ARMs (mostly 5/1) not 30-year fixed. Therefore there is huge underlying risk of benchmark rates normalizing to say 5% and mortgage rates going from 4% to 8%.

    4) Better fundamentals than the U.S. due to faster population growth. The growth is from immigration, as Canada’s immigration rate as % of existing population is significantly higher than the U.S. In addition some of these immigrants come from China/SE Asia and of these, a subset is wealthy enough to afford expensive housing. British Columbia is particularly attractive to them. While this certainly helps the housing market, I doubt Chinese would like to buy into falling markets, and I am also skeptical that there are SO MANY wealthy Asians moving to/”investing” in Canadian housing that they could be a significant % of total homeowners, although they may currently be a decent % of buyers on the market today.

    5) Toronto and Vancouver are mature, prosperous, dense cities and should have similar housing valuations as NYC and SF Bay Area. That’s fine, except if you look at the numbers both places are significantly more expensive than their U.S. “counterparts” despite having lower household incomes.

    Vancouver has an economy and climate similar to Portland/Seattle – incomes worse than Seattle but better than Portland – yet homes in the city limits are 2-3x the price, and for a similar-sized home in the city limits more like 5x (Vancouver has a lot more condos, which tend to be smaller). In the burbs Vancouver is something like 2.5-3x Portland and double Seattle.

    Toronto has an economy and climate very comparable to Chicago – wages and family incomes are the same in the metro areas – yet a single-family house is 3x in greater Toronto vs. Chicagoland. Inside the city limits the discrepancy widens to 4x.

    I will say that a small reason for a price premium in Canada is that Canadian cities are significantly safer (in terms of crimes-of-opportunity and property crimes) than nearly all similarly-sized U.S. cities, and similar to very safe U.S. cities like Portland and Seattle.

    On the flip side, the climates are significantly colder which is a reason against a premium. There are many other issues to consider when coming to fundamental valuations (diversity/underlying strength of economies, tax rates, rental yields, trajectory of rents, currency under/over-valuation, etc.). On balance, in my subjective view U.S. housing overall is probably fair-priced with significant pockets of both under- and over-pricing. Canada, even in “cheaper” cities like Montreal and in Alberta, is expensive and Vancouver/Toronto metros are obscene.

    • says

      I apologize for the late reply – I was in Boston with only a cell phone, and I wanted to respond to your detailed comment… in, well, detail.

      On your opening narrative – that, unfortunately, sounds bit too similar to our own GSEs – Fannie Mae and Freddie Mac. The Treasury had to have some new powers granted to seize the two GSEs once the bubble peaked here – due to them buying so many ‘iffy’ mortgages. I guess the main article people point to here is the 1999 New York Times article about FNMA and FMCC. Note – it didn’t end well.

      1) I don’t know how much deeper down the rabbit hole I want to travel on this topic (haha, I’m out of my element!), but I did see a piece on that. Regardless, losing 90% of net worth versus 60% – I fair to see too much silver lining on that one.

      2) Yeah, that sounds like a dodge – most RE bubbles have tight supply. Buying a house in, say, Las Vegas in late 2005 was a “bid before seeing because it’ll be gone in 24 hours” ordeal.

      3) Hmm – I think the fact that RE debt to GDP is higher than it was in the US at the peak of our bubble should shoot this one down directly. Yes, Canada has a bit higher home ownership rate than we did at our peak (offhand, I want to say the US hit 67 or 68%), but to declare that this somehow immunizes Canada from all consequences strikes me as… grasping at straws.

      4) It also assumes perpetual Chinese growth. There has historically been a point when a liberalizing economy slows down – China can’t mint record numbers of rich forever.

      5) Vancouver, specifically, has been scary to me. I can see it acting more like a Bay Area due to the geographic realities – you know, hard to grow to the west, north, or east – but I suppose people can buy to the south. I would love to see someone defend the pricing of Vancouver, heh. I’m worried Vancouver will be in trouble.

      On the weather point – pretty funny. California can definitely fall back on that to some degree. I like to joke to my Italian friends that the Bay Area doesn’t have a Mediterranean Climate – the Mediterranean has a Bay Arean climate.

      It’s a joke that doesn’t get many laughs!

      • says

        While Vancouver geography is similar to the Bay Area, it doesn’t have a powerhouse tech economy to provide jobs + cash. Just some Asian “investors” and a government that will guarantee very high LTV loans with high debt-service ratios. Transit system is pretty good there though – I think ~19% of commuters use transit – certainly aided by high property valuations leading to good tax revenues.

        • says

          I’ve lived in the Bay Area and Los Angeles, and the Bay Area transit system kills LA, haha. Traffic is still absolutely brutal here – 1/3 to 1/2 speed limit during rush hour is the norm. Property taxes are similar – 1.2-1.4%, and kept low due to Prop 13 (which in CA means all our other taxes are massive).

  6. says

    BTW most Canadians I’ve talked to have been very stubborn+defensive about the sustainability and fundamental soundness of their housing prices and housing market. I remember this same attitude from many Americans, including myself for awhile (change my mind in late 2005/early 2006). I have also encountered this with Koreans (very high prices in the Seoul area, with prices recently coming down triggering huge government efforts to reflate the market) and have read many books/articles with Japanese conveying this sentiment in the late 80s in Tokyo and Osaka areas.

    • says

      You changed your mind at the exact right time. It’s one of those ‘Wisdom of Crowds’ things – i.e., Crowds have no wisdom. Enough people arguing emotionally is a pretty good sign you’re onto… something. I’m sure if you went back to the Tulip Bubble, or the Beanie Baby bubble you’d see the same thing – “Ha, you’re not buying? You’re going to miss the gains, sucka!”

      • says

        Yes my friend’s mom said the same thing during the Beanie Baby bubble. That said, housing does at least provide some current yield (imputed rent). However due to property taxes – I believe average ~1.2% in Canada – plus interest rates on a high-LTV loan wipe a lot of that out, since rental yields up there are pretty low now (see Nelson’s post).

        • says

          Could be a YMMV thing – when I bought here, you were looking at 160x – 200x rents in an average house in Santa Clara County (and coincidentally my neighborhood). Now you’re closer to 300 in my neighborhood – it’s getting a bit out of control now. My house has appreciated at double digit rates for 2 years (and I don’t know what’s going to happen now that mortgage rates have popped).

  7. The College Investor says

    I can see that happening. Their economy recovered before ours did, but cheap lending and banking have raised prices. May be time for stagnation followed by a fall.

    • says

      Right – we have no idea what a deflating bubble has to look like. It could be Japan – not declines, but a long (LONG) time of zero growth.

  8. ProfitsOn says

    In the past, bull moves have lasted for about 10 years (1964/1974, 1980/1989) and have extended for 55%/60% top/bottom.

    • says

      Technically analyzing it, (and I know the numbers are a few months old), where would you put the ‘mania’ point, and what point do you think might be impossible to crest?

  9. wealthinformatics says

    I have not looked at Canadian real estate market so not much to say there. But isn’t one of the problem with the last bubble in the US caused by irresponsible lending (and of course borrowing)? What is the trend on lending in Canadian markets? Are people borrowing beyond their means or are they taking on high but affordable debt?

    • says

      Neither have I – this is as close as I get to trolling, I suppose. Thing is, if I believed it was a great investment I’d be figuring out a way to invest into it from the Bay Area – instead of trying to figure out if we’ve got a domino situation lining up.

  10. Bodo says

    Well you are a little late to this party. People have fretted over this bubble for a long time. So long in fact that many rules were introduced in the last few years to tighten who can jump into real estate in Canada and how leveraged. We have already greatly reduced the numbers of over-leveraged buyers.

    It has really no characteristics of a bubble at this point and no comparison to the American experience of a few years ago. Sub-prime mortgages are a cottage industry by comparison. Our prices are rising in a good economy, not in an economy rushing into a deep recession and stock market crash.

    Inventory is low in most markets, employment is rising, and people need to live somewhere. Try and find a home in Toronto and you will find out why prices are high. Our situation is more like oil at $120 – a bit pricey, ready to plateau or pull back a bit maybe, but not far off true value unless some unforeseen calamity hits – oil isn’t going back to $20. There are sectors that may have bubble potential such as new condos which are often heavily affected by speculators rather than dwellers. But even those are subject to rules that stop impulse buying unless you have the money to lose.

    On bubbles in general. There is a bubble bubble. Everyone sees a bubble everywhere and lord knows you can find a graph or stat to back it up. The problem is bubbles are unforeseen and emotional. Someone always “predicts” them, because many “analysts” predict doom every day in financial advice articles so they can point to those predictions when one finally pans out and make money of their prediction skills.

    • says

      Haha, if it’s a party it’s not very well attended!

      Sincerely, if you are exposed to Canadian Real Estate, I wish you luck – but the two graphs I tossed up above certainly scream bubble to me. You’re looking at numbers that are not just record highs in Canada, but also numbers which surpass the Irrational Exuberance in the United States Real Estate Markets of just 7 years ago.

      I think you’re backwards on the ‘Bubbles in General’. Sometimes it’s possible to point to a bubble when you’re in it, but the difficulty is making money on them, or calling the peak. Don’t forget that ‘Irrational Exuberance’ is a quote from 1996 about the stock markets – which ran up for 3-4 more years!

      • Bodo says

        Well up in the great white north the bubble party started some time ago and most of us have showed up.

        Yes, you chose graphs that scream. But the US comparison you make is with an economy entering an extremely deep recession with high persistent unemployment, a deep sell-off in securities, and policies allowing for widespread sub-prime mortgages. If you assume that for Canada in the next 2-3 years, who could disagree with you?

        However we got warned and scared about bubbles starting 2 years ago, and have become anything but exuberant. We expect a pull-back and know the expansion in prices is dead for many years to come. This has largely squashed the market into a holding pattern for a long time. Prices are steady or rising with inflation, but volume is way down. Some individuals will lose homes as rates rise, but the evidence of a widespread danger is lacking. Even the reckless have been forced into stringent new rules in the last couple years. People who bought in before that can afford a 20% price hit and still break even.

        As I mentioned there are bubble candidates, like the Toronto condo market which has been internationally commoditized to some extent. Whether it can take the larger market down significantly with it is under discussion.

        • says

          “If you assume that for Canada in the next 2-3 years, who could disagree with you? ” – well, at least one person, it seems (ha). Don’t forget that the US Economy at the time was on an absolute tear, and people were saying much of the same things Canadaians are saying now – that’s why I made the comparison. I recognize our long recession, and our recovery doldrums – but that doesn’t take away from the comparison. I’m literally saying something like that could happen in the North.

          From my perspective, as a resident of the Bay Area (a place where real estate has now reflated pretty close to the 2006 peak), all of the Canadian mortgage adjustments may mess around at the margins, but I doubt it’s enough to stem the tide. I don’t know how or when something will happen, but I do think that roughly 7% annual gains on an asset class nationwide is too high; it outstrips inflation by too much.

          I know some places in Canada are very attractive due to the confluence of good jobs and smart immigration policies (I’m thinking Vancouver/Toronto here), but I think both Vancouver and my home in the Bay Area will be hit quite a bit if China slows down. Since we’re seeing some cracks in their growth now, I’d feel safest protecting myself a bit. If you followed Nelson’s article (you should read it if you have a chance) you can use options as cheap insurance on a falling market – worst case, you’ve got some expiring options.

          • Robert says

            I think we have a common ground on your SF comparison. Projecting stagnant price growth in Canadian RE over the next decade is fairly mainstream now. No one will be surprised at flat prices 7 years out, whether from plateau or after a dip. we just don’t expect price jumps any more. 2 – years ago we had some such fever.

            (I have assumed San Francisco is the bay to which you refer and am curious if I am correct )

          • says

            You nailed it – The Census Bureau calls it 11 counties, but I consider it:

            Santa Clara County
            San Mateo County
            Alameda County
            San Francisco County (Hilariously, just San Francisco – South San Francisco is San Mateo County)
            Maybe Marin County

            I’ll have a piece on it soon – I know my way around US data better than Canada, heh.

          • Bodo/Robert says

            Sometimes it is good to flog a dead horse because they feel I still declare ano pain. I saw a Bloomberg article today that reminded me of this discussion. Remember I started off saying your main problem with the article is being late to the party (extremely late IMHO). This new article is interesting because it only indirectly deals with housing. The Canadian banking sector has had to deal with a housing slowdown for 4 years now and has made many adjustments. We can debate where Canadian house prices are going next, but surely a 4 year slow-down spiral defies the bubble imagery! Even if we find after 7 years we have taken that long to drop 20% or more, it just ain’t worthy of bubble talk.

            I am still declaring a bubble bubble.


          • says

            Heh, a bubble bubble? Nice.

            I don’t know if I’d characterize Canada’s last 4-5 years as a pause – there was a bit of a drop, sure, but it wasn’t sustained, and YoY you’ve seen price increases since the beginning of 2009 (I’m looking at the 11-City composite here). As bad as the Bay Area? No, definitely not 20% YoY, but I’m sure if you dove into some cities (cough, Vancouver) you’d see similar returns.

            I’ll root for an orderly return to fundamentals, absolutely – and I don’t have any skin in the game (unlike Nelson, unless you count on a global contagion or something similar) in Canada. In the Bay Area, I’m more certain of the frothy nature of the current market, but I couldn’t tell you when the piper will be paid, or what will cause him to demand payment. For now, I’ll just watch the overbids!