An analyst has issued a warning that Canada may be on the brink of a significant economic downturn due to what he calls one of “the largest housing bubbles of all time.” Phillip Colmar, a partner at Global Strategist at MRB Partners, spoke to CTV News Channel, cautioning that although a housing crash isn’t “imminent,” it is “pretty inevitable.”
The Root Cause: House Prices vs. Incomes
Colmar emphasizes that the key indicator to watch is the widening gap between house prices and average incomes. For those anticipating a “big headline about a housing bubble,” this disparity should be a focal point. According to Colmar, years of low-interest rates have “seduced a lot of home buyers,” resulting in “excessive leverage backing up the whole system.” Colmar indicates that Canadian homeowners are more leveraged than their U.S. counterparts were before the 2008 financial crisis, saying, “Canada kind of is really off the charts on that front.”
Mortgage Troubles: A Sign of Things to Come
In Canada, unlike the U.S., borrowers must renew their mortgages every five years at current interest rates. Colmar identifies this as a key reason why mortgage burdens can skyrocket. “Affordability is bad right now,” he notes, adding that “debt servicing of those mortgages is pretty excessive.” With Canadian interest rates at their highest point since 2001, following a year of increases aimed at fighting inflation, Colmar suggests that the financial stress felt by mortgage holders is “just a taste of what’s to come.”
Watching for the Bubble’s Burst
While Colmar stops short of predicting an immediate crash, he advises caution. He points to further interest rate increases and employment levels as critical factors to monitor. A combination of rising unemployment and escalating mortgage rates could plunge Canada into a financial crisis akin to the U.S.’s 2008 meltdown. In such a scenario, Colmar anticipates “a very deep deleveraging cycle, a quite pronounced recession,” adding that “the currency will take it on the chin too.”
