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Canada’s housing market is a bubble ready to burst as valuations have “lost touch with fundamentals” and household debt is at a record high

The independent research firm’s report says it fears that house prices could fall by as much as 25% over the next three years.

House prices have been growing rapidly for nearly a decade now and it has reached the point where housing is so overvalued relative to incomes that a downward correction seems unavoidable

Buoyed by strong demand and low interest rates, Canadian house prices continue to rise.  In the year to end-June 2011, the national house price index rose by 4.52% (1.37% inflation-adjusted), according to Teranet-National Bank of Canada. Even stronger price-rises are suggested by the latest Canadian Real Estate Association (CREA) figures, which report that average homes prices were up 9.3% on the year, to CA$361,181 (US$369,068).

The previous 3 years in summary:       • House prices rose 4.06% in 2010 (1.66% inflation-adjusted)       • House prices rose 5.24% in 2009 (3.87% inflation-adjusted)       • House prices fell 0.57% in 2008 (-1.71% inflation-adjusted). In July 2011 sales were 12.3% up from a year earlier, according to CREA. The total number of newly listed homes rose by just 1% in July 2011 from the previous month. There was 6.1 months of housing inventory, suggesting a balanced market.

House prices rose 4.06% in 2010 (1.66% inflation-adjusted) House prices rose 5.24% in 2009 (3.87% inflation-adjusted) House prices fell 0.57% in 2008 (-1.71% inflation-adjusted).

In the Vancouver metro area, and in many cities across Canada (and the world) people are

starting to increase the value they place on: short commutes, walkable communities, transit-oriented

communities, and living a more sustainable lifestyle (less auto use, for example).  If you want a healthier planet and environment, this is a good thing.  But it has the consequence of higher housing prices.

uropean sovereign debt crisis destabilize the global economy, triggering in Canada a 15% decline in house prices, combined with a severe downturn in construction activity

GDP decline of some 2.5% over a period of two years

housing market will be the opposing forces of rock-bottom interest rates and economic weakness,

Another topic for discussion is how to prevent a housing bubble. Some economists argue that governments and central banks can and should take action to prevent bubbles; others say that they aren’t able to do so and that they can only clean up the mess after the bubble bursts.

When the Bubble Bursts

Many households that took out loans are unable to cover the debt.

"Throughout 2011, upward pressure on new home prices has been relatively low," says senior analyst Richard Cho of Canada Mortgage and Housing Corp. "With the unemployment rate elevated and new construction activity moderating, this has taken some pressure off some construction costs."

For 2012, we're not talking here about any dramatic increase in new home prices - but there will be movement.

builders won't go nuts with hikes is because they are still facing competition from the well-stocked resale market.

To kick off 2011 Finance Minister Jim Flaherty decided to make some changes to Canada's mortgage rules including reducing the maximum amortization from 35 years to 30 years.

New listings and sales were down 10% and 13% respectively in January 2011.

sales were down 14% in February, my market watch for the month showed that the market was actually heating up and moving further into seller's market territory.

Record low interest rates created a strong demand for a relatively low number of available homes in Canada in 2010, resulting in a higher average sale price, according to a new study.

housing-related spending accounted for more than 20 per cent (or $330 billion) of Canada's Gross Domestic Product in 2010 -- a rise of 7.1 per cent from the $308 billion 2009,

"Aging baby boomers will generate demand for condominiums and for home adaptations and support services aimed at allowing them to continue living comfortably in their homes,"

When it comes to the eye-popping housing boom that has seen house prices in Canada more than double in just 10 years, there are a few common explanations.

there is evidence to suggest that income inequality — a trend that has been widening the gulf between Canada’s very rich and everyone else for the last three decades — may also be part of the equation.

The bottom line is that the reason why prices are so 'high' is because there is, amongst the buying public, a huge and large income inequality

“2011 has been the year of the highrise, not just in the 416, but also in the 905 regions,” says Joe Vaccaro, acting president of the Building Industry and Land Development Assoc. (BILD)

Toronto took the world record for the most high rises — a total of 132 — under construction in 2012.

Buildings hit new heights: A 75-storey condo, the tallest residential tower in Toronto, was announced for York St.

While the Canadian situation is far different from the U.S. of 2006, the continued surge in condo constru

"While the Canadian situation is far different from the U.S. of 2006, the continued surge in condo construction and overall home prices to levels that are not consistent with the growth in domestic income is certainly raising questions about its sustainability and the fallout if it were to unwind."

"As well, foreign capital inflow has supported the Toronto and Vancouver housing markets for years. That factor has apparently been on a significant uptrend in Toronto in recent years. The outlook for that flow is uncertain, although arguably, Toronto will remain an attractive safe haven for foreign money. But how stable that money is remains a question."

Canadian home prices were up 4.8 per cent. By contrast, home prices in the United States were down 7.5 per cent compared with the third quarter of 2010.

In Canada, the majority of local markets are experiencing a balance between demand for housing and the supply of properties for sale.

The report notes Canada is in the 13th year of the current upward pricing trend — a relatively long time considering that market cycles in the advanced countries average about 12 years

The total amount of debt that Canadians hold in relation to their incomes continued to inch higher in the first quarter, Statistics Canada data revealed Monday.

The debt-to-income level ticked almost a full percentage point higher to 147.3 per cent in the January to March period, the agency said. The figure is a measure of total debt load — including mortgage and consumer debt — versus disposable income.

A decline in durable goods spending pushed consumer credit lower, but stable borrowing costs as well as higher housing resale and renovation activities pushed mortgage debt higher, the agency said.

Is it really 99% v 1%? It has become the rallying cry of the Occupy Wall Street movement - and the Occupy protests around the world. But is it true?

When Americans are asked how US wealth is distributed, they think the very richest fifth should own up to 40% of the national wealth - and that includes 90% of Republicans surveyed. In fact, that richest group owns 85% of the nation's wealth. Those surveyed also thought the bottom 120 million people should own around 10% of the national wealth. The reality: 0.3%

In 2010, the average American earned $26,487 - down over $2,000 in real terms on 2006. That's a drop of 5.27%, including inflation. If you were poor it's been an even bigger drop - the 24 million least wealthy households in America saw their average income go down by 10% From $12,276 in 2006 to $11,034 in 2010

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In 2011, the worst year for equity investors since the 2008 global meltdown, the overall market fell by 11% while financials were down 7%. Bank stocks were largely flat.

Barclays Capital analyst John Aiken forecast an end to the double-digit profit growth that has powered the banks since the financial crisis. Yet less-bearish observers said risks from Europe’s debt crisis and other external threats make banks a wiser investment than more volatile energy and mining stocks. And traditional safe haven plays like telecoms and health care offer little upside after also outperforming the broader market in 2011. Instead of trying to mimic what worked in 2011, investors should look for companies in depressed sectors with good value, such as banks, said Barry Schwartz, a portfolio manager at Baskin Financial Services. “[Pipeline operator] Enbridge is not going to grow at 20% a year,” noted Mr. Schwartz. “However a bank stock could grow at 15% a year and they’re trading at 10 times earnings.” Canadian banks also offer hefty dividends, and did not cut them in the recent recession. Five of Canada’s six big lenders, including Royal Bank of Canada, Bank of Montreal, Bank of Nova Scotia and CIBC have dividend yields of more than 4%. Market veterans said this offers some downside protection if global financial and economic turmoil worsens. “It’s a sign of confidence on the part of Canadian bank management that, regardless of the outlook, they felt that they were in sufficiently good shape to start raising dividends&nbsp; again,” said Gavin Graham, president at Graham Investment Strategy. Toronto stocks got off to a solid start in the first week of 2012, with the composite index rising almost 2% to close at 12,188.64. But gains are expected to be modest this year, with the index reaching just 12,500 by the end of 2012, according to a Reuters poll. Many think problems outside of Canada, especially Europe’s sovereign debt crisis, will impede global growth and demand for commodities. This would hurt more growth-sensitive sectors like mining and energy, which account for more than 40% of Toronto’s composite index. Last year, base metal and energy issues plunged 27% and 17% respectively, adding up to a miserable year for cyclicals after strong performances in 2009 and 2010. Most of the gain from commodities in those years was driven by double-digit growth in China, the world’s largest buyer of industrial metals. But Chinese growth slowed last year, igniting a downward spiral in base metal mining stocks. Despite recent signs that the Chinese economy has steadied and the U.S. economy is picking up steam, eurozone debt worries are expected to dominate in early 2012. Many also expect the gridlock in Congress to worsen as the U.S. presidential election approaches, hurting investor sentiment and compounding the difficulties for resource stocks. Still, analysts said investors should not shun commodity-linked stocks indefinitely. Some think they could rally firmly in late 2012 if concern over Europe eases and the global economy gets back onto strong footing. “To the extent that the market focuses on the U.S., more cyclical names, more consumer-oriented names and more pro-growth names make sense,” said Stephen Wood, chief North American investment strategist at Russell Investments in New York. “Getting overly defensive at very high valuations is not something people want to do.” © Thomson Reuters 2012 Posted in: Economy, Investing, News, Outlook 2012, Trading Desk&nbsp; Tags: Bank of Montreal, banking, Canadian banks, CIBC, dividends, financials, investing, Royal Bank of Canada, the Bank of Nova Scotia, TSX Reuters U.S. Fed officials signal more policy action may be neededGoodman &amp; Co. boosts stake in American ApparelHedge funds take on IMF over Greek debtNot time for 'risky' spending in budget: FlahertyCopper vulnerable to price spikes due to shorts More from Reuters » var npDsqSso = /^[\s\S]*\bdisqus-sso=([^;]+)[\s\S]*$/i.test(document.cookie), npDsq_remote_auth_s3 = 'e30= 4ce72f958bc936ef5001150fc4d4fcef9fc4e256 1326247574', npDsq_api_key = '4ArDk9sCU7Y27T6Ni9ixYD3n90ZSiXdMtCOI9mcHFCEf6gnVGHpnKgereuyCJ3Rn'; Glad you liked it. Would you like to share? Facebook Twitter Share No thanks Sharing this page … Thanks! Close What do you think?Opinions expressed in comments that appear on our site are expressly those of the comment writer and not the Financial Post. Offensive language, personal attacks and unsubstantiated allegations are not allowed and may result in your account being banned. Comments containing links are not permitted. Comment threads are closed after 48 hours. For more information, read our full Terms and Conditions. If you see a typo or error in this story, feel free to <

Canada’s real gross domestic product to slow to 2.2 percent in 2011 and 1.9 percent in 2012

big downside risk is the spillover effect of the European crisis on financial markets and global growth

its key interest rate sits at 1 percent – but noted there is scope for further monetary easing if the economy weakens

Statistics Canada reported in December that mortgage debts in this country have crossed the $1-trillion threshold and consumer credit has risen to $448 billion.

A Canada Mortgage and Housing Corp. report released last month described the level of household debt as a "serious issue."

Canadians currently owe about $1.50 for every dollar they earn.

As a group, the major Canadian banks have outearned their cost of equity for the past decade, and we see no reason for that trend to reverse.

The six largest Canadian banks have extensive commercial and retail operations and large domestic branch networks. Together, they serve 92% of Canada's banking as measured by total assets.

Investment Canada Act, the aggregate holdings of non-Canadian residents and their associates may not exceed 25% of all shares unless reviewed by the government.