Canada's housing bubble is now a 'tale of two cities'

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness..."

That would be part of the opening line from Charles Dickens' oft-quoted but rarely-read novel, "A Tale of Two Cities."

Notably, in a recent note to clients, Capital Economics' Canada team suggested that the book's title actual serves to explain what's going on in the Canadian housing market bubble right now.

And although it's not a perfect metaphor, it still an interesting way to contextualize things.

The "two cities" in question are Vancouver and Toronto: the former saw home sales decline by 23% year-over-year in August, while the latter saw home sales surge by 23.5% year-over-year.

This divergence "demonstrates that even though the Vancouver market may be softening, there is no sign of any weakness in the country's biggest city [Toronto]," wrote the Capital Economics team, led by chief North America economist Paul Ashworth.

"A few commentators tried to link the surge in August specifically with the introduction of the foreign buyer tax in Vancouver, claiming that foreigners were now switching their focus to the GTA. [However,] Toronto home sales (again, seasonally adjusted by ourselves) have been on a steep upward trend since late 2012," they added.

It's also worth noting that Vancouver's home sales peaked in February, and have fallen by a cumulative 40% since then, according to data from the Vancouver Real Estate Board, cited by Capital Economics.

Moreover, the area's home sales fell by 27% year-over-year in July, which suggests that the recent tax implemented on foreign buyers might not be the primary catalyst in August's drop, according to the team.

In light of all that, it's worth considering what could eventually lead Toronto's housing market to start falling as well.

Here's Capital Economics again:

"The truth is that, for all the talk of so-called triggers, when they get that big, bubbles often end up collapse under their own weight. Vancouver housing is another illustration of that with no obvious trigger, just as the original stock market crash in 1929 had no obvious trigger and nor did the bursting of the dot com bubble in 2000. The Toronto housing market is running a little behind Vancouver, but we suspect it won't be long before it peaks too."

In short, something to keep an eye on in Canada.

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