One economist believes there are signs of overbuilding in Canada, a trend that that may be contributing to a housing bubble.
“We think the housing market, from an evaluations point of view, is very stretched. We think evaluations have over-shot fundamentals,” David Madani, an economist with Capital Economics told the Financial Post. “We do see signs of overbuilding in new construction. So, even as the new supply of housing has risen, we’ve also seen a run-up in prices — which is very typical of what you would see in a housing bubble.”
Housing starts remained steady in November, with the trend measure for housing starts used by the CMHC coming in at 195,792 units in November compared to 195,796 a month prior.
Madani believes overbuilding, as well as high levels of household debt, are a risk to the economy.
Figures from Equifax show a $1.5 trillion debt burden for Canada’s households, with the debt load rising 7.4 per cent in the three months to the end of September compared with a year before. That works out at an average debt of $20,891 per person excluding mortgages. Of the $1.5 trillion owed, two thirds is mortgage debt, totalling $985.1 billion.
However, unlike the Band of Canda and Madani, the credit agency says that it is not concerned about the levels as consumers are controlling their debt well.
For his part, Madani believes an eventual rate hike could contribute to an erosion of household affordability.
“So, when rates eventually go up, that would be a huge hit to housing affordability and, therefore, home sales,” he told the Post. “And if home sales fall, then the market price for housing goes down. This could slow household spending, which is the bulk of the economy.”