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Lower Mainland housing and economic issues.

1. 

   vibe
   Member

   So over at Rob Chipman's blog there was some discussion about whether Canada is in a real estate 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:

   

   Attachments

   1. Price_to_Income_Ratio_by_Population.png (25.6 KB, 0 downloads) 1 year old

   Posted 1 year ago #
2. 

   vibe
   Member

   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:

   https://spreadsheets.google.com/ccc?key=0AhIjAVGQ3jl0dHByNHp0UTBxODQxMWxUX2pZVlB6eEE&hl=en

   Posted 1 year ago #
3. 

   Drachen
   Member

   Nice work. I love the graphs vibe!

   Posted 1 year ago #
4. 

   jesse
   Member

   Interesting analysis. So the chart shows that Canada is significantly more urbanized than the US. We also assume that there was generally little asset price inflation in non-urban centres. The first two bars are the important ones for gauging the relative size of the asset bubble.

   The whole holier-than-thou "Canada is more prudent" dogma being spouted by Canadian "experts" is a red herring. Prices compared to incomes (which is a reasonably decent but not exact proxy for rents) are what matters. The perverse lending practices in the US were part of the method used to obtain an asset bubble but Canada with its "more prudent" lending practices resulted in the same thing. Game. Set. Match.

   vibe, I might want to re-post this on housing-analysis -- with credit of course -- if that's OK.

   Posted 1 year ago #
5. 

   vibe
   Member

   Feel free

   Posted 1 year ago #
6. 

   The Pope
   Key Master

   Hey Jesse, when you do can you link back to vibes original post? I really like the way this forum is growing as a way for people to post their own analysis and would like to encourage it. Thanks!

   Oh, and great post vibe! Jesse beat me to the punch on republishing it so I won't post this on VCI, but its the sort of unique thoughtful content that makes doing this site worthwhile.

   Posted 1 year ago #
7. 

   jesse
   Member

   Actually, Pope if you want to post it I think you should go ahead. I will either link to your blog post or to this thread.

   Posted 1 year ago #
8. 

   vibe
   Member

   "So the chart shows that Canada is significantly more urbanized than the US."

   I'm not sure how you come to that conclusion. Neither index covers every urban centre. I mean this may well be the case but I don't think this chart shows it.

   Posted 1 year ago #
9. 

   jesse
   Member

   vibe, I think the right hand bar doesn't have much meaning unless the data set is complete. Assuming bubbles were exclusively the domain of large urban centres, the two left bars are the most relevant ones as they form complete data sets for the total percentage of population living with high prices.

   I'm not sure how to properly interpret the weighted average PI ratios but I haven't thought about it too hard. I think the graph you posted above, showing a histogram of the percentage of the population living with high prices, is a reasonable comparison between countries. This is because, by chance, the general make-up of the bubble cities' geography and demographics is comparable. Any valid premium for future density increases would be roughly the same.

   Posted 1 year ago #
10. 

    vibe
    Member

    Well Jesse, I thought about your comments and made some changes. I included all of the cities above a price to income ratio of 4.5 from the Demographia surveys. I believe this will create a complete data set. The spreadsheet link stays the same, here is the new chart:

    Attachments

    1. PI_Ratio.png (26 KB, 1 downloads) 1 year old

    Posted 1 year ago #
11. 

    vibe
    Member

    Oops, forgot to include Calgary in that last one, here we go:

    

    Attachments

    1. PI_Ratio.png (26 KB, 4 downloads) 1 year old

    Posted 1 year ago #

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