Toronto Housing Bubble Pushing Economy Over the Edge

Toronto is #1!

Usually that’s a good thing. In this case, it’s not.

According to the UBS Global Real Estate Bubble Index, Toronto is the most overvalued real estate market in the world.

Toronto is a nice city, but it’s totally disconnected from reality. Increasingly, the only way people can afford to buy a house in Toronto is to commit mortgage fraud.

Although house prices in Toronto have declined roughly 20%, this hasn’t helped prospective buyers, as the cost of borrowing has doubled. At the same time, life in general has become more expensive as the price of everything else has risen dramatically. Canadians are cutting back spending as they tumble towards insolvency.

Canada Housing Market Forecast
Sources: Canadian Real Estate Association and Desjardins, Economic Studies

As spending declines, the economy slows. The probability of a Canadian recession is rapidly rising. RBC is predicting recession in early 2023, with unemployment hitting 7%. This is a downward revision of their July 2022 forecast for a “moderate and short-lived” recession. It’ll be a miracle if we don’t see more negative revisions.

Forecasts tend to get progressively worse as an economy approaches recession. We saw this as the world approached the Global Financial Crisis of 2008.

“Given the fundamental factors in place that should support the demand for housing, we believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited.” — Ben Bernanke, Federal Reserve Chairman, May 2007

While Canada might escape catastrophe, housing-led slowdowns tend to drag on for years because real estate is so intertwined with the rest of the economy (construction, durable goods, finance, etc.). A sluggish few years, propped up by exports might be the best Canadians can hope for. However, one cannot rule out the unknown unknowns that might surface as bedrock collateral gradually erodes.

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