Low Oil Prices Could Pop Canada’s Real Estate Bubble
Low oil prices have hammered Canadian housing prices, threatening to pop the country’s much discussed real estate bubble, but according to one industry insider, you haven’t seen anything yet.
Over the past few years, Canada’s housing market has truly defied common sense. Despite stagnant wages, soaring debt levels, and a recession in the first half of the year, real estate prices have soared at a double-digit clip for much of the last decade.
The situation has produced some truly eye-popping statistics. For example, the average price of a single detached home in Vancouver is now more than $1.6 million. (Source: “Canada faces house-price dilemma in push to tighten mortgages,” Financial Post, December 3, 2015.) In Toronto, the nation’s largest city, one out of every 140 people is a real estate agent. (Source: “Canada’s next housing bubble: real estate agents,” Financial Post, May 9, 2014.)
These trends might be coming to an end.
Slumping oil prices are starting to take their toll on the country’s housing market. In Fort McMurray, home to Canada’s vast oil sand reserves, home sales have collapsed 41% year-over-year. The average MLS sale price of a home plunged by more than $117,000 in October, down 20% from $585,438 during the same period in 2014. (Source: “The average house in Fort McMurray has lost $117,000 or 20% of its in value in one year,” Financial Post, November 23, 2015.)
The fallout from the commodity bust is now starting to hit other centers. Calgary, Canada’s energy capital, saw average MLS sale prices fall 4.4% year-over-year to $444,535 in October. Nearby cities have also reported big year-over-year declines in home sales, including Regina (12.3%), Edmonton (16.3%), and Saskatoon (21.4%). (Source: Ibid.)
Canada’s economy is built on three pillars: oil, mining, and real estate. Low commodity prices have already knocked down the first two; a real estate bust would kick the last leg out from under the country’s economic recovery.
More concerning, however, would be the impact on households. Canadian consumers are up to their eyeballs in debt, far surpassing the levels witnessed even during the U.S. real estate bubble of 2005. Further declines in real estate prices would shove many homeowners into insolvency, pushing the nation’s banking system to the brink.
How much worse can things get? In a presentation to a private audience in New York on Monday, Canada Mortgage and Housing Corporation’s (CMHC) chief executive, Evan Siddall, presented a range of scenarios. According to stress tests run by Canada’s housing agency, Canadian housing prices could crash 26% if oil stays at $35.00 a barrel over the next five years. (Source: “Oil at US$35 would send Canadian home prices tumbling 26%, CMHC says,” Financial Post, November 30, 2015.)
In the CMHC’s worst-case situation, Canadian housing prices could crash 44%. Deflation, or falling prices, could stall business investment, pushing the nation’s unemployment rate to 16%. The Canadian housing market outlook, and the Canadian economic outlook, in turn, don’t look good.