Canada's Housing Bubble

Jonathan Ratner November 16, 2009  http://network.nationalpost.com

The Canadian housing market may look like a bubble, but low interest rates, a relative shortage of new supply and mortgage innovation should keep it going for some time to come.

Instead of looking at affordability calculations or house prices on their own, it is far more telling to see how the value of housing assets compares to various benchmarks. Economists at Scotia Capital suggests a price-to-earnings proxy that involves comparing prices to rent, where rent is the equivalent income stream to housing as corporate earnings are to equities. This compares the choice of owning versus renting.

This metric is at an all-time high, as is the proportion of renovation spending as a share of income. Meanwhile, the fraction of unoccupied and/or unsold condos is at levels seen in the early 1990s.

Much of this may be explained by the relative absense of new product coming to the market in the bellwether single homes segment, according to Scotia. In fact, total housing starts are well off their mid-200,000 peak from 2007-2008 with the latest annualized reading at just 157,000.

“That relative shortfall of new product has partly fed frothy activity in the resale segment,” the economists said, adding that Canada remains off-cycle compared to most other major markets in terms of mortgage innovation. New products like longer amortized mortgages, insured investor mortgages, and little-down mortgages only came to market in the past two or three years after mortgage insurance restrictions were liberalized.

“Now that last Fall’s pent-up demand has been released, the three forces of low interest rates, transferring future sales to the present via mortgage innovation, and modest new supply can keep Canadian housing markets humming for some time yet before the eventuality of a softer market on rising rates in a future relative demand vacuum set in.”