real estate

Trouble Brewing

I’ve written a few times on real estate prices in Canada and yet there doesn’t seem to be any let up in prices. Here’s an American perspective on housing prices from Business Insider:

Second, Canada has a big, brewing debt problem…

Paul Krugman argued over the weekend that Canada may not be as economically secure as it looks. Canada’s relatively easy time with the global economic crisis is often credited to its highly-regulated banking system. But Krugman argues that the big problem in the U.S. was not the banking crisis but the bursting of the real estate bubble and the huge overhang of household debt that it caused.

economist housing price chartThe Economist

Home prices in Canada are now double what they were in the 1970s in real terms. Historically, over the very long term, real home prices tend to be flat.

Krugman argues:

So if the new, non-bank-centered view is right, Canada ought to be quite vulnerable to a big deleveraging shock despite its boring banks. Of course, people have been saying this for several years, and it hasn’t happened yet — but remember, the US housing bubble took a long time to pop, too.

And third, one of the big factors that has allowed Canada’s house prices to stay inflated may be coming to an end. As an oil exporter, Canada has been one of the big beneficiaries of the global commodity boom.

canada real 2012 fuel exportsBusiness Insider, data from Industry Canada

In 2012, Canada exported mineral oil, fuel and wax products and bituminous substances worth nearly $120 billion (USD), up from $20 billion in 1990 on an inflation-adjusted basis. Petrodollars have been raising Canadian incomes and allowing the country’s residents to bid up home prices.

But as worldwide demand slows and the commodity boom wanes, Canada may be in for a home price bust — and bigger problems than municipal corruption.

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