海角大神

Actor and broadcaster Jeff Douglas says he knows there are 鈥渕ore responsible鈥� things to do than take on a mortgage he will likely have to pay until he turns 70.

But that didn鈥檛 stop him and his wife, interior painting contractor Ana Maria Diez, from charging headlong into the battleground that has become the Canadian real estate market.

Mr. Douglas and Ms. Diez fell in love with and purchased a 1,300-square-foot duplex in a middle-class west Toronto neighborhood last month for $632,000. Like an increasing number of Canadian buyers, they sealed the deal after duking it out with several other couples who also wanted the house. They placed no conditions on their contract and finally paid 112 percent of the original list price of $555,000.

鈥淚t was one of the last houses I think we鈥檇 have a shot at because the price of houses in Toronto goes up every week so it was definitely a now or never situation,鈥� says Douglas. 鈥淎t $625,000 ($632,000 in US dollars) we feel like we got a bargain.鈥�

Douglas and Diez may feel lucky. But house purchases like theirs are increasingly fueling concerns that, like their American neighbors a few years ago, Canadians are spending themselves into financial disaster.

鈥淲hat we are seeing is the irrational exuberance that was present in the聽US,鈥� says David Madani, a former Bank of Canada analyst now with the consultancy Capital Economics. 鈥淚t has all the symptoms of a disaster waiting to happen.鈥�

Fueled by record low interest rates 鈥� earlier this winter, major Canadian banks offered five-year, fixed-term mortgage loans for just under 3 percent (the average for a five-year term is 3.49 percent) 鈥� and an economy that was largely unaffected by the 2008 economic crisis, real estate prices in Canada have taken a steep turn upward.

Nationwide, they have nearly doubled in the last 10 years, to an average of about $373,000.聽In some large cities, such as聽Toronto聽and聽Vancouver, they are up more than 10 percent year over year. Stories of bidding wars, like the one this winter in which a young woman paid $1.18 million, or more than $400,000 over the asking price, for a suburban聽Toronto聽bungalow, have become common.

Although buyers seems convinced that real estate prices can only go up, Mr. Madani, along with the International Monetary Fund, the Economist magazine, and various independent and bank economists, warns they are already overvalued by as much as 25 percent. Madani warns they are likely to drop by at least that much over the next few years. If that happens, he says, the drop in consumer spending and investment in housing would likely be dramatic enough to push the economy into recession.

鈥淚f credit tightens tomorrow, the game is over,鈥� adds Ben Rabidoux, an analyst with the聽US real estate market research firm M Hanson Advisors and the author of the website The Economist Analyst.聽聽鈥淚 think we will see a decade of stagnant returns and a stagnant economy.鈥�

Although low interest rates mean buying a house is only slightly less affordable than it was in the mid-1980s, Mr. Rabidoux and Madani聽聽say other factors suggest a price drop is on its way. For one thing, real estate prices have risen nearly three times as fast as real incomes. That has pushed current house prices in聽Toronto聽to about 15 times the average annual disposable income, compared to a long-term average of about 10. In聽Vancouver, they are 25 times disposable income.聽聽

Rising prices, along with strong consumer spending, much of it on house improvements, have pushed household debt to record highs. Canadians now owe $154 for every $100 earned, up from just $90 10 years ago. By comparison, US consumers owed $161 for every $100 earned just before the economic crisis in 2008, a figure they have whittled down to $141 this year.

For the time being, buyers like Jeff Douglas are content to carry their debt. He says that although he is paying 3.4 percent on his mortgage, he could still afford it at 4.5 percent.

But like many Canadian homeowners, his finances could be at risk if rates go higher than that.聽聽Canadians are more at risk from rising interest rates than their American counterparts are, because unlike the fixed 15- and 30-year mortgages in the聽US, the typical Canadian mortgage resets every five years. Canadians who lock in to a low interest rate now have no guarantee that those same rates will still apply when they renew their mortgage in five years.

TD Bank Vice President Craig Alexander says that when interest rates return to more normal levels, about 2 percent higher than they are now, about one million Canadians, or 10 percent of those who carry debt, would be financially vulnerable.

鈥淚 don鈥檛 see a聽US-style problem with high foreclosures, but I do worry about the economy,鈥� he says.

The Bank of Canada and the Canadian government have repeatedly warned over the last several months that interest rates will eventually rise and that Canadians should start paying down debt. Spending has started to decrease, but for the most part Canadians still seem to have their 鈥渉eads in the sand,鈥� says Rabidoux. 聽

鈥淭here is an idea that it鈥檚 different here, that what happened in the US cannot happen to us,鈥� he said. 鈥淏ut part of it is just simple mathematics. You can鈥檛 have house prices rise like this indefinitely."

The most common difference cited is the Canadian bank structure. Canadian banks have stricter lending rules than in the聽US.聽Only about 3 percent of mortgages are considered subprime, and NINJA (No Income, No Job or Asset) mortgages do not exist here.

But Rabidoux agrees that that difference is key, since it means most Canadians have not been given mortgages they cannot afford under current conditions. But he says, once interest rates begin to rise, over-stretched Canadians will have no choice but to cut back on spending and that when that happens the country is likely headed for a recession.

Still, Toronto real estate agent Melanie Piche says she expects real estate prices to continue rising.

鈥淧eople see their friends, how much money they have made in real estate,鈥� she said. 鈥淎nd there aren鈥檛 a lot of safe places to put your money right now. Where else can you make 10 percent?鈥�

Douglas agrees, and said he thinks of his purchase as an investment, similar to buying into the stock market.

鈥淚 would say prices are hyperinflated. But for the price of housing to go down in聽Toronto, that I can鈥檛 see,鈥� he said. 鈥淪imple supply and demand dictate that as long as the city continues to grow, there will be a demand for housing and that will keep prices up.鈥�