Canadian Real Estate Bubble to Burst as Loonie Drops to 11-Year Low
Over the last 10 years, real inflation adjusted residential Real Estate prices in Canada have increased by 49.34%. This compares to an increase of 5.85% in the UK, a decline of 5.5% in the Euro Area, and a decline of 17.18% in the US.
Currently, Canadian households have per capita Real Estate equity in USD of $62,983 vs. US households having per capita Real Estate equity of only $36,588. The ratio between Canadian and US per capita Real Estate equity is currently 1.72 vs. its 25-year median of 1. For the ratio to return to 1, household Real Estate equity in Canada would need to decline by 41.9%.
Total household Real Estate equity in Canada is currently equal to 143.52% of Canada’s GDP. In the US, household Real Estate equity is only equal to 66.32% of GDP. The ratio between household Real Estate equity as a % of GDP in Canada vs. the US is currently 2.16 vs. its 25-year median of 1.41. For the ratio to return to 1.41, household Real Estate equity in Canada would need to decline by 34.8%.
In Canada, Real Estate equity currently accounts for 32.47% of household net worth, which is above its 25-year average of 30.77%. In the US, Real Estate equity currently accounts for only 13.82% of household net worth, which is below its 25-year average of 16.08%. Canada’s Real Estate equity/household net worth ratio is more than double America’s Real Estate equity/household net worth ratio.
The average Canadian has equity in their home that’s equal to 70.25% of its value vs. the average American only having equity in their home equal to 55.60% of its value. Canada’s Real Estate equity/market value ratio is currently 1.26X higher than America’s Real Estate equity/market value ratio.
Ten years ago, the median Canadian home value was equal to 6.07X the average salary of a Canadian non-supervisory goods producing worker. At that time, the median US home value was equal to 5.96X the average salary of an American non-supervisory goods producing worker. Over the last 10 years, Canada’s median home value/average salary ratio has increased by 24.2% to 7.54 vs. America’s median home value/average salary ratio declining 17.95% to 4.89. Canadian Real Estate values must decline by 35.1% for their affordability to once again be equal to the US.
Canada’s central bank should be raising interest rates to put a stop to its housing bubble, but today they actually cut rates by an additional 25 basis points down to only 0.5%. Only once before has the Bank of Canada lowered rates to 0.5% and it was at the peak of the 2009 financial crisis. With the Federal Reserve likely to raise rates by 25 basis points to 0.5% by year-end, the Bank of Canada’s overnight rate will likely soon be equal to the Fed Funds Rate for the first time in eight years.
The Bank of Canada appears to be focused on keeping its Real Estate market propped up at artificially high levels, despite oil prices once again dropping due to Iran getting ready to soon add a tremendous amount of supply to the market. The Canadian dollar (loonie) today dropped to its lowest level in 11 years vs. the US Dollar. If the Bank of Canada doesn’t shift its focus to protecting the purchasing power of the loonie, it could soon be faced with an inflationary catastrophe.
WARN YOUR CANADIAN FRIENDS