Canada has a housing problem that magnifies economic and social instability through malinvested resources, oppressive debt, low savings rates, reduced household formation, low birth rates, gambling, and drug addiction. Anyone that doesn’t understand the policy-supported links between casinos, money laundering, narcotics, crime, and unaffordable home prices should invest some time digesting Sam Cooper’s investigative reporting laid out in interviews and his 2021 book Wilful Blindness. The money trail has been documented by law enforcement for years.

A new UBS study confirms that housing bubbles accelerated over the past year as the pandemic ignited a global spending spree enabled by the central bank and government stimuli. As shown below, the Greater Toronto Area now ranks with Frankfurt as having the most over-valued housing in the world. Vancouver is in the top six. More than a third of Canada’s population lives in the greater Toronto, Vancouver, and Montreal areas; one-half of that third is in and around Toronto. Not surprisingly, then, the most indebted households are also in these areas.

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The report notes that the likelihood of a severe price correction rises with bubble readings and that worsening affordability, unsustainable mortgage lending, and a rising divergence between prices and rents have historically served as forerunners of housing crises:

Households have to borrow increasingly large amounts of money to keep up with higher prices. As a result, the growth of outstanding mortgages has accelerated almost everywhere in the last quarters, and debt-to-income ratios have risen—most markedly in Canada, Hong Kong, and Australia. Pressure is mounting on governments and central banks to take action. Lending standards, which were relaxed during the pandemic, are being tightened again. Additional hurdles for professional housing investors and foreign buyers already loom on the horizon. Overall, housing markets have become even more dependent on very low interest rates, meaning a tightening of lending standards could bring price appreciation to an abrupt halt in most markets.

No country has ever gotten out of a housing bubble without a bust. The solution is not to add more debt and unaffordable supply, but rather for prices to mean revert back to rational multiples of rent and income. This has to happen because the status quo is inherently self-destructive. At the same time, the worst economic contractions have coincided with falling home prices. There can be no sustainable equilibrium without price pain first.