According to George Athanassakos (via Bloomberg), professor of finance at the Richard Ivey School of Business, Canada may be on the cusp of a severe housing correction as real estate investment surges above a tipping point relative to economic output. He said the following (mentioning the graph below):

“Eventually, everything boils down to demand and supply. Whenever this ratio (housing investment as a percentage of gross domestic product) goes over 7 percent, it signifies over-investment in housing and two or three years later, we have a severe correction. We have experienced bubbles and busts before in Canada, it’s nothing new, and I don’t know why this time would be different.”

Canada’s housing market is booming as historically-low interest rates fuel purchases, driving up home prices and adding to record household debt. Canada’s ratio of housing investment to GDP has averaged 5.8 percent over the last 50 years and is currently at about 7 percent.

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