Canada’s housing bubble may have just appeared

A housing bubble that has been causing pain for Canadian homeowners and buyers alike may have begun to unfold as home prices fell at a historic rate in August.

Home prices fell 2.4% in August compared to July, the largest monthly decline since the data was first tracked in 1999, according to management firm Teranet and National Bank of Canada, which jointly calculate the index. As of July, prices have risen nearly 42% faster than wages since 2015, making homes less expensive to buy, while higher interest rates have made homes more expensive, financial advisory firm The Motley Fool reported in July. (Related: A major warning sign that just popped up for the housing market)

The price crash comes as new housing projects in 2021 have the highest rental rates since the 1960s, according to Statistics Canada, the Canadian government’s statistical analysis arm. While prices are still about 9% higher than they were one year ago, Teranet-National bank data tracks closings, which typically lag brokers’ data by three to five months, Reuters reported.

The Heritage Foundation economist EJ Antoni, speaking to the Daily Caller News Foundation, noted similarities between Canada’s housing bubble and the current high housing costs in the United States.

“The housing market in Canada, like our market in the United States and many other countries around the world, is getting very hot due to the injection of excess liquidity from central banks,” Anthony said. Creating money lowered interest rates, making borrowing costs cheap and making large mortgages more affordable. This has dented demand and pushed home prices to unsustainable levels.”

Anthony also noted that the Fed has a large portfolio of mortgage-backed securities, which is a key difference between the Canadian and US housing markets. Anthony said that buying a large amount of so-called mortgage-backed securities (MBS) increased the demand for the underlying asset, that is, mortgages.

However, as the Fed was raising interest rates, if it sold these MBS holdings, it would lose more than half a trillion dollars, according to Anthony. Anthony said the Fed could certainly do that and offset the loss with stimulus, but doing so would definitely lead to inflation.

“This strange circumstance is conspiring to keep US home prices artificially high,” Anthony told DCNF. “The collapse in Canada is another reference point that the US housing market is not doing well, but it does not yet indicate a collapse in US home prices.”

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