The latest Canadian housing data showed a slight uptick in prices and a pause from 2022’s correction, and a new wave of dip buyers has already begun to call this a buying opportunity, as if valuations at ten times average annual income and 50 percent more expensive than their cash flows were anything but still extremely overvalued.
This is merely the most recent development in what appears to be the end of Canada’s massive housing bubble and the beginning of a potential 2008-style recession for the Canadian economy.
Following the 2008 global financial crisis (from which Canada emerged relatively unscathed), the Bank of Canada’s record-low interest rate policy fueled an unprecedented bull market in Canadian real estate.
While prices showed signs of reversal in 2019, the events of 2020 provided justification for the Bank of Canada’s mind-boggling balance sheet expansion, which virtually quintupled in a matter of months.
Central planners had decided to pour metaphorical gasoline on the country’s already raging-hot fire, creating an outright manic buying frenzy.
The penultimate state of the bubble in late 2021 was astronomical:
By almost every statistical measure, Canada’s housing bubble was one of the largest on record.
As is typical of every bubble, timeless tropes were regurgitated in order to justify the madness.
The most often repeated argument was that the Canada Mortgage and Housing Corporation (CMHC), Canada’s public mortgage insurer and a Canadian version of Fannie Mae, would never allow a bubble to occur because they are supposedly more responsible than US regulators.
This argument fails on numerous counts:
Following the 2008 global financial crisis, Canadian banks gained a reputation for stability due to their resiliency throughout decades of cyclical global recessions.
But the question that must be asked is not whether the Canadian financial system has seen a crisis in recent decades, but whether it has seen a bubble the likes of which occurred over this past cycle.
The seeds of a bust are sown throughout a boom in the form of malinvestments rendered profitable by artificially low interest rates, and thus the severity of a recession is ultimately determined by the degree to which malinvestment permeates the economy.
It is safe to say that after more than a decade of nationwide real estate malinvestment, a significant portion of Canadian bank assets is correlated to housing, which will expose Canadian banks to the threat of insolvency in the event of a large-scale market correction.
But both the government of Canada and the Bank of Canada have shown a penchant for intervention and will almost certainly prevent the failure of any major Canadian bank, transferring significant losses to the taxpayer.
Canada is inarguably a wealthy nation with a complex capital structure and an abundance of natural resources, but this will not stop a painful housing correction from taking place.
While central bank–monetized government stimulus may prevent nominal valuations from falling, relative prices will inevitably regress to historical levels. One hopes that a return to economic sanity will be accompanied by a return to free market principles and a reduction in state interventionism.