By Ketki Saxena
Investing.com -- In June, a report by Yasmin Younes, a global strategist at Citi, rated the Canadian housing market ranks first as the most vulnerable to rising interest rates among developed nations, as measured by a few critical indicators.
Last year, UBS's Global Real Estate Bubble Index ranked Toronto at the top of the list of cities with a housing bubble.
The fact that the Canadian housing market is in a so-called bubble is one that has oft been commented on by economists, and an idea familiar to nearly everyone Canadain; most acutely to those seeking to purchase a home or cope with skyrocketing rents.
We know we're in a bubble. The question is whether it's going to pop.
One economist thinks it will.
In an interview with BNN Bloomberg, Phillip Colmar, partner at Global Strategist at MRB Partners, notes that “Canada is probably sitting on the largest housing bubble of all time".
Colmar asserts that highly inflated home prices are a fallout of the easy money, low-interest rate policy instituted by the Bank of Canada since 2008.
Colmar believes that there's a high risk of a deleveraging cycle as mortgage rates continue to climb, particularly as Canadians have seen debt-to-income rations and total debt burdens climb.
“The amount of Canadian leverage into the system versus incomes is pretty astronomical — and we’ve seen debt serving going up dramatically", Colmar notes.
Canada's housing price-to-income ratio stood in June at 136.3% - the highest amongst all developed economies, as per a report by Citibank.
Colmar believes that the bubble eventually will pop: “There is definitely a risk here that if mortgage rates go higher or unemployment were to rise or we hit the next recession, then this thing does end up in a deleveraging cycle".
Colmar believes this deleveraging cycle is inevitable, despite the efforts by the OSFI, Canada's financial regulator, to insure banks and mortgage holders from the fallout of extended amortizations and negative amortizations as homeowners grow increasingly unable to pay off the interest on their mortgages,
Recently, the OSFI has introduced regulations, which as per Peter Routledge, Superintendent of Financial Institutions are designed to "ensure banks and mortgage insurers have adequate capital buffers to absorb risks that arise when mortgages fall into negative amortization. We believe these incremental changes add necessary resilience to Canada’s mortgage finance system.”
The OSFI has also recommended banks implement a series of measures to protect overleveraged borrowers, including proposing a halt on compounding interest.
Whether the Bank of Canada's interest rate hike cycle does in fact affect a deleveraging cycle, giving the lie to the widely held belief that Canadian housing only goes up, however, remains to be seen.