Are we on the verge of a Canadian property market crash?

Since the US mortgage crisis of 2008 the worldwide economy has struggled to remain in positive territory although countries such as Canada and Australia for example have maintained forward economic momentum. Therefore it will come as a surprise to learn that many experts believe we are on the verge of a Canadian property market crash despite the fact the economy still remains in positive territory and is unlikely to fall into recession.

In many ways it depends upon how you look at the figures associated with Canadian property as to whether you believe we are on the verge of a soft landing or cold hard crash. There is no right and no wrong answer but if we look at the increase in average home prices across Canada from 2006 to June 2013 perhaps it is time for a slowdown. Average property prices have increased from $256,000 to approaching $390,000 in a relatively short space of time. So what are the indicators we should focus upon?

Disposable income

If there is one factor which continues to drive property markets it is disposable income which effectively means the funding available to families and individuals. At this moment in time household debt when taking into account mortgage repayments is a record 160% of disposable income. This would seem to indicate that a growing number of Canadian homeowners will struggle to maintain their payments going forward especially as and when the worldwide economy recovers and worldwide interest rates move higher.

Disposable income is a very basic but a very prominent indicator of the underlying strength and the underlying weakness of any property market.

Quote from PropertyForum.com : “Job market trends and low interest rates are supporting the housing sector in Canada with sales remaining stable and prices predicted to rise this year and next.”

Building permits

As property markets continue to attract attention and investment we often see a surge in building permits issued by the Canadian authorities. Unfortunately there was a 12.9% reduction in building permit numbers in June although this figure is even worse for multi-unit dwellings, which fell by 18.8% over the month. This on its own could be deemed to be a quiet month but investment in land for future development has fallen by 51% in Toronto, 52% in Vancouver and 30% in Calgary. These are certainly worrying times for the future of the Canadian property market!

House price indicators

Despite the fact that there are many reasons to be concerned, a number of experts believe that short-term house price figures will show that sales are going well, house prices remain strong and the sector could at worst experience a soft landing but should avoid a crash. The problem is that these housing index figures are historic and many of these transactions will have been in the pipeline for some time. If we look to the future, with building permits and land investment, there seems to be a lack of interest and lack of demand in the short to medium term.

It will be interesting to see how the Canadian authorities react to this worrying development as they are proving to be more proactive than reactive. Indeed the authorities recently acted to limit the packaging of mortgage backed securities as a means of attempting to cool down the mortgage sector. Whether this will deflate what many see as a Canadian housing bubble in the short term or whether it is too late to avoid the bubble going pop remains to be seen.