Over at the Financial Post there’s an editorial that’s pessimistic about the Canadian real estate market:
The arithmetic is simple, and some of the warning signals look uncomfortably like those of the days before the market implosion that brought the 1980s to a thumping, crashing close.
Start with resale home prices. A “matched sales” approach to measuring prices tracks, over time, multiple sales of the same properties — this reduces the likelihood of measurements getting skewed by cyclical or regional shifts in the price mixes of homes that happen to be selling. Over the past ten years, prices so measured, in Canada’s major markets, have doubled, increasing at more than 7% per year, at a time when consumer price inflation generally had been running at about 2%.
So why is that a problem? Because average wages have not been running much ahead of inflation, and that means that house prices have steadily been bubbling out of reach of workers’ abilities to afford them. The house price-to-income ratio last peaked and then plummeted from 1989 to 1991, and the ratio regained its prior peak in 2004-05. Since then? It has climbed steadily higher yet, the ratio now far outstripping anything seen in the past 20 years.
Eventually that makes housing affordability a problem, and quickly so when interest rates start to rise. Housing looks affordable now, given that mortgages remain on the market at rates near their all-time lows. However, carrying costs relative to income would rocket upward, were rates one or two percentage points higher. Such rate increases are not in the cards in Canada today — but they will arrive all the same, and sooner rather than later if inflation continues to test the upper bound of its target range, as it did through 2011.
Read the full article here.