Wednesday, September 28, 2011

Chart of the Day: Canadian Home Prices vs. U.S.A.

"Canadian home prices in July were up 1.3% from the previous month, according to the Teranet-NationalBank National Composite House Price Index. This rise took the index to a new high of 215 (January 2000 = 100, see chart above0).  It was the fourth consecutive monthly increase exceeding 1%, and the eighth consecutive monthly increase after three straight monthly declines."

MP: On an annual basis, Canadian home prices increased by 5.26% compared to July last year, the highest annual gain in nine months, since October 2010.  Over the last ten years, annual home price appreciation in Canada has averaged slightly more than 7%, which is lower than the 12.4% annual home price appreciation in the  U.S. during the six-year period between January 2000 and December 2005 that led to the unsustainable real estate bubble and subsequent price correction.

Q: Is Canada headed for a real estate bubble, or are those record-high price levels sustainable?


At 9/28/2011 4:25 PM, Blogger David Andolfatto said...

Normalizing to 2000 is not entirely appropriate. We need the levels please! Were Canadian homes, for example, priced 50% lower than their US counterparts in 2000? Cannot tell from this graph.

At 9/28/2011 4:33 PM, Blogger truth or consequences said...

"Is Canada headed for a real estate bubble?"

Short answer: NO

Will the Can. market correct (10-20%)??? Maybe...probably...

Why?...No mortgage interest tax deduction. No 30 year fixed rates...and no you just can't "give the keyes back to the bank"...Do that and the bank comes after your car, your boat...whatever.

And generally a lot less leverage

At 9/28/2011 5:08 PM, Blogger MovingEast said...

While we are talking about Canada, Australia is another good example of the same issue. Definitely a correction in the works, all the same reasons and excuses are being trotted out in those countries that we heard in the US a couple of years ago (not making more land, not overleveraged for 2 income families, banks have good risk management etc etc).

Probably all we need is a slowdown in demand in places like China, and if another downturn comes along, I don't think both places will escape.

Full disclosure - sold my apt in Sydney a few months ago based on this thesis. Median house price to median income is way off historicals....

At 9/28/2011 5:31 PM, Blogger Ironman said...

Canada's real estate is being affected by a bubble, but not one in its real estate market (it's behaving according to fundamentals, but there's a bubble outside Canada that's affecting those fundamentals).

The same is true for Australia, although their situation has been going on for longer.

Both, as raw material providers, have been affected by the massive economic bubble in China. Their house prices, I'm afraid, are only sustainable provided China's economy keeps up its growth, which has unfortunately been slowing over the past year.

Look for the housing markets in both Canada and Australia to change for the worse as that sets in.

[Note - this is somewhat of a major change in our thinking from things we've posted previously - we had earlier found that no real estate bubbles were at work in either country, but didn't account for how their markets might react to bubbles outside either country!]

At 9/28/2011 7:07 PM, Blogger Stone Glasgow said...

We need to see owner-equivalent rents for Canada in order to make this decision.

At 9/29/2011 12:23 AM, Blogger Cabodog said...

I'd agree -- we need to compare pricing to rentals.

This ratio is why my personal opinion is that "apartment alternative" (eg, low-end housing) has bottomed in the USA (owning is back to making economic sense, especially with mortgage rates sooo low).

Plus, any Canadian investor with any sense at all would be dumping Canadian real estate and buying a few miles south in the USA.

At 9/29/2011 7:07 AM, Blogger Frozen in the North said...

The graph is misleading, going back to the early 1980s shows that house prices in Canada are still lower than in the U.S (The Economist has an interesting chart). More importantly, Canadian national income continues to rise (there is much less income disparity) -- and health care cost or exogenous to the personal disposable income (although an important component of the taxes paid by Canadians).

All that said, there is no doubt that as a proportion of income, housing cost is "in the bubble zone" in terms of sustainability. In Montreal, Toronto, Vancouver housing costs exceed 4x average income -- which is generally considered an excessive level.

However, borrowing cost are at historically low levels, but unlike the U.S. there is no such thing as a fixed rate 30 year mortgage -- maximum duration is 5 year (at which time rates are re-set) should interest begin to rise in the future, the Canadian housing market could come under pressure.

The Canadian authorities have already made it more difficult to borrow, reducing the maximum loan term to 30 years (from 35) and maximum loan amount to 85% of purchase price. Finally, any loan of 85% of purchase price has to enforce a borrower test as to its ability to sustain higher interest rates.

Still, close or in the danger zone!

At 9/29/2011 8:52 AM, Blogger Ben said...

You can see house price growth vs. CPI rents for major cities here:

CPI rents are quality-adjusted, so not the best measure. CMHC also calculates rents, but their data set is not nearly as extensive. Nevertheless, you can see the issues:

With regards to leverage in the Canadian market, I'd suggest we have a significant leverage issue as well. Here is consumer credit as a percent of GDP in Canada and the US:

And if we look at CMHC's mortgage portfolio, it's not remarkably different from Fannie Mae's in 2007:

At 9/29/2011 9:21 AM, Blogger morganovich said...

canada's median income has been exploding.

it was up 13% from 2005-2009 and up again in 2010.

this is predicated pretty much entirely on resource prices.

canada's housing market is entirely a function of them.

if resource prices drop meaningfully, so too will Canadian real estate.

At 9/29/2011 9:29 AM, Blogger Ben said...

@ Frozen in the North
"The Economist has an interesting chart".

The Economist made a huge error in using the New House Price Index in their interactive house price charts. It is an all-but-useless measure. I wouldn't put much faith in that. I've written about that fact here:


"canada's median income has been exploding."

It has been rising, but personal disposable incomes have lagged house prices significantly in all major cities. In the bubbliest cities on the West Coast, average resale house prices are over 25 times PDI. This is as bad as any US city at the height of their bubble:

I notice a lot of discussion about Canada being reliant on commodity prices to remain firm. Falling commodity prices, which I think are likely, will pull hard at the TSX, which is 50% energy and materials. However, I think we're missing the massively disproportionate role that housing-related industries have played in economic and labour market growth in Canada over the past 10 years. The reality is that falling house prices would CAUSE a recession, and therein lies the greatest risk to the Canadian economy at present:

@Carpe Diem
Sorry to fill your comment section with links to my site. Just trying to clear up some common misconceptions.

Ben Rabidoux

At 9/29/2011 11:36 AM, Blogger Todd said...

I heard several economists 'predict' the crash of 08, but they all did for different reasons. Now they all claim they were right, but they can't all be. Harry Dent predicted the correction in 2008, particulary in real estate, based upon demographic trends. Others such as Peter Schiff predicted it based on other considerations. If Canada's demographic trends (low birth rate and growing gap between young and old) are the same as in the US (and I think they are), then your graph would be a refutation of Dent's thesis.

At 9/29/2011 2:39 PM, Blogger Benjamin Cole said...

Some say the USA "bubble" was popped by a decrease in demand, and too-tight Fed policy. Would be interesting to know what has been monetary policy in Canada.


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