What Would Bubbles Do?
Many blog readers are no doubt aware that, late last month, the Canadian Centre for Policy Alternatives released a paper by David Macdonald entitled “Canada’s Housing Bubble:Â An Accident Waiting to Happen.” As the title suggests, Macdonald argues:
Canada is experiencing, for the first time in the last 30 years, a synchronized housing bubble across the six largest residential real estate markets in Canada.
On the whole, I found the paper to be very informative.Â And, for the policy wonks out there, the paper does simulate three possible scenarios going forward.Â Nevertheless, I’m left wondering how things are in factÂ going to unfold in Canada’s housing markets over the next several decades, and which groups will be hit the hardest if and when the bubble bursts.
A housing bubble emerges when housing prices increase more rapidly than inflation, household incomes, and economic growth.Â Several factors tend to contribute to the growth of a housing bubble: low mortgage rates, access to easy credit, net immigration and the stock of available housing.
He explains that there have been a total of three “housing bubble bursts” in Canada in the past three decades, and that they have been confined to just two cities, namely Vancouver (1981 and 1994) and Toronto (1989).Â Notwitstanding those bursts, “inflation-adjusted housing prices in all major Canadian cities remained remarkably stable from 1980 until 2001.”
In considering Canada’s six largest housing markets (Vancouver, Edmonton, Calgary, Toronto, Ottawa and Montreal), Macdonald delivers the following ominous news:
Housing prices for 20 years, prior to 2000, stayed in a narrow range of between 3 and 4 times provincial annual median income.Â Today, however, housing prices adjusted for income are out of their historical range, costing 4.7 to 11.3 times Canadians’ annual income.
For me, this brings to mind a May 2006 policy paperÂ written by Michael Mendelson in which MendelsonÂ assesses (among other things) whether home ownership is a reasonable financial strategy for low-income households to increase their savings.Â In the paper, he argues that owning a house “is wonderful when things go well, but it can result in huge losses when things go bad.”
I’m therefore concerned about the impact of a “housing bubble burst” on low-income households who own their homes.