From the previous post of the Canada housing bubble part 1, we showed that Canadians are stretched far beyond the limits of debt, with debt-income levels at similar levels to the United States before their housing collapse. However, the million dollar question is, for how long can this last? Before we can answer that question, we need to break –down and analyze the components of what fueled this bubble to determine if trend is sustainable.

One way that home prices can increase, is to have Canadians assume larger debt. Although, as mentioned above Canadians are approaching all-time levels of debt, and the only way to assume more debt is to increase their incomes. Increasing incomes during global financial turmoil and a period of high inflation is meek at best. Perhaps salaries of government employees and some private sector jobs will rise, but most jobs wont and will probably stagnate. This situation is clearly unlikely to provide strength for home price increases.

Another way for a home price increases, can be done by further decreasing interest rates. Interest rates as of today from Bank of Canada are 1%. Yes interest rates can go marginally lower, however, this policy would be artificial and would require government intervention in the markets. While we can follow suit of this situation, as the Americans have. The long –term effects of low interest rates will undermine the economy with its malinvestments from an artificially low rate and will only “kick the can down the road” as rates return back to normal.

A third way that they can increase home prices, is to create easier credit with the aid of federal and provincial corporation i.e. CMHC. Although, the current minimum requirements for CMHC insured mortgage is 5% down. We can technically lower this to 0%, however, I believe that this will backfire and will create political suicide. If they want to try expanding the Canadian Housing Bubble, they must do covertly without anybody noticing it. This situation to lower credit terms again is unlikely.

A last way the housing bubble can remain on track would be to increase foreign capital into the Canadian Housing Market. For instance, Asian’s has greatly influenced the Canadian Market, especially in Vancouver where home prices are roughly 11 times average household income. Similar to Hong Kong and Sydney. Can this trend continue with additional foreign capital entering into the Canadian market? Yes, however, if there is a slowdown in Asia, we can see this foreign demand dry up.
Please tell me what your thoughts are below.