Bay Street veteran David Rosenberg said he's seeing signs that stress in some of Canada’s hottest housing markets is worse than when he first sounded the alarm over the U.S. subprime mortgage crisis nearly two decades ago.
Rosenberg, the chief economist and strategist at Rosenberg Research, said in a television interview Friday that by almost any metric he watches, financial conditions in the Toronto and Vancouver housing markets have deteriorated to the point where policymakers should have grave concerns.
“I’m taking a look at all the metrics I had in my hands when I called the housing bubble in 2005 and 2006 in the United States. I was looking at home price-to-rent ratios, I was looking at home price-to-income ratios, I was looking at the extent to which the household sector was overexposed to residential real estate on their balance sheet,” he said.
“I’ve got news for you: the numbers in Canada, on all the metrics, are higher now than they were at the peak of the U.S. housing bubble 13 years ago.”
Rosenberg’s repeated warnings over a housing bubble come as a cocktail of record-low interest rates and sky-high demand for detached homes during the pandemic led real estate prices in Canada’s two largest housing markets sharply higher. The average home price in Toronto was up 15 per cent year-over-year, hitting $1,045,488 in February, while Vancouver home prices rose nearly seven per cent over the same time period, with an average home selling for $1,084,000.
The heat has even spilled into outlying communities, with Toronto suburbs like Brampton and Oshawa seeing double-digit price gains as buyers head further afield in a bid to find more space during work-from-home pandemic restrictions.
That gravity-defying run has bucked expectations for how the domestic housing market would behave during the pandemic, which was initially thought of as an event that would depress home prices due to the economic shock of COVID-19. Canada’s own housing watchdog, Canada Mortgage and Housing Corp., recently tried to explain how it badly missed the mark with its initial call for a nine to 18 per cent decline in prices in mid-2020.
Amid that rising home price environment, Rosenberg has been steadfast in his call that the market is in a bubble, comparing it to his experience trying to convince Americans they were staring down a similar crisis more than 15 years ago.
“It’s like listening to [former Federal Reserve Chair] Ben Bernanke in 2006, when he told everybody, ‘Oh, don’t worry, house prices nationwide never go down, don’t worry.’ I’ve got to tell you, when I was at that perch as chief economist at Merrill Lynch, I was laughed out of meeting rooms talking about a housing bubble in 2005 and 2006,” he said.
In spite of that conviction, Rosenberg isn’t willing to make a call on when exactly the bubble will burst, warning these conditions could persist for years before a crash.
“We are in a housing bubble, I guess people will say, ‘Well, what will ever cause that bubble to burst, maybe it will never burst?’ Well, at some point, it will,” he said.
“Bubbles can fester for years. Remember the dot-com bubble, we talk about 1929 for the stock market. But we are in a very unstable situation, when you have housing values running so far beyond the underlying fundamentals.”
While rock-bottom interest rates have helped underpin the housing market in what former Bank of Canada Governor Stephen Poloz described as a worthy trade-off for supporting the Canadian economy through the recovery, there are signs the bond market may not be cooperating with the Bank of Canada’s ultra-accommodative stance. Yields on a Canadian five-year bond – which underpins fixed-term mortgage rates – have been rising steadily, hitting their highest level since February 2020.
Any price moves downward in the residential housing market could have dire consequences for the economy, according to Rosenberg. He warned a plunge in home prices could send Canada spiraling into recession due to the increased economic cloud of the sector.
“If [home prices] just mean-reverted, the impact on Canadian balance sheets would be so severe that then the second-round impact on spending would actually take us into that recession that Stephen Poloz was talking about that we’re avoiding by having this bubble in residential real estate,” he said.
“It’s like the cat and the tail: what’s chasing what?”