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January 03, 2022

Is Canada's real estate bubble about to burst?

Canadian home prices are now showing many of the signs of a classic bubble, according to a recent report from Bank of America Merrill Lynch.

Factoring in record low mortgage rates, the housing market nationwide is at least 10% overvalued, say Merril economists. More importantly, under more normalized interest rates, home prices would actually look about 25% overvalued based on current prices, they estimate.

“In our view, the housing market is one of the most vulnerable sectors to this weakening economic environment, showing classic signs of over valuation, speculation and over supply,” says the report. “We are not calling for an all out rout in the market — but caution is now decidedly warranted.”

Home prices will likely contract slightly in the first half of 2012 as housing demand slows on tougher jobs and income growth environment, but flatten as the economy picks up in the second half of the year, they predict.

Of course, it all depends on where you live. According to economists at the TD Bank, "a larger-than-average price and sales correction looks to be in store" for the housing market in Vancouver, for instance. TD forecasts a sales drop of 15% and a home-price decrease of 12% over the 2012-2013 period.

But that's nothing compared to the dire predictions of Steve Kaplan, writing at Seeking Alpha. He sees the U.S. housing meltdown slowly spreading throughout the developed world, cutting housing values in half in many instances.

What does the future hold? Looking at the rest of the world, click here for an interactive chart where you can enter the country of your choice to see how housing prices have fluctuated relative to the rate of inflation.

Do you see such a bubble forming where you live? Does this concern you at all? Or Kaplan's  prediction simple scare mongering?

By Gordon Powers, MSN Money



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Gordon PowersGordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a financial services consulting firm. Gordon was a personal finance columnist for the Globe & Mail for many years, has taught retirement planning...

Jason BucklandJason Buckland

The modern-day MC Hammer of money, Jason can often be seen spending cash that isn’t his with the efficiency of a Wilt Chamberlain first date. After cutting his teeth as a reporter for the Toronto Sun, he joined the MSN Money team with...