Bloomberg economists say Canada among the top countries at risk for housing bubble: Canadian banks backing away from mortgages

Economist Niraj Shah said that he sees a "risk that a global round of monetary easing may fuel housing bubbles," implying that we have yet to see any housing bubbles unfold, or get confirmation of a bubble by a change in trends for the price of homes. Over the last few months, central banks have indicated that interest rates could be dropped if economic conditions continue to deteriorate in advanced and emerging markets. So, the worry is that prices could continue growing higher for housing... which could be making a bad situation worse.

Indeed, Canada has a magnificent housing market - one which has attracted the attention of many eyes, both at home and abroad. When properly compared to pre-2008 US home prices, Canada is in a league of its own, competing only with a few other commonwealth nations, and a select few in Europe. Bloomberg economists came up with an interesting chart demonstrating just how far ahead Canada is when it comes to price and debt levels:

Many economists and officials in Canada have come out and compared the strength of the Canadian economy in comparison to the United States. I've come out and shown how US nominal GDP and various other statistics are, in fact, quite a bit stronger than Canada's. This is at a time when most advanced economies are struggling with anemic growth, low inflation, and the self-induced trade-war. 

There's really not much to brag about in the US, so to say that Canada is on a much better footing in its poorly diversified and over-financialized economy, might be a tad bit too optimistic. Canadians are good at optimism. I'm a Canadian, so I'm quite familiar with it.

We can take a deeper dive still into this question of a Canadian housing bubble. The chart below contains two perspectives, each with different methodologies on how they calculate price changes. Both are indexes, though: 

If you take your finger or cursor and navigate it over Statistics Canada's index and Teranet-National Bank Index, you start to question where all of this is really going. And, it's not like we don't have other clues.

In fact, as Bank of Canada (BoC) demonstrated in an analytical note to BoC staff some months ago, lots of things have changed beneath the financial machine that makes these house prices possible. In particular, a kind of cliff-diving in mortgage originations among the top financial institutions in Canada is evident. These banks hold nearly 75 percent of all mortgages, which compose nearly 1/3 of all assets on their balance sheets. The Canadian banks have been a magnificent propeller for the Canadian dream to own a home... even if you can't or shouldn't really afford it. Take a look:

This trend is more evident now than ever. At the moment, more and more home buyers are turning to alternative lenders for credit with which to buy homes. Sometimes they are paying 7 percent or more for this debt. Just the other day, CMHC, Canada's state-backed mortgage corporation, came out and said that alternative lenders are holding a greater share of total mortgage originations. It also said mortgage growth has reached its lowest level in a quarter of a century.

Overall, things are a bit on a knife's edge. In fact, we'll know more about month-over-month and year-over-year changes in house prices in a few hours when Teranet and the National Bank of Canada (not to be confused with the Bank of Canada, the central bank) release their statistics for June. It will be noteworthy to see if prices are starting to creep up again, and to run some technical perspectives on price momentum. 

If we break the all-time-highs, that will be a big signal that things are likely to go higher. If we start to see some supports break-down, it might begin to solidify the bubble thesis. With the big banks scaling out of the lending game and letting the alternative lenders have a field day, I'm not confident that prices will have an easy time at current levels - not to mention them having any momentum to break former all-time-highs in markets like Toronto and Vancouver.