It is striking that, even while moved to concern and some action, the Bank of Canada and the Minister of Finance are still desperately afraid to admit that Canada is experiencing a housing bubble.
One can go on and on about how difficult it is to spot a bubble. But, as Dean Baker has often argued with reference to the supposedly hidden US housing bubble which inflated after the collapse of the dot com boom, such apparent sophistication should not distract attention from the evolution of some key ratios – such as the rate at which housing prices are rising relative to all prices, the ratio of house prices to incomes, and the ratio of house prices to rents.
The average resale price of housing as reported by the MLS – the key measure monitored by CMHC – shows a rise from $158,145 in 1999 to $303,594 in 2008. http://www.cmhc-schl.gc.ca/en/corp/about/cahoob/data/index.cfm If the average house price had risen in line with consumer price inflation, the 2008 price would have been just $191,225. In short, house prices have clearly been rising much faster than the overall price level – up 92% 1999-2008 instead of 21%. That big fact remains true even if you account for the fact that the MLS price series is not ideal compared to the Case/Shiller index in the US and note that price increases do vary a lot in regional terms.
As Toby notes in his fine blog post, the Vanier Institute of the Family report notes that the increase in house prices has far outstripped the growth of family incomes. In fact, Chart 10 of the report shows that the average MLS price has risen from 3.2 times average household income after tax in 1999, to 5.o times average household income today (end of 2009.) The ratio had been stable in the 1990s before exploding from the turn of the millennium. http://www.vifamily.ca/library/cft/famfin09.pdf
CMHC provide data showing that the real disposable income of homeowners rose only very modestly from $53,100 in 1999 (in 2006 $) to $57,700 in 2006 (the last year in the series.) 2007 and 2008 are unlikely to have changed that picture of very modest real income growth much.
The huge gap between real income growth and the rise of house prices has, of course, been filled by the growth of mortgage debt.
What about the ratio of house prices to rental housing? CMHC reports that the average rent of a two bedroom apartment in metropolitan areas rose by 28% between 1999 and 2008, or just a little ahead of inflation.
A quick examination of these key ratios indicates ample support for the view that there is a Canadian housing bubble. When it explodes – as it will when we experience rising interest rates in combination with a still very slack economy – the result will be a nasty erosion of real household wealth, reduced spending, and a squeeze on jobs.
Unlike the US, this is unlikely to prompt a banking crisis. The high ratio mortgage debt is insured by CMHC and the federal government and, unlike the US, Canadian families hold recourse mortgages – which means that the banks can step in and take non housing assets in the event of default. But many families, especially younger families, will be in deep trouble.