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Haneef Wallani

The magnitude of Canada’s housing crisis

Canada’s housing bubble has escalated to a point where the question is no longer if the bubble will burst but rather the scale of the collapse.  On October 30, 2012 CIBC’s economist Benjamin Tal published a report attempting to downplay the Canadian real estate bubble by claiming it will not be as severe as the crisis that hit the U.S.  However, his arguments ignore several crucial factors that point to the inevitable housing crisis being severe enough to cripple the Canadian economy via a hard landing causing at least a 20% decline from peak housing prices.For starters, StatCan recently reported that Canada’s household debt-to-income ratio just hit 163%, overthrowing U.S.’s peak of 162%, which they hit just before their housing market toppled (Chart 1).  Although Mr. Tal acknowledges this, he attempts to sidestep this problem by claiming it is a non issue as the debt-to-income ratio for the past three years in Canada is rising at a slower rate than in pre-correction U.S for the same period.  What he fails to mention however is that U.S. consumers had an exponential rise in their debt-to-income ratio for about three years leading to the collapse whereas Canada’s housing bubble has been slowing brewing for the past 10 years, making this statistic completely irrelevant.Chart 1:Another point Mr. Tal makes is that the quality of the debt in Canada has not changed dramatically in recent years and that Canadian consumers are in better shape now than their American counterparts when their housing bubble peaked.  What he does not realize is that credit scores only correct themselves after the boom period is over. This is due to banks making major adjustments to credit scores only after the individual is unable to service his or her debt. We see this illustrated in Chart 2 where U.S.… Read More