Does Canada Have Real Estate Bubble

Some investors and finance experts warn that Canada might face a real estate bubble because home prices are skyrocketing ahead of incomes. Buyers borrow huge amounts of money to purchase average homes and often resort to subprime lenders that charge higher rates. Canadians are already heavily indebted and rising home prices are something to worry.

Is the Bubble Going to Burst?

The issue has seen a lot of media attention recently, and bubble warnings surface almost on a daily basis. Lower rates are walletassociated with overbuilding, rising household debt, bloated real estate values, and overvaluation. The bubble might burst in case of recession because household incomes would drop. Many homeowners will get into the position where they are unable to keep up with large monthly payments and will default. Rising interest rates might have the same effect on the real estate market. Borrowers holding variable rate loans will pay more in interest charges to the point where they can’t afford to own a home. At the same time, many worry that rock-bottom interest rates tempt more and more Canadians into taking more credit at a time when real estate prices are already sky-high. If the bubble bursts, many homeowners will be left with negative equity. This means that consumers will be in no position to use credit, whether installment or revolving, to protect the estate market from further collapse. Economists warn that if the bubble bursts, the Canadian economy will face a long and serious recession.

Subprime Lenders

Bad credit lenders have a role to play when home prices are record high. Estimates show that about 5 percent of mortgages in Canada are subprime loans. These are high-rate loans offered to risky borrowers. Given that home prices in Vancouver and Toronto are red-hot, many home buyers are unable to make a down payment of 20 percent and resort to bad credit lenders. They offer mortgages with a lower down payment in exchange for higher rates. Thus borrowers pay more money toward interest charges.

The share of loans offered by subprime lenders has doubled over the last 2 years. This is a source of concern given that banks are subject to tighter regulations since the financial crisis. According to CIBC, this may cause risk to shift from regulated financial institutions to unregulated lenders that serve high-risk borrowers. Risky customers are borrowers with fair and poor credit and those with a history of seriously delinquent accounts, foreclosure, maxed out cards, multiple and excessive debts, and other credit issues. These customers are risky in that they have poor credit management skills and are more likely to default compared to borrowers with stellar credit and a solid payment history. They are usually turned down by major banks and unions and look for alternative sources of financing. Subprime lenders are one option for borrowers with less than perfect credit who want to finance the purchase of a home. As a rule, however, risky consumers who default don’t have valuable assets for lenders to seize, except for their homes. What is more, Canadians have about 55 percent equity in their homes, which is a figure comparable to the U.S. average 10 years ago. Some borrowers also use their credit cards to make a down payment, adding more debt toward high-cost mortgage balances.


The good news is that the share of subprime mortgages in Canada is lower than the share in the U.S. (24 percent) when the bubble burst. What is more, buyers who put less than 20 percent down are required to purchase home-loan or mortgage insurance. Borrowers who apply for high loan-to-value mortgages buy insurance which can be purchased from private companies or CMHC: Fannie Mae and Freddie Mac in the U.S. were privately owned while CMHC is government owned. Moreover, the regulatory system in the U.S. is rather complex, and different bodies have overlapping functions and responsibilities. The Office of Superintendent of Financial Institutions in Canada is the main regulatory body that oversees mortgage insurers and federally regulated entities such as pension funds, loan companies and trusts, insurance companies, and banks.

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