Is the Canadian housing market really different from the United States housing market? Or is there just a time lag between the two countries? We have all heard how Canadian banks are more conservative than their American counterparts but that does not mean that Canada does not have a housing bubble. Previous housing bubbles in Canada had stricter lending than now and the amount of household debt is at all time highs with interest rates set to rise.
Here is a comparision of the United States housing market at the peak 2007 and Canada at the end of 2010. These housing market indicators measure if homes are fair value or not.
Real House Prices
United States
Canada
Median Multiple
United States
Historically, the Median Multiple (median house price divided by median household income) has averaged 3.0 or less in the United States. The third quarter of 2007 represented the peak of the housing bubble in many markets. By this point, the Median Multiple averaged 4.6. The average in More Prescriptive Markets was 5.8, with the Ground Zero Markets at 7.3 and the Other Prescriptive Markets at 4.8, The More Responsive Markets had an average Median Multiple of 3.2.
Canada
Historically, the Median Multiple (median house price divided by median household income) has averaged 3.0 or less in Canada. Housing in Canada is moderately unaffordable with a Median Multiple of 4.6 in major metropolitan markets and 3.4 overall.
Price to Rent
Months of Supply
United States
Affordability
United States households
In 2007, the ratio was 26.02 percent for US households. This does not include taxes, or utillities. Canadian households
In 2010, the RBC affordability showed that the average Canadian house ate about 36% of income for Canadians. ( condos, bungalows, two storey) This does include taxes and utilities.
Ownership ratio
United States households
The peak of home ownership hit 69% in 2006 and has declined since.
Canadian households
Home ownership rates have surpassed 70% in Canada. Is that the peak?
Debt-to-income
Canadian households had a higher debt-to-income ratio than their U.S. counterparts for the first time in 12 years in 2010. The ratio of household credit market debt-to-personal disposable income rose to 148.1 percent from 143.4 percent as income fell 1.5 percent. In the U.S., debts represent 147.2 percent of households’ disposable income, according to the U.S. Federal Reserve.
Outstanding Mortgage Credit Growth
From 1980 to 2008, Canadian mortgage credit growth was over 775%!
From 1980 to 2008, American mortgage credit growth was over 825%!
These charts look like twins.
Inflation
Population Growth
Canada population in 2008- 33,506,000
An increase of 37%
United States population in 1980-226,545,805
United States population in 2008-305,000,000
An increase of 34.7%
Residential Investment as % of GDP
It does not look like Canada is too different from the United States using all these measures. Granted, housing markets are not limited to only some of these measurements. And some of these measurements are from different sources so some of the data can be skewed. But there is no denying the fact that Canadian and American housing strayed away the long term growth fundamentals of a housing market which is inflation and incomes, and used easy, cheap credit to bid up houses and create a housing bubbles.
Rising interest rates aren't required to create an inversion in the home value graph; all you need is a mass psychology catalyst. That could be a crash in commodity prices (TSX as a proxy) or the realization that the Chinese miracle isn't one, or a whole list of other probable events.
ReplyDeleteCharlotte,
ReplyDeleteagreed. Almost all calculations show that or lead to the point that Canada and Saskatoon have housing and credit bubbles. But the one thing that can not be measured so easily is psychology of the housing markets and rising interest rates won't be the only factor in letting air out of the bubble.
The question that remains is what catalyst(s) end up busting the bubble? Demographics, the record household debt, rising rates, China/or India crashing or slowing down could all play a factor. Or maybe the realization that the economy was fed by the wealth effect which gave the appearance of a strong economy?
Regardless, I wouldn't want to the person loaded up with debt to find out.
Throughout history,even the most intelligent people got caught in asset bubbles.
ReplyDelete“Issac Newton had the great good luck to get into the South Sea Bubble early. He made a really decent investment and a very quick killing, which mattered to him. It was enough to count. He then got out, and suffered the most painful experience that can happen in investing: he watched all of his friends getting disgustingly rich. He lost his cool and got back in, but to make up for lost time, he got back in with a whole lot more (some of it borrowed), nicely caught the decline, and was totally wiped out. And he is reported to have said something like, “I can calculate the movement of heavenly bodies but not the madness of men.”
http://financialinsights.wordpress.com/
I'm starting to see young people ascribing to the saying: "I'd rather rent with no debt than own with no equity and a mortgage". All you need is 20% of people to believe in it to create a tipping point. Once that occurs, renting, apartments, tenancy will no longer be dirty words.
ReplyDeleteI would like to see Chart #2 with the other cities also graphed until 2010. It seems that they are all graphed until 2004 and then the saskatoon graph extends to 2010. Is this a graphical error or is it made to underscore your point.
ReplyDeleteSigns point to a severe housing correction in Canada
ReplyDeletehttp://www.theglobeandmail.com/report-on-business/signs-point-to-a-severe-housing-correction-in-canada/article1979229/
Matt,
ReplyDeletethe chart had data from all other cities up until 2004. I did the calculations for Saskatoon to extend the graph up until 2010. Some of the other cities like Vancouver have higher inflation adjusted house prices than Saskatoon.