Canada's Real Estate Market Bubbly

Over the last five years, the CHMC's liabilities -- meaning the mortgages they hold on their books -- have gone up five times from C$80 billion to C$400 billion. Any time you see a business increase its liabilities by that amount, it's intriguing. When you consider the last two years has been the worst economic downturn since the Great Depression, it's even more head-scratching.

However, Canada's economy was going along okay pre-Lehman. When the stock market dropped, Canadian housing and real estate activity stopped and prices did drop. But, with most consumers and the Canadian banks in okay shape, and with Canadian job losses not as bad (relatively) as in the U.S., Canadian consumers had quicker confidence to spend thanks to the lower interest rates.

When famous bear David Rosenberg left Merrill Lynch to move back to Canada in 2008 and join Gluskin Sheff, he spoke in glowing terms about Canada's position in the global economy. Yet, even he has begun to acknowledge the housing bubble that exists in Canada.

If you talk to Canadians about the possibility of a real estate downturn, you get a swift and immediate response: "We don't have subprime like in the U.S., so a downturn can't happen here." This is categorically untrue. If you can't get approved for a mortgage from the traditional banks in Canada, there are alternative mortgage providers. Whether you call them subprime lenders or not is up to you but that's what they're doing.

The fact is that home prices can't keep going up while incomes are going down. That's an environment ripe for a correction. At some point, sellers will outnumber buyers, prices will flatten and then decline, people will feel poorer and list their homes, begetting more selling pressure.

The question is: Will there be a hard or soft landing in Canadian real estate and what are the implications?

Optimistically speaking, the Canadian government and Canadian homeowners hope for the following:

Rich Hong Kong-Chinese keep buying condos in Vancouver supporting prices there;

The U.S. economy continues to rebound, supporting Canadian manufacturers;

Employment increases in Canada, making consumers more confident and willing to spend; and

If the economy grows slower than expected, the Bank of Canada can always keep rates low.