Canada's Housing Bubble

Analysis of the real estate bubble in Canada --

Wanted: better house-price indexes Print E-mail

We might want to order up a huge grain of salt to go with the latest housing stats released by the Canadian Real Estate Association (CREA). Actually, we may want to get a truck load of the stuff from a salt mine somewhere.

In a June 15 press release, CREA announced that the average price for a house sold on the Multiple Listing Service (MLS) shot up to a record high of $319,757 in May. “Over the past four months, the national MLS residential average price has recovered 16.4% from the low in January,” added CREA in its press release.

This data does not gel with other data series on the economy and housing market. Last checked, Canada was still in recession: the unemployment rate in May rose to an 11-year high of 8.4%. Since the recession began 11 months ago, Canada has lost over 360,000 jobs — with more than 10% of that total coming in May. Hmmm … how can house prices spike so much when so many people are losing their jobs or can’t find work?

Meanwhile, other measures of Canadian house prices are showing declines. The Teranet–National Bank National Composite House Price Index dropped 5.8% during the 12 months to March. And, according to Statistics Canada, selling prices for new homes fell 3% over the 12 months to April (the sharpest deceleration in new home prices since the recession of the early 1990s).

The problem with using average prices in the housing market, as mentioned in my blog, is the failure to compare apples with apples and oranges with oranges. In each period, the average price is calculated from a different mix of houses. There will be differences in the proportion of houses by dwelling space, style, number of bedrooms, lot size, region, and a variety of other characteristics.

In particular, when there are a higher number of sales from regions with more expensive homes, the CREA index will signal an increase in price simply due to this shift in the mix of houses. This, indeed, is what has happened in recent months: sales in high-priced cities such as Calgary and Vancouver are rising more quickly than elsewhere and distorting the CREA index.

CREA does footnote this problem in its press releases. But why even bother calculating such a faulty indicator and reporting the results as a lead item in monthly press releases? Why not headline a less biased measure?

That would be an index like the one produced by Teranet and National Bank. Launched about six months ago, it does a much better job isolating pure price change by using the “repeat sales” approach.

Just prior to its release, TD Financial Group released a study of house prices in Canada, lamenting distortions in measurement. One of its recommendations was that “Canada needs a repeat sales home price index.” They got their wish when the Teranet-National Bank index came out shortly afterward.

In the United States, indexes based on the repeat-sales formula are now mainly used. Of note is the S&P/Case-Shiller Home Price Index.

It would seem to be time for Canada to follow suit.

By the way, the S&P/Case-Shiller Home Price Index also doesn’t jibe very well with CREA’s house price stats. It is showing a drop of 18.7% over the 12 months to March and a 2.8% drop from February to March.

Don’t believe the housing hype Print E-mail

June 26, 2009 Colin Campbell

Judging by the latest real estate data, the Canadian housing market could scarcely be better. Average home prices are up more than 16 per cent this year, and in May they hit an all-time monthly high, according to the Canadian Real Estate Association. By those numbers, Canada didn’t just sidestep the housing market crash that continues to plague the United States, it sailed right through it virtually unscathed. And yet, there are plenty of signs that the Canadian housing market is still sitting on some very shaky ground—and even the potential that Canada’s big housing crash is yet to come.

Housing bubbles around the world: looks pretty bad Print E-mail

Rebecca Wilder May 16, 2009

The chart illustrates price-rent ratios for some of the most notorious housing bubbles - Ireland, Spain, the UK, and the US - indexed to 1997. The price-rent ratio can be compared to a price-earnings, or even better a price-dividend, ratio in finance. It measures the relative value of the asset: the price of the asset (purchase price of a home) divided by its flow of fundamental value (rental income earned or the value of having a roof over your head). As the price-rent ratio grows, the market value moves away from its fundamental value.

Canada's new home market is weakening Print E-mail

Rebecca Wilder  May 11, 2009

The weak conditions in the labor market - dragging demand for new homes and input prices for building - and commodity prices (inputs) is driving down the value of new homes in Canada. From The Daily:

Contractors selling prices decreased 0.5% in March compared with a 0.7% decline in February. This resulted in a New Housing Price Index of 154.6 (1997=100).
Garth’s “Greater Fool” Theory Print E-mail

Jonathan Chevreau March 9, 2008

Canada is not immune from the subprime crisis:  Garth Turner

The U.S. real estate crash is about to sweep into Canada, says Garth Turner in a just-published book entitled “Greater Fool.” Turner – the Liberal MP, entrepreneur and real estate investor – says the problems underlying the American subprime crisis “go far beyond mortgage products and also reach into Toronto, Calgary and Vancouver.”

Historical Prices and Inflation Print E-mail

Kevin Mar 4, 2009

I had been meaning to do this one for awhile, but never got around to doing all the number crunching... hopefully you guys will find this entry interesting, cause it took a fair bit of work.

Edmonton Historical Prices

Edmonton Historical Prices

Canada's dirty subprime secret Print E-mail

Mar 14, 2009 Greg McArthur and Jacquie McNish Globe and Mail

From the ramshackle, plywood deck on Brad Goodyear's rural Vancouver Island home, most people see piles of trash, a mattress, abandoned appliances and heaps of salmon fishing nets.

Price-to-Rent Ratio For Housing is Like the Price-to-Earnings Ratio For Stocks Print E-mail

Lawrence Roberts

Just as stocks have price-to-earnings ratios (PE Ratios) used to establish relative value, houses have a price-to-rent ratio to establish relative value. Rent is the income or potential earnings a property can produce. It does not matter if the property is rented or if an owner lives in the property. The potential for rent is equal to the potential for earning.

Greater Vancouver Price / Rent Ratio Print E-mail

House prices in Greater Vancouver are overpriced and consequently the rental yield on properties is very low. The chart above (click to enlarge) shows the long term detached house price adjusted for inflation, the inflation adjusted rents for a 3 bedroom apartment and the price to rent ratio for the benchmark detached family home (I used a multiplier of 2 on the 3 bedroom apartment rent to represent the benchmark detached rent).

Global Real Estate Ratios Show Extent Of Bubble Print E-mail

Real estate, as an asset, derives its value from two sources: personal income and rents. The first makes it possible for an owner occupied property to be purchased while the second allows for an investor to purchase real estate.

The following charts show the relationship between real estate prices and these two variables:

No housing bubble in Canada: Flaherty Print E-mail

July 17, 2008 Carrie Tait, Financial Post

CALGARY - Federal Finance Minister Jim Flaherty shrugged off housing worries in Canada Wednesday, saying there is no bubble and that the subprime-mortgage woes crippling financial institutions in the United States are not threatening banks north of the border.

"There is no bubble in the Canadian housing sector," he told reporters after speaking to roughly 400 people at a Calgary Chamber of Commerce event.

Global House Prices/Price to rent ratio/ Price to income ratio Print E-mail

May 22, 2008

Price to rent ratio/ Price to income ratio

When Will Housing Bottom? Print E-mail

Mike Shedlock / Mish Oct 25, 2007

Those looking for a housing bottom anytime soon are likely to be disappointed. Let's see why from three different angles:

  • Mortgage Rate Resets in Conjunction With a Consumer Led Recession
  • Historical New Home Sales
  • Historical Housing Starts

On the basis of mortgage rate resets and a consumer led recession I mentioned a possible bottom in the 2011-2012 timeframe.

Renting Makes More Financial Sense Than Homeownership Print E-mail

Jack Hough April 18, 2007

I have something un-American to confess: I rent an apartment, despite having enough money to buy a house. I plan to keep renting for as long as I can. I'm not just holding out for better prices. Renting will make me richer.

I normally write about stocks for, but the boss asked me to explain to readers my reason for renting. Here goes: Businesses are great investments while houses are poor ones, so I'd rather rent the latter and own the former.


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