Wednesday, March 30, 2011

Canada Home Prices: Headed for Steep Correction?

Home price indexes for January were released this week for the U.S. (Case-Shiller) and Canada (Teranet), see chart above.  Both home price indexes for both countries equal 100 in January 2000 in the graph.  U.S.  home prices more than doubled between 2000 and 2006 and peaked at 206.52 in July 2006 when the real estate bubble burst and home prices plunged by 32.4% before hitting bottom in April 2009 at an index level of 139.26.  Canadian home prices have more than doubled between 2000 and 2010, and peaked at 204.59 in August 2010, before flattening out over the last six months.  

There has been some speculation that the Canadian real estate market is headed for a major correction, here's an excerpt from yesterday's WSJ article "Housing Booms North of the Border": 

"As much of the U.S. housing market limps along, home prices north of the border are on a fresh tear, fired up in part by a borrowing binge that has sent Canadians' debt to record levels—and now higher than their notoriously profligate U.S. neighbors—while income growth pokes along. All that has raised worry at the country's central bank, which repeatedly has warned about rising debt levels, and among some economists, who say the market is ripe for a correction—maybe a steep one.

David Madani, Canada economist at Capital Economics, an independent research consultancy based in London, says Canadian housing prices could be in for a 25% drop in the next three years, a correction he says is warranted by the now-inflated ratio of house prices to income. House prices have risen to almost 5.5 times disposable income per worker, well above the long-term historical average of 3.5, he says."

6 Comments:

At 3/30/2011 2:12 PM, Blogger Eric said...

BLS/Federal Reserve Cartel analysis version: Housing price inflation from 2003 to 2011 is 0%!

If the negative trend for U.S. housing prices in these 20 selected cities continues, as it is very near the "end of recession" low, would that constitute a double-dip, or are we merely still in the bottom of the first dip?

 
At 3/30/2011 2:28 PM, Blogger juandos said...

Well if Business Insider is correct housing prices are still correcting in 18 major US cities...

 
At 3/30/2011 3:01 PM, Blogger StVIS said...

It could be. Check out China's real estate market, it looks destined for a correction as well.

Juandos,

Thanks for the link, for indicating the obvious, and reminding us where we still stand.

 
At 3/30/2011 8:25 PM, Blogger Hydra said...

But, but Canada has high down payments and no 30 yeaar loans. How can they have a housing meltdown?

 
At 3/31/2011 9:23 AM, Blogger Ross said...

Another interpretation is the high slope deviation that occurred due to unsustainable loan vehicles (aka sub-prime) caused the point-of-inflection (aka crash) and the US prices over-corrected. That aligning with high household debt means the correction back to the Canadian curve has been delayed.

As someone else noted, Canadians have high down-payments and shorter mortgage terms. Both of those have been further reinforced in Canada recently as well.

So, broad conclusions from a simple chart analysis seem weak... though that doesn't preclude a Canadian price correction due to general biz cycles... and that itself may be overdue.

 
At 4/02/2011 11:31 AM, Blogger VangelV said...

But, but Canada has high down payments and no 30 yeaar loans. How can they have a housing meltdown?

Easy. Prices are too high because too many people see real estate as a no lose investment, particularly in areas that attract a lot of immigrants. Homes in my area that used to go for C$800K two years ago are now being listed (and sold) for C$1.2 million. I do not see any growth in personal income to justify such an increase in price. I have friends who own factories in China or are working in the UAE that use condominiums and houses as savings vehicles. Some own more than a dozen, most of which have been acquired in the past year or two, after our mild 'correction.' From what I can tell, they are one incident away from losing all of their original investment. They seem to be betting on the collapse in the currency because they point out that houses are cheaper relative to gold, silver, copper, wheat, sugar, oil, etc., than they were ten years ago. Yet, they would not consider buying commodities and are still loading up on houses.

The housing bubble will end badly one way or another and Canada will follow the collapse of the US housing market, particularly when the next leg down takes prices much lower in real terms.

 

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