Economist to CTV: Perfect Storm Brewing in Canada's Housing Market

Aug. 22, 2016 — In a recent interview with the Toronto-based Business News Network, Professor Alan M. Taylor said Canada's hot housing market looks a lot like the U.S. before the global financial crisis.

Canada looking like U.S. before the financial crisis: Economist

UC Davis Economist Alan Taylor in a Skype interview from his office with Canada's Business News Network

Canada escaped that crisis relatively unscathed, he told BNN host Jon Erlichman. "You wouldn’t want to wish on Canada the alternative of going back and having a crisis, but ... that there hasn’t been that cooling off period of Canada. There hasn’t been a kind of discipline or sense that, 'Oh, maybe things have gotten overcooked here.'"

Taylor said vast regional differences in home values — hot in Toronto and Vancouver, but softer in Alberta and other oil-producing provinces — are similar to variations seen in the U.S. real estate market before the financial crisis in 2007-08. "This is something that the central bank and other policymakers in Canada will want to pay attention to." 

In July, the Bank of Canada held its benchmark interest rate steady at 0.5 percent. 

"What’s striking about this particular recession, which has been deeper and longer than anything since the 1930s, is that we haven’t had that normal business cycle reset of rates, although many people have predicted it year after year," Taylor said. 

Meanwhile, certain housing markets like Toronto and Vancouver are seeing an inflow of foreign capital, he said. 

“There’s something of a perfect storm there," Taylor said. "Given the timing of global trends — the fact there’s a synchronized recession in many countries — plus these very specific housing markets that are acting like something like a safe deposit box for the global high-net-worth individuals ... all of those are mixing together to create a potential danger. Because if rates do go up — if, when — then we may have a difficult reset ahead of us."