Canada's Housing Bubble

Analysis of the real estate bubble in Canada --

Canada Vs. Australia: No Bust In Canada, But A Recession Is Probable Print E-mail

Mar 28 2012 Igor Novgorodtsev


After the publication of my article on Australia, several readers contacted me pointing out that the United States' northern neighbor is afflicted with the same disease as its down-under cousin: a commodity-dependent economy, housing bubble, and overleveraged consumers.

I decided to take a closer look to see if a similar set of symptoms point to the same disease. After looking at the facts, I concluded that Canada is also in a tough spot and is probably bound to experience a significant recession in the near future. Yet, Canada's situation is much more nuanced, and an outright economic bust is much less likely. I compared the economy of both countries, their real estate, and banking systems.


Canada and Australia are similar in many ways, apart from the common language and immigration history. Canada is the second largest country by territory in the world while Australia is sixth. Both countries are sparsely populated with their populations concentrated in several large cities: Canada with 34 million people has an 81% urbanization rate versus Australia with 22 million people and an 89% urbanization rate.

Both are blessed with vast natural resources and have greatly benefited from the decade long commodity boom.

There are some very important differences though. Canada, in many ways (please forgive me Canadians), functions like a 51st. US state. For every Detroit, there is a Windsor across the river with automobile factories, auto-part manufacturers, and supporting infrastructure. Large US multi-nationals like to build factories in both countries so they can artfully play labor unions against each other and hedge their currency risks (see "As Unions Lose Their Grip, Indiana Lures Manufacturing Jobs").

Nominally, Canada exports 45% of its GDP with 79% of it going to the US. Australia exports "only" 27% of its GDP with the largest trading partners being China and Japan.

It's tempting to think that Canada is much more vulnerable to the global economic slowdown until you look at the export details:

Graph 1: Canadian export composition (Source:, author's calculations):

A large chunk of Canadian exports is manufactured products: over 34% is machinery, equipment, and auto-parts. The next largest segment is energy products: oil, electricity and natural gas.

All experts segments only slightly fluctuated over the last 5 years during the pre-crisis, the financial crisis, and the slow recovery.

Graph 2: Canadian export mix over last 5 years (Source:, author's calculations):

This is very different from the Australian exports where coal and iron ore exports steadily have taken a larger share.

Most importantly, the largest share of the Canadian natural resources exports are oil, natural gas, and electricity. Only oil has a true global market, while natural gas, whose prices drastically vary in world "spot" markets, has been in "recession" in North America since 2008. Electricity is even more "local", as it needs power lines for transmission, mostly going to the USA.

While I am not a proponent of a "peak oil" theory, I recognize the fact that we are running out of "cheap oil" and the high price of extraction is likely to support prices at an above $70 a barrel level, even in case of a recession. According to the Economist, the "break-even" price for Alberta's tar sands was $50 a barrel and was still declining.

Graph 3: Natural resources export mix (Source:, author's calculations):

Finally, the industrial goods segment is an equal mix of fertilizers, industrial chemicals, and metals, none representing more than 10% of overall exports.

The exported goods of Australia are absolutely dominated by iron ore and coal, common and cheap commodities with an almost unlimited supply-- unlike oil. Their prices are highly elastic and are almost certain to collapse even in case of a mild demand slowdown:

Graph 4: Australia's exports:


At first glance, the prices in Canada have risen as much in the last decade as they did in Australia, and both countries are in a clear bubble territory according to the Economist research.

Graph 5:

Yet according to other statistical measures, housing in Canada is much more affordable than that in Australia, and the price appreciation may have been a function of low property prices in the 90's:

Table 1: Property comparisons in Canada, Australia, and USA (Data:




Price/Rent Ratio

19 years

27 years

21 years

Rental Yield/Inflation




As one can see from this table, Australia rental yields are nearly zero in real terms.

The Canadian housing market drastically varies from region to region. Prices in Montreal seem quite reasonable, even cheap; prices in Vancouver are very high:

Table 2: Yield rates by Canadian region (Source:


Just like Australia, Canada is dominated by several major banks known as "big five": Royal Bank of Canada (RBC), Toronto-Dominion Banks (TD), Bank of Nova Scotia (BNS), Banks of Montreal (BMO), and Canadian Imperial Bank of Commerce (CM).

Table 3: Bank comparison (Source: author's calculation, IMF,

Tier 1 Capital Ratio



























US Average




I pointed out in my article on Australia that its big four banks (ANZ, NAB, WBC in this table) are very vulnerable to a sudden flight of capital because their deposits are insufficient to cover their loans. The Australians have to rely on selling banks bonds in foreign markets. Should Australia run into economic difficulty, its currency is likely to depreciate, spooking investors into dumping bonds due to "currency risk."

Canadian banks (RBC, TD, BMO), on the contrary, are very well-capitalized with bank deposits. This capital is usually very "sticky": even during the US financial crisis there were almost no "runs on the bank."

Canadian banks can earn money with less leverage due to better net interest margins (NIM), as their yield-curve is upward-sloping.


This article is by no means a comprehensive analysis of the Canadian economy. While it's clear that Canada has its share of economic challenges in many ways similar to Australia's, the outright "short Canada" case is just not there. It's likely that Canada may experience a recession this or next year, especially if the US growth rate stalls. However, an outright Ireland or Iceland-style bust is not likely here.

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