Guest Post: What's Really Driving House Prices In Canada? The Must-See Graph Of The Day...

Tyler Durden's picture

Submitted by Ben Rabidoux of Economic Analyst

What's Really Driving House Prices In Canada? The Must-See Graph Of The Day...

We've spent a great deal of time analyzing the drivers of house price
appreciation in Canada.  We know the usual suspects...the ones that
drive house prices in normal times.  And we've examined them all and
found them wholly unable to account for the unprecedented rise in house
prices in Canada:  Rents (cities and provinces), Incomes (part 1 and part 2), GDP (part 1 and part 2), Inflation.  House prices have massively outpaced them all.

We've also examined the supposed drivers of real estate appreciation:  Population growth and immigration
The reality is that these two have a negligible effect on real estate
values except in situations where land use regulations are highly
restrictive.  It's supply and demand, baby!  Population growth increases
demand, but don't think for a second that our construction industry in
Canada isn't just as motivated by profits as any other industry.  Demand
will not go unmet....unless restrictive land use regulations are in
play, in which case they contribute to boom-bust cycles (reference this gem by Leith Van Onselen for an excellent read).

And just for fun, we examined how demographics gave real estate a 0.5% annual tailwind for the past 40 years.  That party is now over.  Demographics are now estimated to exert a 1% per year drag on house prices going forward.   Bummer.

My position has long been that the driver of house price appreciation
in Canada over the past decade has been primarily the result of the
unprecedented expansion in debt caused by the loosening of CMHC mortgage insurance requirements and the removal of the maximum insurable mortgage ceiling....facilitated by a falling interest rate environment, a new mass perception of the 'investment worthiness' of real estate as an asset class, and the emergence of housing as a form of conspicuous consumption
But if we boiled them all down into one word, it would be this:  DEBT! 
And the pace of debt accumulation is not sustainable... ergo, the pace
of house price appreciation is not sustainable.  Nor are house prices at
current levels relative to underlying fundamentals.

Not convinced?  Behold!....presented without further commentary...

house prices canada debt gdp


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Clayton Bigsby's picture

I see your uh-oh, sir, and raise you a "Ruh-roh Raggy!"

bankrupt JPM buy silver's picture

Not so fast.  I commented on this the other day on my blog.  So I must comment again, here, to see if I am the only one seeing what I'm seeing.

All my new neighbours are Asians.  They have bought all the houses near me at market asking price in the last 2 years. 

So the above graph and theory are completely disregarding the fact that the Asian invasion is NOT buying real estate in USA anymore.  They are coming to Canada to buy it.  Thus, we could say that most new real estate purchases are in 'strong hands' as Asians usually put down a substantial down payment down as they dont spend their money on worthless shit like Americans do.

Finally, there is no doubt a buying frenzy is here, but they are taking the weak sellers off the market.

The only way that this market will be derailed is if Mark Raises rates to 7% overnight.  Or else this will continue until rates get jacked.

Comments please.  Is anyone else seeing this in their Canadian city?

Thomas's picture

I'll take another angle. Since so much of real estate is based on debt (not a lot of equity out there), this seems almost to be an identity. Of course real estate debt correlates with real estate prices. The question is what is driving the increase in debt? It's the mechanics of debt acquisition that needs scrutiny to really answer this question. It's that loosening part, not the plot, that is the meat on the bones.

Michael's picture

$350k median house price in Canada? That's nothing, from my experience, literally.

The home I own and live in now first sold new in 2006 for $311K in SW Florida.

In 2009 I bought the house for 29K cash. You heard me right the first time, $29K.

I will so enjoy watching Canada and Chinese real estate crash and burn just like SW Florida in the coming years. 

raymondrza's picture

No one in their right mind wants to live in SW Florida...squeal like a pig...?

eureka's picture

"All my new neighbours are Asians. "

You are correct. What drives everything?  China - including USD depreciation which equals Canadian $ appreciation. I.E.  Canadians "got rich" without doing anything.

Anyway, who cares?  Canadians are a bunch of speculators, priviledged day dreamers and tight-wads.  Vancouver - pretty class tower condos notwithstanding - lets out ALL ITS sewage unfiltered - which proves one can pretend & whine environmental yet remain a swine - and that saves you quite a bit of CAD$ too, ehh?

I'm with SouthPark: Blame It On Canada - and - there's the solution for the ramining 35% moronic US Isolationist Hegemons: ATTACK CANADA - IT'S RIGHT NEXT DOOR - YOU CAN BE HOME TO FUCK YOU SHEEP FOR SUPPER.

Any proud US humorless hegemon may now junk himself away.

bankrupt JPM buy silver's picture

"Canadians are a bunch of speculators, priviledged day dreamers and tight-wads"


How can someone be a tight wad if they are a speculator?  Priviledged?  How so?

Everything I make is taxed by 50%.  Then, everything I buy is taxed by 13%.

Whats left I buy phyzz with.

King_of_simpletons's picture

Here's news. There is nothing called Fixed Rate 30 year Mortgage. Everything in the common wealth is ARM. By common wealth, I meant Canada, Australia and such.

Advoc8tr's picture

And mortgage attached to person not asset .... the difference between what the bank sells the forclosed home for and your initial loan compunded at the new high interest rates follows you into destitution. Any job you get .... wages garnished

mickeyman's picture

No question there are more Asians in our area of Canada (western part of GTA)-Chinese in the southern portion and Indians in the Brampton area.

One thing about the graph--it looks to me like mortgage debt is lagging price. Given the author's thesis I would have expected the opposite.

Maybe houses are that kind of good--I can't recall the formal name--for which demand rises with price rather than falls. So when Canadians see house prices rising they rush to get into the market before the price rises out of their price range. Sounds like weak hands to me.

Double down's picture

Morgage debt is the implied put to the asset.    

ExploitedCitizen's picture


I'm a government building inspector, out east of Toronto.

The Asians are buying up houses here around Markham/Unionville, Richmond Hill and some of Muslimsauga.

The whites are all moving outwards, Whitby, Milton.

You will see outside of the Asian areas, it is mostly naive white couples, with 2 brand new cars, a big $375000 house, and then proceed to landscape the shit out of it.

Look outside the asian areas and you will see bubble towns everywhere.  The asians are fueling this bubble.  I see 50% retirees who sold there house in the GTA for a buttload of money to asians, moving out my way and dropping a ton on a shitty subdivision homes.

So this is a real guess to see what pops first, the whites or the asians.  The asians are buying a lot on spec, from the asian investors I've spoken too, they are really naive to bubbles.

Look at 2008 what happened, our bubble almost popped.

BenRabidoux's picture

I don't buy this explanation at all.  If it is all the strong hands buying the real estate, how do you explain the fact that the debt to income ratio in BC is by far the highest in the country?

Asian buyers may well be driving a small segment of the market, but they don't make the market.  I would suggest that this pie-in-the-sky story of unending capital inflows from China has been the major factor in motivating locals (earning local incomes) to plow headlong into the market in order to keep up with the Wangs.

How else do you reconcile the 'wealthy Asians paying cash' story with the most indebted consumers in the country?


centerline's picture

Why dont you go visit Steve Keen's site.  It is Australian - but the mechanics are all the same.  The bubble is going to pop, and it isn't rates that can serve as a trigger.

IdiotInvestor2's picture

Well the question - is this merely unsustainable or is this a real bubble like it was here in US ? And when it bursts, who are the primary bag-holders ? Which banks ? And will the Canadian Govt back-stop them making the tax payers pay for all this.

How big will be the economic impact if the bubble bursts, assuming it is indeed a bubble.

I know very little about Canadian housing market, hence all these questions.

Thanks in advance.

Dr. Porkchop's picture

CMHC = Taxpayer backstop already in place

Sockeye's picture

The real bag holders are Canadian taxpayers via CMHC. The real winners, Canadian banks. Surprising, eh?

ZeroPower's picture

Quite an irrational liberal viewpoint.

Is anybody pointing a gun to the head of those people wanting to buy a home? No. If they choose to try and live beyond their means, then we've all seen what soon happens. 
Granted, there isn't trillions of MBSs collateralizing CDOs ready to head to WS on these homes, but i suspect a large part may still default soon as rates start inching higher in the US.

The banks win because of the yield curve - but this has always been the case. Someone takes the risk who gets the reward. The buyers, if they make it through the mortgage, got the reward of getting a house at a (post probably ever since a few years) very low rate.

Diogenes's picture

They are not living beyond their means. Unlike the US, in Canada you have to show you have a job, or some other source of income before you can get a loan. Furthermore you must have a credit rating and not too much debt.

Conventional financing is 25% down payment, CMHC insured is minimum 10% down. So even in the case of a CMHC insured mortgage the buyer has his own cash on the line, and has a job and a credit rating.

If interest rates suddenly shoot up a lot of people will be in trouble. But what are the chances of that happening as long as Bernanke and Obama are in charge?

Make no mistake, US interest rates control interest rates around the world.

ZeroPower's picture

I agree people are "better trained" here than in the States - or maybe theres just bound to be less irrational people using their houses as ATMs merely because we have 1/10 of the pop and so the impact isn't as large. As for a credit rating too - ya you had to have a credit rating in the US, except it was lowered to a totally unreasonable amount.

Market is pricing in rate increase only near end 2012 so this indeed might be just in time for a new administration.

BenRabidoux's picture

Hard to agree.  Check out the growth in lines of credit in the graph in this post, then tell me Canadians aren't using their houses as ATMs.  To the same extent?  That's debatable...

SRV - ES339's picture

You couldn't be more wrong... you may want to do a bit more research... it's been more like the US model than you could ever imagine.

Jessica6's picture

Yep, I suggest the poster above spend a little more time on and other sites.The Harper government really gutted a lot of the saner regulations.

For a while BMO offered zero down mortgages (40 years amortization) though they fortunately put a stop to that. Most recent mortgages have been 5/35.

Plus there are no shortage of 'alternative' mortgage lenders, it's subprime all over again just a different name they call it.

As for living beyond their means - Canadians are terrible for that right now. Just need to spend some time in the GTA - admin assistants driving leased mercedes, young couples bragging about their equity (which they've borrowed on). Just wait till job losses hit and it's going to be very ugly.

Bay of Pigs's picture

"not too much debt"

Fuckan eh pal, what part consumer debt to GDP @ 147% don't you get? That is the very defintion of "living beyond ones means".

That is the whole point of the article. Cheap DEBT is driving this market. 

BenRabidoux's picture

"Conventional financing is 25% down payment, CMHC insured is minimum 10% down. So even in the case of a CMHC insured mortgage the buyer has his own cash on the line, and has a job and a credit rating."


You don't know what you're talking about.  CMHC insurance is required for any mortgage with loan to value of more than 80%. 

Minimum down payment is 5%, not 10%.  And on the topic of having your own money on the line, how about the 5% cash-back mortgages offered at all big Canadian banks.  Here's one offer for you:

Let me break it down for you.  Borrow the down payment from a friend/relative/credit card/line of credit, pay it off when the mortgage closes and you get the cash back.  You now own a home, with the mortgage fully insured by CMHC....check that....the Canadian taxpayers. 


It's exceptionally difficult to reconcile the 'conservative Canadian bank/consumer' story with the fact that consumer debt as a percentage of GDP is now equal to the US at the peak of your own bubble.  Certainly we never had the predatory lending and blatant fraud in our mortgage market, but let's dispense with the notion that Canadian banks or consumers are prudent.



Double down's picture

You do not need a friendto borrow from.  Use your RRSP as a tax free down payment.  You have to pay installments back to yourself over the course of ten years (I think) to avoid paying tax on the amount withdrawn) 

There is your tax free down payment, shit you even get a tax credit if it is your first house! 

Terminus C's picture

5% down is only for first time home buyers

BenRabidoux's picture

100% false.  5% applies to all homebuyers. 

Advoc8tr's picture

"Make no mistake, US interest rates control interest rates around the world."


I wish someone would tell Mr Stevens that .... we are paying 7+ % on standard ARM down here. Lowest we ever got was 5+ %

Squid-puppets a-go-go's picture

same in australia

goofy fukn thing is, our reserve bank drops and raises interest rates as the economy dictates, but the 'big 4' lenders dont even follow them anymore- because they're borrowing something like 80% of their cash from short terms US markets.

So effectively govt policy is window dressing, and irrespective of other fundamentals the aussie market is beholden to US banking dictates.

We're one of the only countires in the western world with low govt debt but we cant take advantage of it because the private sector banks are so intergrated with the international cult of debt.

centerline's picture

They way Australian banks are set up makes a claim of safer lending which in fact is a complete joke.  Now, the level od debt over there is way past the point the US bubble burst.  There is going to be some serious pain down under.  May be very soon.  Be careful.

BigJim's picture

So... if something happens to drive the OZ dollar down relative to the USD, could be very bad news for all those Aussie banks...

Malachi Constant's picture

Is anybody pointing a gun to the head of those people wanting to buy a home? No.

But yes. Parents, peers, coworkers, parents of their kids' classmates, government, neighbours - let alone banks and their PR machine, aka mass media, including "news" "reports". Real estate and hockey, followed by the distantly third weather, is ALL that people talk about in Vancouver. If you have as little as a single atom of desire to be accepted in the society, you will rush to "own".

centerline's picture

Uh, haven't you already seen the playbook?  Does the term "bubble" mean anything?

Jaciems's picture

k relax, its still nowhere near the scale of the states and the banks arent at risk of default, this really depends on the city youre talking about 

i live in montreal and the whole real estate bubble talk is bs here but places like around toronto or vancouver i wouldnt be surprised if real estate were overpriced (especially vancouver)

im sure the numbers are skewed big time by the growth in the prairies (alberta, saskatchewan...) mainly because of the oil sands

im sure that supply hasnt been keeping up with demand there and prices have been shoothing up

Raphio's picture

Average Vancouver house price now @ $815 000. Largely driven by Chinese influx.

Here is a fun, graphic presentation of Vancouver RE prices over the last 40 years

The Real Fake Economy's picture

right on.  The Chinese who are paying all cash are what's/who's driving RE prices up.  

RockyRacoon's picture

So, by proxy, the US is buying the houses in Canada!  I like it.

Trade those Treasuries for a little chalet in Vancouver.   How quaint.

Diogenes's picture

Canada is not the US. There will not be a crash because Canadian banks did not make all the crazy loans in the first place.

Look at the chart again. Notice how there was a big boom in the eighties, worse than today and with interest rates much higher than today's.

Now see how the boom ended in 1988-90. Prices dipped then basically flatlined for 10 years before the next boom took off.

That is what typically happens in Canada. Yes we have boom and bust cycles but not to the extent of the US.

I expect prices to continue rising as long as governments pursue inflationary policies. If they ever decide to go for the balanced budget, higher taxes and higher interest rate policies I expect the market to dip then stay flat for a while.

In the meantime I am buying nice houses in quiet small towns for the rental income. If they go up that's nice but I can hold on quite comfortably and live on the rental income. If they come out with some kind of draconian rent control due to runaway inflation I can sell them at a profit. So no, I am not afraid of a Canadian real estate collapse.

Diogenes's picture

Right now I am betting about 85% of my life's savings in small town Canadian real estate, the balance being in physical gold and silver.

Loose Caboose's picture

Yup, small town is okay.  It's the west coast and Toronto housing prices that have become bloated beyond all recognition.  So, I agree with some correction coming to the these particular areas but small town will take a small, even negligible correction.

I happen to live in a small-medium Canadian town but it's the home of the Blackberry, so we have other concerns......


BenRabidoux's picture

I agree.  The housing bubble in not 'national' in the sense that every community will be hit equally.  You are getting an excellent cap rate....certainly no evidence of a bubble there.  If you read my posts examining house prices and GDP across the nation, you'll note that I don't make blanket statements regarding the Canadian housing bubble.  I would avoid Vancouver and Toronto condos like the plague.  I expect the eventual drops to be as severe as many of the hardest hit areas in the States.  But that is not to say that all communities will be hit hard...


pain_and_soros's picture


The Canadian econcomy is driven in large part by its 6 major cities/metro areas (Toronto, Vancouver, Calgary, Edmonton, Montreal, & Ottawa) where almost 50% of the country's population resides - so if and when the US economy experiences an economic downturn, so will the Canadian econcomy and asian immigration to Canada will slow and those 6 major cities will be suffer a massive crash, but the smaller communities will be significantly impacted as well - especially in Ontario where the provincial government debt is $220 billion & counting (yea, you read that right with a B).  Its interest payment is $10 billion - which is half of its total annual deficit and it won't be in a position to bail out the municipalities, who will be left with drastic property tax increases and cuts in social services to try to maintain livability.  I doubt that BC will be any better off.

How about the feds - surely they'll bail out the provinces, since they control the printing presses, right?  Yea, except their debt currently stands at $560B (over 40% of GDP and growing), and interest payments at current low rates are starting to take up a great portion of the annual budget - and in an economic downturn, government tax receipts will drop while social assistance payments go up - which will tend to increase interest rates, putting further downward pressure on house prices.

The fact is, housing has been an unsustainable growth strategy for the natural resource based Canadian economy, driven by population (i.e immigration) growth and the FIRE economy (about to go up in flames). 

The once solid manufacturing sector has, like its counterpart in the US, been hollowed out, so all we have left is dwindling precious natural resources (including fresh water) and a bunch of land speculators/real estate developers bribing (er, convincing) municipal politicians to make zoning changes to allow for increased development (and toll highways and traffic gridlock) increase their municipal tax base, while the land developers build as many shithole $300K townhouses they can cram into a 100x100' subdivision (same goes for the condo builders) for our "growing" Canadian econcomy...

This is the same type of massive ponzi scheme as in the US that will also end badly since the real economy has been crippled by the pigmen, who are protected from any losses thanks to CMHC...

If you live in Canada, get ready for hard times coming to a place near you.

Bay of Pigs's picture

Consumer debt to GDP is 147% in Canada now. That is worse than the USA.

A smarter move (which I've been telling my Canadian friends) is to SELL in Canada and BUY in Hawaii. A total no brainer if you ask me. And a currency at better than par with the USD.


Diogenes's picture

As long as the wind doesn't shift to the west.