Dangers outweigh possibilities in $200B Canadian housing wealth

The Bank of Nova Scotia recently calculated that approximately $200 billion in housing wealth has been generated in Canada over the past 12 months alone, a development that is sure to make home owners (especially on Vancouver and Toronto) pleased with their well-timed investments.
However, in his report for The Globe and Mail, market observer and long-time industry writer Michael Babad noted that the potential risks of these huge sums seemingly outweigh the upsides such as generous investment returns.
Probably the chief consequence of this trend is the increased fear of a potential bubble.
“This is the biggest threat to the economy, and one that has caught the eye of the Bank of Canada and the regulator of commercial banks,” Babad wrote.
“Rising household debt … has gone hand-in-hand with large increases in the cost of housing,” Capital Economics global economist Michael Pearce recently said in reference to inflamed housing markets in Canada, Australia, Sweden, and the Netherlands. “The risk is that, if house prices begin to fall, households will be forced to cut back spending to repay debt and that defaults will rise as households fall into negative equity.”
“The risks are perhaps greatest in Canada where there is evidence that looser lending practices, including issuing mortgages with very long amortization periods and with high loan-to-income ratios, are driving recent increases in housing demand,” Pearce added.
The impact of out-of-control price growth on younger generations merits serious consideration as well.
“The number of months required to accumulate a down payment on a representative home at a savings rate of 10 per cent was 34.9, versus 32.6 months a year earlier,” Matthieu Arseneau and Kyle Dahms of the National Bank said. “[In] Vancouver, for a non-condo dwelling, it reached 403 months, which is almost 34 years.”
No signs of eventual cooling down are evident in the most active markets, and for now, both the dangers and the possibilities in Canadian housing remain on a precarious balance.
“Realtors are getting richer by the day. I have no problem with that – I wish I could get rich, and I guess I am because I own a house in Toronto – but, please, not on the backs of people who God-knows-when will ever be able to buy their first homes,” Babad wrote.

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