As global real estate bubbles burst at differing intervals, those still engaged in mania fever try to justify the current inflated economic structure. With the current US median home price at $151,600 and the median household income at roughly $50,000, prices seem to be stabilizing. But the metrics show that Canada is poised for a deep correction.
The Canadian real estate market is driven by massive speculation and prices that are disconnected from underlying fundamentals (a bubble). People are buying with the intention of selling a few months down the road.
Canada is taking this bubble to an entirely new dimension. The US hit its deleveraging moment of truth in 2007 but Canada has pressed on. To argue that households are taking on manageable debt is nonsense. The US at the peak had nearly a 125% debt-to-disposable income ratio while Canada is now inching closer to 145%.
Some areas in Canada are wedded to foreign buyers, and the slowdown in places like China will have an effect. Most of the buying is by domestic households, however, and many are going into massive debt to support this lifestyle.
And the market is slowing down: Price declines in Vancouver dragged the national average home price lower in July, even as most markets saw slight increases compared to the same month a year ago. The Canadian Real Estate Association reports that the national average price for homes sold in July 2012 was $353,147, down 2% from July 2011.
The longer the mania goes, the more painful the unwinding will be. Just as the US housing bubble coincided with good employment figures, Canada is relying heavily on real estate as a part of its economic growth. But is the economy healthy because of real estate, or is real estate healthy because of the economy? A similar scenario unfolded in the US.
Given Canada’s household debt figures and the mania in real estate, when the contraction comes it will be painful.
To read Dr. Housing Bubble article: Canadian Housing Bubble Goes into Full Mania
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