As debate about the stability of the Canadian housing market continues to swirl, a new report has come down firmly on the side of the bubble believers.
Rising debt levels, falling personal savings rates and house prices that have become detached from rents signal that a significant correction is on its way, according to Euro Pacific Canada, the Toronto-based branch of the global brokerage headed by Peter Schiff, who gained notoriety for predicting the U.S. housing meltdown. (Schiff also served as economic consultant the the failed 2008 presidential campaign of libertarian-leaning Ron Paul.)
Despite the recent efforts of regulators to cool the Canadian housing market, the report, released on Thursday, identifies several risk factors that bear a frightening resemblance to the factors that preceded the mortgage meltdown south of the border.
In addition to high levels of household debt, the report draws attention to the recent growth in Home Equity Lines of Credit (HELOCs) as a particular concern. Secured against the equity of a borrower’s home and made more attractive by bargain basement interest rates, these loans have exploded in popularity in recent years, up 170 per cent since 2001, the report notes.
While Canadian banks have tightened the strings on risky mortgages, they are continuing to stand behind HELOCs “even after this type of lending helped inflate the U.S. housing bubble,” the report warns.
According to Dan Simon, an investment consultant for Euro Pacific Canada, HELOCs are akin to “using your home a an ATM.” But the real issue, he said, is that “What most people tend to do with the money they pull out of their home is buy consumer-related goods.”
“In essence, it’s increasing consumer debt levels, and that’s what we see as a significant problem in Canada — the rising consumer debt levels,” he said.
The reason for this concern, he says, is what less home equity — and more debt — would mean in the event of a sizeable drop in house prices, which have continued to climb even as the world economy remains on shaky footing.
“Given the extreme run-up in housing prices, there’s a real chance that housing prices can fall back significantly in Canada. That would wipe out the equity people have in their homes,” he said.
After warning about the dangers of HELOCs, The Office of the Superintendent of Financial Institutions said in June that it plans to limit the maximum loan-to-value to 65 per cent, down from 80 per cent.
But Simon equates this and other recent regulatory moves with “trying to close the barn door after the cattle’s gotten out.”
“I definitely feel that there will be a correction in the Canadian housing market,” he said.
Simon predicts that average prices could drop by between 20 and 30 per cent — pointing to the disconnect between house prices and rents in major Canadian cities as a prime indicator of this coming crash.
Based on the recent experience in the U.S., where house prices spiked way above rents at the height of the housing bubble, “We expect that there would be some sort of correction that would bring the housing prices here more in line with rents,” he said.
Not all economists are convinced that these indicators foretell such a dramatic slide, however.
Aron Gampel, deputy chief economist for Scotiabank says regulators are taking strides to avoid a significant correction in housing prices, which could not occur without a significant “trigger,” such as a rapid rise in interest rates, an unlikely scenario.
“The U.S. correction, and ones we’ve seen in other countries occurred during a recession. It was triggered by a financial crisis when the market was already in correction mode,” he said.
“We still have fairly vibrant housing markets here, because the economy is still moving ahead, and we’re still adding jobs, we’re still generating income gains. So I don’t see signs here to expect a significant correction of that magnitude.”
Gampel predicts that prices will come off by about 10 per cent over the next few years, driven by the erosion in affordability in markets like Vancouver and Toronto.
Also on HuffPost:
- Canadian Household Debt By Region
- 6. Atlantic Canada: $69,300
- 5. Quebec: $78,900
- 4. Manitoba & Saskatchewan: $84,900
- 3. Ontario: $124,700
- 2. British Columbia: $155,500
- 1. Alberta: $157,700
WHAT $350,000 WILL BUY YOU IN THESE CANADIAN MARKETS
St. John's, Nfld. -- $125 Per Square Foot
This four-bedroom, two-bathroom custom-built bungalow in St. John's West End neighbourhood boasts hardwood floors, a covered sundeck and an oversized yard. With an asking price of $349,900 and 2,750 square feet of livable space, this spacious home costs approximately $125 per square foot.
Trois Rivieres, Que. -- $127 Per Square Foot
This five-bedroom, two-and-a-half bathroom house features a double-width garage and a heated inground pool. At approximately 2,750 square feet and an asking price of $349,900, it works out to around $127 per square foot.
Winnipeg -- $160 Per Square Foot
This spacious split-level home in southeast Winnipeg features four bedrooms and three baths, a stone fireplace and a jazuzzi in the master bedroom. It sits on a 142-foot-long, pie-shaped lot. At 2,182 square feet and a $349,900 asking price, it works out to around $160 per square foot. <strong>CORRECTION:</strong> <em>An earlier version of this slide incorrectly listed the price-per-square foot as $600</em>.
Red Deer, Alta. -- $248 Per Square Foot
This five-bedroom, three-bath home features vaulted ceilings, a fireplace and a massive walk-in closet in the master bedroom. At 1,408 square feet -- this average-sized house on the prairie works out to $248 per square foot.
Montreal -- $250 Per Square Foot
This two-story townhouse condo just east of downtown Montreal features three bedrooms and two baths, cherry wood floors and a terrace. At 1,400 square feet and an asking price of $349,000, this condo works out to $250 per square foot.
Burlington, Ont. -- $388 Per Square Foot
This cozy bungalow on the edges of the Greater Toronto Area features four bedrooms, two baths and a long, 175-foot lot. Highlights include a granite countertop and newly finished hardwood floors. At a snug 900 square feet, this house is going for $388 per square foot.
Toronto -- $499 Per Square Foot
This one-bedroom, one-bath condo in Toronto's Entertainment District features a balcony with a southeast exposure. In a sure sign the condo is outfitted with just the basics, the unit's sellers boast of its "brand name appliances" and "frost free refrigerator." At 700 square feet (including the balcony), it works out to $499 per square foot.
Vancouver -- $688 Per Square Foot
This one-bedroom, one-bathroom corner unit in Vancouver's Kitsilano neighbourhood "shows much larger than the square footage," the realtor boasts. That's good, because at 508 square feet, this place is only slightly larger than some of the bedrooms and living rooms available in similarly-priced houses in other markets. The condo boasts "gorgeous mountain views," but it'll cost you -- $688 per square foot.