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Is Canada Going Back into a Recession?

18 May 2012

Even with our fairly speedy recovery from a recession that Canada just barely fell into, no one is eager to see it happen again. But the incredibly hot housing market that shows no signs of slowing down any time soon indicates that that’s exactly where we might be headed. At least, according to one of Canada’s leading economists, Ben Rabidoux.

Of course, the number one element that’s going to drive us into a recession are the high, high prices in some of Canada’s housing markets. And while not that long ago Vancouver could be seen as who to blame for it, Toronto has now taken over that title.

Toronto mortgage brokers and Toronto real estate agents alike have been seeing the trend continue to climb for several months, and they say that if anyone has doubts about Toronto’s housing market, just take a look at the bidding wars within the city.

Brendan Powell, one real estate agent in the city says, “Last year, we were seeing bidding wars that went up to $100,000 over [asking price,] and that was a really big deal. Now we’ve actually seen a handful that were more than that – maybe twice that – which is insanity.”

His partner, Melanie Piche, also explains just how Torontonians find themselves paying so much more for their Toronto mortgage than they had originally intended. “For every extra $50,000, they’re only looking at an extra $200 a month, or $210 or $220 at the current rates. And those numbers are manageable for a lot of people. So suddenly you can get the house that you want for an extra $220 a month – go for it. And you’ve just paid $50,000 more than what you were planning on paying.”

Neither Powell nor Piche see a U.S.-style housing crash happening here in Canada, because our banks only loan to sound borrowers, and they’re placed under stricter guidelines and mandates.

However, Ben Rabidoux thinks that once interest rates go up people will stop spending, housing prices will plummet, and the economy will fall into a “deep recession.” But while that may not be great news for Canadians, Mr. Rabidoux’s data that he bases his opinion on might be somewhat off. Currently most experts agree that as a whole, Canada’s housing market may be overvalued by 10 to 15 per cent.

According to Rabidoux though, “All of the models scream to me that we’re looking at house price nationally that are overvalued on the order of 30 per cent – at least.”

Do you think a 30 percent overvaluation is a high estimate? Or do you think Rabidoux’s right on the nose, and that Canada most likely is facing another recession?

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