Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

Long Ideas

Housing Bubble in Canada

Fears of a housing bubble have become so great in Canada that they are now having an effect upon that nation’s ongoing election. During a debate between the candidates for Prime Minister on Thursday, Sept. 17, 2015, the housing bubble was one of the main topics on the agenda, according to the CBC.

Among other things, the candidates debated the possibility of placing limits on foreign ownership of property. Real estate prices are now so high in Canada that they’ve become a serious political issue. Liberal Leader Justin Trudeau is even using the shortage of rentals in Canada as a political issue.

One person trying to sidestep the housing issue in Canada is Prime Minister Steven Harper, the conservative leader. Even though a number of experts, such as Edmonton investment advisor Hilliard MacBeth, think that a crash is imminent. MacBeth told the CBC that a dangerous housing crash is on the way because many homeowners have taken out too much debt.


That, of course, sounds familiar to Americans, who are still haunted by the specter of 2007 and the great mortgage meltdown. One has to wonder if something similar is not imminent in Canada and if it could hurt the U.S. economy.

Some American companies, notably Costco Wholesale (NASDAQ: COST), are heavily exposed to Canada. Costco gets about 10% of its revenue from its Canadian sales.

Is Canada’s Housing Crisis our Future?

Beyond the obvious implications for some U.S. companies, Canada’s housing bubble could give us a glimpse of our near future.

The U.S. real estate market is experiencing some nasty bubbles, notably in California and New York, and as in Canada, some of the bubble the heated demand is driven by foreign buyers. Some Asian Canadians are experiencing prejudice because of Chinese home buying in areas like Vancouver, the CBC reported.

Another similarity to the situation here in the U.S. is a serious housing shortage parts in Canada. Instead of a real bubble, the high prices are artificially driven by a lack of new houses in the market. One reason for the shortage is a growing population and falling housing stock.

The amount of housing stock in parts of the U.S. is not keeping up with demand because many buyers lack the income to purchase new homes, so contractors are not building. One has to wonder if something similar is not going on in Canada. A big reason why America’s housing market has not recovered is wage stagnation, which is fueling income inequality. The only markets that have truly recovered in the U.S. are upper end ones in places like Brooklyn and San Francisco, much as Canada’s recovery has been confined to Toronto and Vancouver.

That’s a situation that sounds much like the 1930s when there was little or no housing in the U.S. for a decade. That led to a serious housing shortage during and after World War II that had some pretty profound effects on the nation. The housing shortage did not end until the government made cheap financing available to veterans in the form of the GI bill, which led to a housing boom.

Another similarity to the U.S. is that there actually appears to be several regional bubbles in Canada, mainly in Vancouver and Toronto. The situation is more pronounced up north because Canada’s population is far more concentrated than ours. Contrary to what most Americans think, most Canadians actually live in Southern Ontario, a rather small area of the country centered on Toronto. That makes regional housing bubbles and shortages far more of a national issue.

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One reason why housing is not on the U.S. national agenda is that for most Americans, there is no housing shortage. A quick look at Zillow indicates that prices are actually falling in many markets, including regions in Colorado that are a little over a hundred miles from the red-hot Denver market.

It is doubtful that we’ll see a national housing debate like the one in Canada. Instead, housing will remain a local problem in parts of the United States. Other issues like healthcare and jobs will dominate the American political debate instead.

Something to worry about though is the regional effects of a Canadian housing collapse. A housing crash in Vancouver would certainly affect Washington State, for example, although a crash in Southern Ontario might have little effect upon Michigan. It looks like Canada’s real estate worries could soon hit home south of the border, whether we’re paying attention to them or not.