Blogs & Comment

How will the housing bubble pop?

Historical precedent suggests the Canadian housing bubble could correct gently, not sharply.

(Photo: Riko Pictures/Getty)

Canadian house prices have climbed 32% more than family incomes since 2002, notes market analyst Freddy Hutter in TrendLines Research. This is nearly the same level of overvaluation U.S. house prices reached in 2007, just before they collapsed.

But Canadian house prices need not suffer the same dramatic plunge in house prices.

Hutter, now grey-haired and living by a lake in the Yukon, witnessed a previous housing bubble inflate in Canada during the 1980s. He says it “was actually a more severe event,” with average house prices standing 55% above the trend in family income at the peak in 1989. Yet afterward, the “average home price fell a mere 6%” before resuming a slow climb. The 1989 high was not reached again until about 10 years later.

Hutter sees a similar resolution to the current bubble. “Considering the momentum in play within the present economic recovery, it is not unreasonable to expect a repeat of that long-term sideways correction ….” he concludes.

Why might housing busts play out differently in Canada? Perhaps it has something to do with a difference in the financial and legal setting—for example, less securitization of mortgages and greater recourse for lenders against homeowners who walk away from their mortgages.

Still, let’s not take chances. As discussed in “Stop the housing bubble before it’s too late” the Department of Finance and Bank of Canada should not let the overvaluation go to an extreme.”