It’s human nature to generalize. That’s our coping mechanism. We simply can’t process the overwhelming amount of data we’re bombarded with. Sometimes this serves us well. But other times it leaves us with a dangerous blind spot.
Let’s face it, there were at least a dozen factors that contributed to the U.S. housing bubble inflating and popping. These factors include everything from interest rates and government regulations to popular TV shows that made “flipping” houses the get-rich-quick scheme du jour.
But for all the factors that contributed to the problem, the general public has made a simple generalization of the root cause. They blame it on loose lending.
It’s like, “hey, if we can’t understand all the factors… let’s just blame the banks.”
It’s this generalization – that risky lending caused the bubble/bust – that leaves Canada with a blind spot.
As Harry points out, it’s true that the Canadian banking and mortgage engines are more conservative than their U.S. peers. But that doesn’t leave them immune to all the other factors that contribute to a housing bust.
Here’s a look at the home price indices for the U.S. and Canada. As you can see, Canadian home prices are in new bubble territory, reaching heights not even seen in the U.S.
What’s more, Canadian homes are no more affordable than U.S. homes were at the peak of our own housing bubble.
U.S. home prices crashed because, much like a Ponzi scheme, there were no new buyers who could afford to keep the gig going. In 2006, the ratio of U.S. disposable income to home prices peaked just above 150. That meant, for every $1 an American had to spend, he was buying a house worth $150. This wasn’t sustainable.
Today, Canada is in the exact same predictament. For every one dollar – and that’s a Canadian dollar, or “loonie,” by the way – that Canadians have to spend, they’re buying homes that cost C$152.9.
This is the same upper threshold of income-to-price that precipitated the U.S. housing bust.
So how is Canada different?
If you haven’t done so already read the Survive & Prosper issue on “The Next Real Estate Bubble.”