The Housing Bubble

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. 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.

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.


  • Andrew: Did you know about the Teranet-National Bank index of house prices?
    It’s the nearest Canadian equivalent of Case Shiller. (The numbers won’t affect your argument much at all, but we might as well use it, especially since they went to a lot of trouble to construct it!)

  • “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.”

    Not at all surprising. No politician of any party will tell voters that their property value is over-inflated and no politician of any party will advocate government regulations that burst property value bubbles nor will any of them advocate policies that hold property values at the rate of inflation.

    Instead, all politicians -and the bureaucrats that they control- deny that property value bubbles can exist and actively promote policies that over-inflate those prices. Buying votes.

    The BoC may not be under the direct control of the Harper government, but it does have a mandate to not rock the boat. Rocking the boat would make it difficult for them to achieve their mandate of 2% inflation, no more, no less.

  • Canadian silver bug

    I find the talk about bubbles to be based on a faulty definintion, I believe a bubble is when people continue to chase prices on a commodity (houses in this case) when there is no shortage of the commodity. In the U.S. Spain, Portugal, there were huge housing booms where people were chasing prices and buying on spec an item that there was ample supply of, this is not the case in Canada

    In Canada, especially our big markets the prices have risen for years on direct demand for homes not speculation, and we have not built up a glut of inventory.

    Yes homes are becoming unafordable, but this is largely due to population density, expanding home sizes and real demand, not unfettered exuberance.

  • Thanks to Nick for the link. This index which tracks changes in the prices which have have sold more than once shows essentially the same thing – which is that prices have doubled since 2000.

    I have my doubts about supply matching non speculative demand. Checking the historical stats I find that investment in new residential construction averaged 0.5% of GDP higher in the period 2000-2009 than it did in the 1990s (3.1% vs 2.6%) We built over 1.5 million new houses 2002 to 2008, about one third more than in the preceding seven years.

  • “House prices had corrected for a few months in late 2008 and early 2009 but took off again. Among several factors, the pickup reflects record low interest rates and the little reported fact that the Canadian government, via CHMC (Canada Mortgage and Housing Corporation), is now purchasing and or insuring most new or renewed mortgages from banks.” A process that government sponsored enterprises Fannie Mae and Freddie Mac did very we’ll, to its own conservatorship.

    “The statistics reveal that, over the last year, outstanding mortgages held by banks have basically been flat while NHA (National Housing Act) securitized holdings (held by CMHC) are up by one-third and thus represent almost all of the growth in residential mortgages outstanding in the last year. As such, the risk of falling house prices is increasingly held by the taxpayer.” This was reported by the report from vanier institute, interesting to see it glazed over.

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