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BLOG: Canada's existing home sales fell 3.2% in October compared to September, according to the Canadian Real Estate Association. No big deal right? After all housing sales were brisk through the summer and bigger picture-wise Canada's housing market has been on a near-constant upward trajectory since 1997, hitting all-time highs on a regular basis.
While bearish commentary from most Canadian economists who has been scarce, other institutions, and media outlets many of them outside the country, have been sounding a warning call for some time. Goldman Sachs, International Monetary, The Economist and the Financial Times have argued the Canadian market is overcooked and ripe for a correction.
David Madani, Canada Economist with Capital Economics in Toronto has been bearish on the Canadian housing market since 2011. He believes Canada is in for a prolonged and painful correction that could see prices fall by as much as 25 percent.
That would be comparable to the last time the market crumbled in 1989/1990, which dragged on for the better part of a decade.
Remember that? Probably not. And that's part of the problem, according to Madani. The last meaningful correction was so long ago, that many have forgotten housing prices don't, can't and won't go up forever.
So what exactly makes the Canadian market so frothy right now?
Overbuilding is a major cause for concern, says Madani. The most egregious overbuilding he maintains is in the condo market, particularly in the Greater Toronto Area, where eventually a huge oversupply of condos that will drag down prices.
Furthermore Madani says affordability is out of whack. Erstwhile Bank of Canada governor Mark Carney admonished Canadians on many occasions for taking on too much debt. Madani says the BoC was one of the few Canadian institutions to warn on a possibly overheating housing market.
This graph below, created by Madani's team is telling. It demonstrates that house prices have risen faster than incomes. And that the cost to own a house has risen faster than the price to rent a house. Or interpreted another way it makes much more financial sense to rent a house in Canada that to own one.
As a homeowner in Toronto I have to admit the longer I talked to Madani, the more nervous I became. So how does he feel about his own gloomy prediction being a home owner in Toronto? His reply.."I don't own. I rent"
I asked Madani why the market hasn't corrected yet? (Seeing as he's been making this call for over two years) His answer: Yale University Professor Robert Shiller was predicting a crash in the U.S. housing market as early as 2002. The U.S. market took a further five more years to start falling in value. (By the way, earlier this year Shiller was awarded a Nobel prize in economics.