Why a soft landing in Canada's housing market is not likely in every city

Some analysts and banks know that Canada's real estate market is overvalued by 10% to 25%.   Each week, more and more housing bubble stories are coming out.

Some believe that incomes will grow while house prices fall by a small margin or just stay flat.  This is the soft landing theory.While it is possible that a soft landing could occur in some places,  Canada as a whole will not and that means that some places will get absolutely sideswiped.
Here is a quick look at the national average house price from the 80's until now.

The last housing bubble in Canada was in central Canada in 1989.  Toronto and area were quite bubblicious at that time.  But it was not a national housing bubble, as the west was still licking their wounds from the housing bubble that burst in the early 80's.  But as we know today, there are many more participants as most major centers in Canada have entered bubble status with different speeds and at different times.   

Now if we go back to the time period of 1989 to about 2000, the average Canadian house price fell a bit while incomes basically caught up to house prices as we see here in this upcoming house price to income graph.  From 1990 to 2000, house prices increased by about a total of 7% while the house price to income ratio edged down a smidgen. This is what I believe is the closest thing Canada has to what could be labeled as a "soft landing".  But even in this "soft landing", Toronto and area got hammered while other places were not affected at all.  Why? Because they did not have a housing bubble.  Today, "it is different this time."

What really helped soften the blow was the drop in interest rates.  The time period from 1990 to 2000 was a time when interest rates went from double digits to mid single digits.

It is the main reason why affordability improved throughout the 90's and the beginning half of the 2000's.

 Especially in the city with the housing bubble in the late 80's and early 90's.

Household Debt to GDP and Household Debt to Income Ratios Show a "Soft Landing" is Unlikely

The next two graphs are key to understanding why a soft landing in Canada's housing market is unlikely.  In the "soft landing" phase of 1990 to 2000 where house prices stayed level, household debt to GDP grew from 63% to 67%, but this was a time when interest rates were lowered which cushioned the increase of debt growth to buoy house prices.  At 94%, Canada is now 10% past the sustainable household debt to GDP ratio threshold  ( according to the Bank of International Settlements).  Heading forward, Canada does not have the luxury of interest rates going down.

Here is mortgage debt to GDP

On a similar theme as household debt to GDP, the household debt to income ratio did not increase much in the ten years that house prices stayed flat and interest rates were lowered.  There is no magic number at which this ratio is unsustainable but the US and UK peaked at 160%, so Canada is close to that number.  Do we really need to go higher to find out?

Here is mortgage debt to personal disposable income

In the 90's, house prices stayed flat while interest rates trended from double digits to single digits.  And even with that, the household debt to GDP and income ratios increased in that decade.  Heading forward, Canada does not have the luxury of interest rates going down.  Canada can not continue to increase debt loads faster than GDP and incomes.  Eventually, GDP and incomes will have to increase faster than debt growth.  This will put a remarkable strain on house prices.


Some have suggested that if interest rates stay low for a long time, that it is possible that a "soft landing" could happen. And this is possible but not throughout Canada.  If interest rates stay low for a decade, that would mean that the economy in Canada has been in the crapper and that means many places throughout this country would be suffering through high levels of public and private debt.  Nothing will save Vancouver and other places from a housing bust.   But there are pockets that could have a soft landing and I'll explain who could in a future post.