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Spring could warm up home prices in Canada even more

Stephanie Johnson

A housing bubble in Canada: Is it possible? (Part 7 of 10)

(Continued from Part 6)

What do home prices mean for Canadians?

In 2012, real estate accounted for more than 75% of the typical household’s wealth, according to a report by Environics Analytics. This means that a 30% fall in home values would reduce Canadians’ net worth by over 20%.

Rising home prices in Canada

Between 2000 and 2007, house prices zoomed in countries like Spain (EWP), Canada (EWC), and the US (IVV). House prices increased by 138% in Spain, 89% in Canada, and 55% in the US, respectively.

In Canada, house prices continued to rise across the country—particularly in the largest cities. In Vancouver, the average home prices rose 27% from December 2008 to December 2014, according to the Canadian Real Estate Association. In Toronto, home prices rallied 49% during the same period.

Rising home prices lead to households taking on more debt to fund the purchase. Increased bank lending to fund the purchases drives real estate prices up more. As a result, it leads to a housing bubble.

Rising home prices + rising household debt = recipe for a housing bubble

Since then, the situation in Canada got worse. Canada’s household debt-to-income ratio was 162.6% in 3Q14. House prices are climbing. The Bank of Canada’s rate cut intended to boost to the economy. Also, there was the cut in the prime lending rate by banks—like the Royal Bank of Canada (RY), Toronto Dominion Bank (TD), Bank of Nova Scotia (BNS), and the Bank of Montreal (BMO). This could spur even more household borrowing as mortgage rates cool off.

Continue to Part 8

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