USA bubble peak vs. Canada today

Vibe posted an interesting comparison of the 2006 US bubble peak to the present day Canadian situation in the forums this weekend.  The local Vancouver market is bubblicious, but is there a national Canadian housing bubble?

Everyone pretty much agrees about Vancouver, but here are a couple of points that were made about the national scene:

1.It is reasonable to claim that there is not a housing bubble in Canada because only certain areas are over inflated.

2.Vancouver’s very high prices skew the national average and cause Canada to look worse than it really is.

One thing I think we can all agree on is that the US did have a housing bubble. Well I put together a spreadsheet that I feel shows that affordability is about as bad across Canada as it was in the US at their peak. It also shows that Vancouver is not skewing our national data any more than the most overpriced cities in the US were skewing their data.

In order to measure affordability I used house price to personal income ratios. I compared the 20 cities used in the Case Shiller Housing Index to the 6 cities used in the Teranet Housing Index. The US data is from 2006 while the Canadian data is from 2009.

I think the following graph most clearly illustrates my point:

Vancouver is the only Canadian city with a ratio over 9, while the US had 3: LA, San Fran and San Diego. Toronto is the only Canadian city with a ratio between 5 and 9, the US had 9 in this range. The under 5 range looks bigger for Canada but we have more population covered by our index than they do by theirs. The important thing is that the percentage of each nations population living in cities with elevated ratios is similar.

The distribution and average ratios for both countries are almost identical. I did a population weighted average of the ratios and this gave a higher value for the US than Canada, 6.3 versus 5.6. Keeping in mind that the Canadian data comes from 3rd quarter 2009, during our recent price dip, I don’t think this is a huge difference.

Now I don’t know what the future holds, but to me this data suggest we are in a very similar situation to the US at their peak. We might not take the same path down (we already had a double top) but I don’t see why our eventual bottom should be much, if any, higher than theirs. And any price drops should be distributed across the nation in a similar fashion as well.

Here is a link to the data for anyone interested.

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Anonymous
Guest
Anonymous

Yup Canada is different all right. It is 4 years behind!

Best place on meth
Member
Best place on meth

Like Miami, this city will end up dropping over 50%.

Even worse for condos.

Kite towards moon
Guest
Kite towards moon

One thing people don't realized is the importance of CANADA as best alternate.Most of Canadian residence can fly to USA and UK for immidiate visit.Anybody who think that people will spend multi million dollars to buy a house in uk or usa are deluded with day dream.I think even Halifax may do better than any American cities in the future.In the merging spin beyond 2010 this world of investors include UK and USA must look for safe bet somewhere and that would be none other than CANADIAN cities and why not? Is there any investor in the world to sit without investing for decades?

vreaa
Member

In this morning's 'Breakfast with Dave', David Rosenberg says the following:

"GETTING READY FOR THE CANADIAN HOUSING BUST?

Well, the CMHC is getting braced for something because the housing agency has doubled its reserves to $1.3 billion — ostensibly to be used as claims rise during the imminent BoC rate-hiking cycle."

jesse
Member

This is an interesting way of interpreting the data. It doesn't give us a sense of how indebted owners are but given what we know about personal savings rates, the sales volume, and the length of the boom, there is little to no doubt Canada is disturbingly similar to the US in what really matters: price to income and price to rent ratios.

mohican
Member

Very nice.

Any metric of price to income or price to rent puts Vancouver clearly in bubble territory just like the US cities mentioned.

Countrywide, there are many parts of Canada not in a bubble – Quebec and Atlantic Canada for example.

Auditnerd
Guest
Auditnerd

Vancouver is clearly the most absurd housing market outside of China.

Housing in Calgary and Edmonton are still unaffordable. Value is relative, of course. 300k in Calgary v Houston (I'm presently deciding on those two to move to) is pretty shocking.

Snowrunner
Guest
Snowrunner
Numbers are only part of the story, they are a strong indication, but real estate (like any investment) also rides on people believe that it is a good deal. Say, 10% of "owners" go under and the media plays that story, much like the media has driven up house prices, they can also drive it down (beyond what is needed). Having said this, I don't think we see a crash in the short term, meaning, I don't think we'll see 20% off by the end of the year and then that's it. The obsession with house prices / markets is one thing, but it is only a small part of what is going on in the world. Lack of US recovery, higher interest rates, loss of jobs will have a much bigger impact on house prices than people seem to… Read more »
Gordon C.
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Gordon C.

Quite obviously, the interest rate affects affordability.

The lower the interest rate the higher the multiple of income to house prices can expand.

It would be interesting to plot median income to monthly payment say of a representative $100,000 in financing. In that way you could allow for the difference in the way the Americans calculate a mortgage versus Canadian banks.

jesse
Member

@Gordon C.: "The lower the interest rate the higher the multiple of income to house prices can expand"

I don't necessarily disagree with this statement but it's worth asking what mortgage rates being low is really saying about the economy and future income gains in general.

vreaa
Member

I don't think we've adequately discussed and digested the implications of this recent statement:

“We foresee a marked weakening in housing”

– Mark Carney, Governor of the Bank of Canada

This has MASSIVE implications. He is literally announcing that there will be a bust.

crashcow
Member

GETTING READY FOR THE CANADIAN HOUSING BUST?

May 3, 2010

David Rosenberg

"The CMHC is getting braced for something because the housing agency has doubled its reserves to $1.3 billion — ostensibly to be used as claims rise during the imminent BoC rate-hiking cycle."

crashcow
Member

@vreaa: You beat me to it, again.

House owner
Guest
House owner

EX me you idiotic bear?

With hundred and thousand of wealthy Chinese officials buying house with cash,how could it be bubble;indeed,it is well supported by inflow of cash from Great China.House owners are all ensure a prosperous retirement for the yrs to come.China is Vancouver's guardian.

House buyer
Guest
House buyer

EX me you idiotic bear?

With hundred and thousand of wealthy Chinese officials buying house with cash,how could it be bubble;indeed,it is well supported by inflow of cash from Great China.House owners are all ensure a prosperous retirement for the yrs to come.China is Vancouver's guardian.

vreaa
Member

@crashcow: haha

His commentaries are pretty good, eh?

Dude
Guest
Dude

@House buyer:

No group of people are buying now. Stop referring to one race you idiot! All the Chinese I know are not buying and many of them have not bought. Stop your crap!!! Many of them did not buy because they think the market is over price.

VRENGD
Guest
VRENGD

It looks like the phantom "rich asians" will be much less rich in the near future. Their paper gains and inflated collateral look set to collapse.

"Property trading volume went down 64 percent last week from a week earlier in Shenzhen, down 45 percent in Beijing, down 38 percent in Shanghai, and down 2 percent in Guangzhou.

In China's 35 main cities where housing market data was monitored by the newspaper, 21 saw their trading volume of commercial housing area go down last week, with the figure in Hangzhou going down 73 percent."

anonymousAA
Guest
anonymousAA
Off-topic, but what's up with the rental market in the lower mainland? We've been casually looking for a place (we like where we live but more space would be nice) and I just keep seeing the same places posted over and over again-often at totally unreasonable prices: $2200 for a 2 bed condo in BURNABY? $1750 for a 2 bed at the Quay in New West? Yikes! I put an ad out in housing wanted and actually got a few replies, to my shock! One guy said, ya we've posted our condo at 1475 but would consider negotiating on the rent (guess he's had no takers). Now we're considering waiting because everytime I look at craigslist the listings just seem to keep piling up. Or will these would-be landlords eventually throw in the towel and list the property? Either way… Read more »
Gordon C.
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Gordon C.
Crashcow said" "The CMHC is getting braced for something because the housing agency has doubled its reserves to $1.3 billion — ostensibly to be used as claims rise during the imminent BoC rate-hiking cycle.” I would think this is more to do with the new accounting rules that came into affect on January 1 of this year. CMHC has to follow rules similar to other insurance companies and the statements have to be transparent to shareholders (the Canadian people). They can't hide things on their books like before. Except, CMHC was grandfathered on previous years, so CMHC only has to have reserves that relate to sales that occurred after January 1. So, I am betting the level of the reserve is still inadequate by industry standards. Fannie Mae and Freddie Mac were private companies that answered to the shareholders, their… Read more »
boomingVancouver
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boomingVancouver

Have you been to LA bear? It's like Vancouver only bigger. Makes sense that house cost same as LA in Vancouver especially with rich asian hot money pouring in because of Canuck games.

spark
Guest
spark

(an aside)

i took the kid to granville island on sunday, as i was driving along the length of 6th ave i saw no less than 12 open houses. i'm just sayin'.

jesse
Member

@Gordon C.: "[Fannie Mae and Freddie Mac's] poor level of reserves lead to financial trouble and the US government stepping in"

There was always an implicit government guarantee of losses regardless of whether or not they were publicly traded. CMHC is no different. I think Rosenberg is doing a disservice with his latest quip. It seems more an accounting change than any meaningful change to CMHC's mandate; with a government backstop the need for reserves seems extraneous but for increased transparency.

The timing of the reserve increase certainly is coincidental with sharp warnings from the BoC head. Still it may be nothing more than coincidence. In any case IMO the horse has already left the barn.

Snowrunner
Guest
Snowrunner
Off-topic, but what’s up with the rental market in the lower mainland? We’ve been casually looking for a place (we like where we live but more space would be nice) and I just keep seeing the same places posted over and over again-often at totally unreasonable prices People who realize that they cannot sell for the price they want or need, so they try to become landlord, believing that "a renter pays the landlords mortgage". As more and more people will be facing the same situation prices will come down as soon or later these unwilling landlords will have the choice between either losing $1000/month or $2500/month (or more). Of course once that point is being reached the downward pressure will increase and it's a renters choosing. I expect this to start either very late this year or early next… Read more »
Vrengd
Guest
Vrengd

There is no secret remain everything is unfolding as planned,in 2010 Olympics "Canada Welcome The World" to come up to Vancouver real estate podium.I was wrong regarding monthly payment that an owners can handel compare to 2008.In my new edition, i have revised my assessments regarding monthly payment and that is Vancouver buyers.Vancouver buyers and owners will be able to handel their monthly payments for decades to come.These following graph shows that owners that were handeling payments against million last month of march are able to go beyond $1,300,000. Kite to the moon.