Canada's housing party plays on as world warns of risk

Wed Sep 10, 2014 11:16am EDT
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By Andrea Hopkins

TORONTO (Reuters) - Jeff Lowry and his family left a sedate housing market in Tennessee last year and moved to Canada in the midst of a housing boom, where bidding wars and soaring prices were an unpleasant reminder of his American roots.

    Trading in his suburban home outside Nashville for a smaller $600,000 house in Waterdown, Ontario, about 40 miles outside of Toronto, the 39-year-old regional manager wonders if he's just bought into another bubble.

    "Obviously it is risky, and we're concerned," said Lowry. "The housing market is skyrocketing and we wonder, are we paying the top price? Will what happened in the United States happen here? I don't know. I guess it's a gamble."

    Experts ranging from Fitch Ratings and Morningstar to the International Monetary Fund and economist Paul Krugman have warned about the risks of the housing boom in Canada, where the average home price has doubled in 11 years. They point to record high household debt, cheap mortgages, and overbuilding as harbingers of the kind of doom seen in the U.S. housing collapse five years ago.

    "Think of me as the designated driver at a party," said Dan Werner, an equity analyst at Chicago-based investment firm Morningstar. He warned in July that a house price correction is inevitable in the next five years that could send values tumbling by as much as 30 percent.

    "There is this euphoria when you are within an up housing market,” Werner said. “We fell into it that here. I don't want to say Canadians are in a party mode, but they are thinking, 'What can possibly go wrong if prices keep going up?' It's going to end badly."

    Werner said the reason why a collapse is inevitable include: home prices are rising faster than personal income; low mortgage rates are unsustainable; household debt levels are at historic highs; and builders have erected so many houses that there will soon be oversupply.

    Fitch said in July that Canada's housing market was about 20 percent overvalued and warned that the country's debt-to-income ratio, which at about 163 percent echoes levels seen in the United States just before its crash, will be a liability when interest rates rise.   Continued...

A sold sign is displayed in front of a house in Toronto in this December 15, 2009 file photo.    REUTERS/Mike Cassese/Files