How hard would a ‘soft landing’ be in Canada's housing market?

Some Canadian economists are saying we don't have to worry about a housing bubble. For example, Stephen Gordon from Maclean's blogs, “Odds are on a soft landing for the Canadian housing market”.

But one very important number these economists are leaving out is real house prices. (Real prices are corrected for inflation.)

Real house prices dangerously high

Last year, Nobel Laureate Paul Krugman looked at real Canadian house prices and concluded the Canadian economy is susceptible to a “deleveraging shock.”

This graph shows the trouble:

Over the long term, real house prices tend to stay around 100%. Today they are higher than 200%.

US comparison

Canada has no chance of suffering a US-style housing collapse. Theirs was founded on predatory, sub-prime, mortgage lending. These fraudulent mortgages started off with affordable payments that skyrocketed after a few years — that's why the market collapsed so fast.

Japan offers a better model

The Japanese experience offers a better comparison. The following (descriptive) graph on real home prices shows a housing bubble that took 15 years to form — and 15 years to deflate:

Hard soft landing

But Japan's “soft landing” was anything but soft. It created an economic catastrophe the country is still reeling from today. They have suffered a shocking 20 years of near-zero interest rates, deflation and anemic economic growth.

Conclusion

Japan shows it doesn't matter how soft the landing is, it's how far down the ground is that really counts. Considering Canada is now as high as Japan got, it's a long way down.

Will real house prices fall back down to 100% in Canada 15 years from now? No economist can say squat about that. But if Canada suffers a hard soft-landing, we'll know who's to blame: Stephen Harper.