Housing Bubble

What is meant by the term “Housing Bubble?”

When conducting research on the Canadian housing market, it’s impossible not to encounter information and news regarding the idea that the country is currently engulfed in a housing market “bubble,” one that is poised to burst at any moment. The topic is highly debated, generating speculation from dozens of independent analysts and financial institutions. Most of the articles we have found discuss the phenomenon for an informed audience, assuming the reader has some familiarity and knowledge on the topic. We at thought it would be a good idea to clarify what is meant by the term “housing bubble,” so that that those embarking on their homebuying journey, who don’t necessarily have an education in real estate, can better grasp what some believe is the direction the Canadian housing market is headed.

A fairly good summary of what a “housing Bubble” is can be found on Investopedia, a definition which highlights the delicate and volatile interplay between the market forces of supply and demand, and the risks involved in market speculation. Here’s the breakdown:

Canada Housing Bubble vs US

  • Investors and developers begin to build large quantities of housing units in a given location, fueled by the speculation that a high demand for units in that area will translate into a high number of sales at an elevated price.
  • In the time it takes for the supply of homes to reach the speculated demand (a process that takes years), the demand ca, and often times does, decrease dramatically, and for a variety of reasons (displacement of interest into another area is one example).
  • Once the excess supply has sat on the market long enough for investors and developers to panic, the end result is a dramatic slash in prices to boost sales and hopefully cut losses. This decline in home values, which affects all homeowners and not just newly built homes, is what is referred to as the “bubble bursting.”

The finger of blame for this process unfolding is traditionally pointed at low interest rates and the loosening of borrowing standards, which helps to fuel demand. Benjamin Tal, a well-known and highly respected economist at CIBC, recently commented on the lack of market information and statistics regarding mortgage debt levels, calling the situation “mind-boggling” and “unhealthy” (you can read more about it here). He argues that this information is needed in order to accurately calculate the extent of the adjustment the government must execute, one to correct what he believes to be an “overshooting” housing market.

Among those economists and analysts who believe that Canada is on the verge of having its housing market bubble burst, one of the more optimistically predicted outcomes, is what many refer to as a “soft landing,” The first step to understanding this possible future, is first accepting the fact that a market correction is needed in the form of a gradually increasing interest rate. In the “soft landing” scenario, such an increase, if timed out accordingly, will be easily absorbed by potential borrowers of mortgages and loans

Part of Tal’s issue with the lack of information available on mortgages is that it is impossible to determine with any certainty the amount interest rates need to increase in order to ensure the market’s soft landing. The reason Tal’s request for more information seems unreasonable to some, is the specific types of information about personal and corporate spending and borrowing that he deems necessary for proper calculations to be performed. Statistics such as the dollar value of mortgages that are originated every three months, the credit score of borrowers of those specific loans, and what the share of foreign investment is in areas like Toronto’s booming condo market, information some might be hesitant to give away.

In an article written by Tamsin McMahon of Macleans (read here), the author claims that Toronto home prices overall are increasing, but suggests that some neighbourhoods are more “bubble-prone” than others. McMahon’s analysis looked at TREB data om median house prices (adjusted for inflation) in 35 Toronto neighbourhoods in between 1996 and 2014, and revealed some pretty fascinating insights. Absolutely no neighbourhoods in Toronto saw home values drop in that time period, with neighbourhoods in the city’s centre doing better than those in the outer regions. Neighbourhoods such as Riverdale and the Junction went from “seedy to trendy,” with home prices escalating dramatically, up 170% and 136% in each community respectively. Of those neighbourhoods described as having performed “unimpressively” in the time period studied were Leaside and Mount Pleasant, only up 27% and 47% respectively, which is attributed to the large number of condo buildings in each community, which cannot take advantage of rising house prices.