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Northern Exposure

Hilliard MacBeth, a financial planner from Edmonton, Alberta, has written a book predicting a crash of the Canadian housing market. It seems unbelievable. Quiet and stable Canada may soon face a financial meltdown. How?

“Fifteen years ago, I started to notice people changing their attitude towards real estate, probably due to the bursting of the dot-com bubble in 2000,” MacBeth says. “I noticed Canadians were buying more real estate—second homes and third homes. Some bought real estate for their 19-year-olds heading off to university. It became clear they believed real estate was a one-way bet that always goes up.”


Then, the U.S. housing bubble burst. MacBeth was amazed to see Canadian home prices continue to rise. It has led to a book, “When the Bubble Bursts: Surviving the Canadian Real Estate Crash” (Dundurn), released in March.


I spoke with MacBeth in February.

Prices Up Nine-Fold

How do you explain the Canadian housing bubble?


“We have this amazing government corporation called CMHC [Canada Mortgage and Housing Corporation], which guarantees a high percentage of household debt,” MacBeth says. “The lender—usually a Canadian charted bank, highly respected and a model of prudence and probity—forces the home buyer to buy insurance so that there’s no risk to the banker. He’s happy to take a 5 percent down payment, even 0 percent down, because he’s not taking any risk. That injects a measure of moral hazard into the situation. The lender doesn’t care, and the homeowner believes the value of the real estate can only go up.”


Sure, home prices do rise. But, in reality, they rise no faster than the rate of inflation. MacBeth cites the work of Yale professor and Nobel Prize winner Robert Shiller, who reviewed housing back to the late 1800s and found no increase in housing adjusted for inflation. So, the recent housing bubble in the United States was an exception and is why MacBeth is worried about Canada.


“Our housing prices have grown at more than twice the rate of inflation since 1975, and most of that has been since 2000,” MacBeth says. “House prices that should have gone up four-fold over the last 40 years grew at two and a half times the rate of inflation. They’ve gone up nine-fold.”


The ratio of house prices to household income further confirms the existence of a bubble. Whereas the United States peaked at 4.4 times household income before its crash, Canada house prices currently average five times household income, MacBeth says.


“People forget that all household debt is paid out of income. It’s never paid by selling the asset,” MacBeth says. “Nobody sells their house, pays off their debt and moves to a trailer.”


So, debt to income in Canada remains a problem.

A Broad Problem

When will the Canadian housing bubble burst?


“We don’t know,” MacBeth says. “About 500,000 homes a year are transacted, 6 percent of the 8.4 million owner-occupied homes in Canada. U.S. residential investment, which includes furniture, specialty construction, renovation—everything, got as high as 6 percent of GDP and plunged to 2 percent of GDP. It’s now recovered to 3 percent of GDP. Canada has been 7 percent [of GDP] for several years. So, we’re 1 percentage point higher than the United States, and we’ve been there longer.”


The problem, MacBeth says, is broadly based.


“It’s Ottawa, Montréal, Quebec City. It’s New Brunswick, Prince Edward Island and Nova Scotia, because people there came to work in Alberta’s oil sands and increased house prices back home with their extra income,” he says. “All six major markets—Vancouver, Calgary, Toronto, Montreal, Edmonton and Ottawa—are over three times household income. The highest, Vancouver, is 10 times.”


As for what to do, MacBeth says the key for individuals and businesses is to reduce their debt.


“Debt takes away options,” MacBeth says. “Housing is an illiquid asset. It’s hard to sell real estate assets in order to pay down debt. The trick is to do it before we get too far into the bubble.”


It’s definitely something to keep an eye on it.

Mark L. Johnson is an industry marketing consultant and writer. He tweets at @markjohnsoncomm and connects at

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