The warning is coming from inside the house, and it’s not from one of Bay Street’s bears. BMO senior economist Robert Kavcic said Canada is “playing with fire” in a note this week. Looking at the percent of income needed to carry a mortgage on homes, he doesn’t think 2017 was a bubble. The current situation is rapidly turning into one though. If mortgage rates rise, or stay the same and prices rise at the current pace, the market hits classic bubble levels.

Worse Than The Foreign Buyer Mini-Bubble

When people say this time’s different, they’re right – just probably not in the way they think. Kavcic called the explosive price movement in 2016/2017 a “mini-bubble.” The impact was limited to some segments, and locations. He also maintained while costs sharply increased, it was still manageable. “The result was correcting and taking almost 4 years to recover” after policy makers acted. Today, the picture is a little less optimistic.

If Mortgage Rates Rise, Canada Is Back To The Late 80s Bubble

Low interest rates motivated sales activity, but also created a debt trap. The cheap carrying costs are making it easy to load up on high debt levels. However, if mortgage rates go back to pre-pandemic levels, “we’re back into late 1980s territory by this valuation metric,” notes the economist.

If Mortgage Rates Don’t Rise, Canada Is Back To The Late 80s Bubble

Leaving mortgage rates where they are sounds like the obvious solution, but that won’t work either. “If mortgage rates stay where they are, but prices keep doing what they’re doing, we’re back into the late-1980s territory by this time next year.”

If rates rise, or stay the same and home prices continue, real estate turns into a textbook disaster. Sounds like a house condo of cards.