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Guest Post: What's Really Driving House Prices In Canada? The Must-See Graph Of The Day...
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...
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where do you live? GTA?
Just outside the GTA, Whitby area.
My anecdotal evidence of bubble pop in real estate in Victoria suggests that 6 months ago was the top, and there will be hellacious pain.
Disclaimer: I have physical and no debts.
Booyah.
What woud a similar chart for US housing look like?
Vancouver + GTA doesnt = Canada
3 million people in GVA
7+ Million in GTA
10 million people... 30% of the entire Canadian population lives in these two areas.
Throw in Victoria, Okanagan area, Calgary and Edmonton into that as well. Probably another 2 million there.
The Kool Aid drinker above you won't listen to rational arguments based on MATH.
I heard the same shit about Seattle, Portland, Maui, etc...
So from the graph we see a 10 year period (1980-1990) of increasing house prices -in fact tripling.(roughly) Next we see a 10 year period of flat virtually no growth (1990-2000). Then we see a third decade of growth, just over a doubling. Seems to me the way to compare this is to add the real GDP numbers to the graph. hey had to have been a decline in the past 3 years that affected the blue line - moertgage as a % of GDP.
That upward winding chart says it all! Hey can we get some [middle canadian] ideas?
Berlusconi Style? YEN (dot)
What can a sentient being say? What? Canadians don't have access to any recent historical evidence of housing bubbles? Say what?
Okay, I'm calling it.
Human beings are dumber than rocks.
Yeast.
http://www.youtube.com/watch?v=hM1x4RljmnE
Dr. Albert Bartlett called it:
Look Ma! Growth!
1. A lot of short term mortgages, so as rates have fallen peopel ahve seen the drops in their mortgage payments (unlike being stuck with a 30 year mortgage in a declining rate environment.
2. A lot of renters moving to entry level houses. I'd love to see the % of house owners over time. Even with higher prices, with the low rates a townhouse or semi is about the same as a 2 bedroom rental.
3. The Conservatives relaxed regulations too much, making it too easy to get a large mortgage with little down.
4. No one real estate market in Canada. Vancouver is very different from say London.
5. Immigrants are definitely a factor. Immigration is running close to 1% a year. That has to have an impact.
6. Lots of condos in the mix, not just houses. Toronto downtown has been repopulated with literally walls of condos in the alst couple of years. We all wonder who is buying them.
7. All is good until rates reverse
To billwilson On point 4. I happen to live in London and while there are no $2M crack houses for sale here there is a tremendous amount of over priced garbage, particularly in the context of the local economy which is pretty much sucking the hind teat right now. My monthly nut to rent a nice little fifty year old bungalow is far less than the mortgage, taxes and upkeep expenses that are 'imposed' on the debt serfs who would choose to 'buy' in this repeat of tulip mania . As I don't see real estate in most places being anything other than dead money for more years than I expect to live, renting is a no brainer. Debt free, living below my means and enjoying watching the teaching of a long overdue economic lesson.
The interesting thing is that there is no "jingle mail" in Canada. You can't just return the keys to the bank and walk away as in the US. The banks in Canada can and will go after the gold in your teeth!
After reading through the entirety of these posts, one is forced to conclude that Canada's future is Chinese landlords, Egyptian welfare recipients, and the usual overlord klepto class. This is because taxpayers will continue to purchase mortgage debt that's 3x what they can afford. Oh - and there will be more watery pothole beachfront being hauled in. Because of these factors, Canada will remain history's only permabull real estate market. Cooo loo coo coo cooo loo coo cooooo.
Demographics suck in Canada.
Housing in canada within the next 10 years will probably start a very long and drawn out deflation period due to demographics if nothing else. Median age in canada is 41 and rising. Once the boomers start to die off there will be no one in the market to take their place. Canada younger population is about half the size if you look at birth rates. Put on top of that the increase impossible task of maintaining a health care, debt , etc that was built up with the idea that the demographics would always be more young than old and well you you get the picture. We could see the end of socialized medicine/cpp within the next 20 years as we had once known it not to say this isn't already happening.
Younger generation wont even have any expectation of political representation either with fewer voting and a much larger older populations who vote more. So expect policy to be shaped by the boomers and elderly.
Well I went one step further in pointing this very same conclusion to Mark Carney and to Jum Flaherty. Yes, this is a housing bubble and only a fool would call it anything but. If Carney would not have followed the FED's lead and left interest rates alone during the first contraction in 2007 likely this debt binge would have ended there. However like the good fifty third state that we are we went to near 0 at 0.5% assuming that these rates would not entice people to chase returns in real estate and wherever else they could funnel the free money. It goes like this. You drop rates to near zero, savings stop, loading up on debt begins and false demand is created. This has happened anywhere this fiscal policy has been implemented. In every country bar none. The difference between this and the US is an entire society has been indebted versus selling extravagant debt instruments all over the world. It will end likely worse. Oh yes....by the way we don't have the worlds reserve currency to get us out of trouble either. So it should be interesting. You know when the government is warning people about their debt levels it is already too late.
Well I went one step further in pointing this very same conclusion to Mark Carney and to Jum Flaherty. Yes, this is a housing bubble and only a fool would call it anything but. If Carney would not have followed the FED's lead and left interest rates alone during the first contraction in 2007 likely this debt binge would have ended there. However like the good fifty third state that we are we went to near 0 at 0.5% assuming that these rates would not entice people to chase returns in real estate and wherever else they could funnel the free money. It goes like this. You drop rates to near zero, savings stop, loading up on debt begins and false demand is created. This has happened anywhere this fiscal policy has been implemented. In every country bar none. The difference between this and the US is an entire society has been indebted versus selling extravagant debt instruments all over the world. It will end likely worse. Oh yes....by the way we don't have the worlds reserve currency to get us out of trouble either. So it should be interesting. You know when the government is warning people about their debt levels it is already too late.
I just want to point out one more thing. The graph says it all. Where is the average price of US real estate right now? Anyone not know why? Debt ok, a collpase of debt when it becomes unsustainable. Real estate between the two countries has always been based on the exchange rate difference but they are generally around the same price. Which one do you think is going to correct? US housing will sky rocket again and people will go on a buying binge or Canadian real estate will correct in a big way? Hmmmm....hard one to figure out.
Look on the bright side. At least you're a country away from the Mexican violence cartels.
Being a Commodity Colony never has a good ending when interest rates go up and commodities go down.
And the Great White North needs to put some money into border security before the crash comes because the gangs just across the border will quickly run out of fresh meat.
Northcom will be too busy with the inland Red States to give you any help.
Give it your best shot shot dude(literal definition). Last time it was tried we torched the White House after you torched Toronto.
All kidding aside NATO rules. We even have a democratic, capitalist Muslim nation on our team. Whose your daddy!!!!!
Did you know Turkey is the NATO member with the 2nd biggest military after the USofA?
Anybody know if banks are required to write down down nonperforming debt after a cecertain period? I heard they were and the period was 2 years.
In 2008 the insolvent US banks were fighting to meet payroll because there assets crashed to real market value stopped yeilding payments and liquidity dried up. Only cashflow provided by TARP and accounting fudges by the FASB to hide their insolvency saved their asses. When solvency returned to the market, Canadian banks unloaded a tidal waves of IPOs. Hundreds of millions each week by each bank were raised continously for 6 months. If they were not broke they must have been damn near close to dilute their equity by several orders of magnitude.
NOW, where do think that money was spent? Last month the ratio of rent revenue to mortgage servicing went negative again. I work in downtown Toronto, and keep loosing my favorite parking lots to Condos. Last week I saw two more billboards go up and groundbreaking at two more sites all within a lunch time stroll of where I work. I rent a 25 year old 3000 sf bungalow in burbs for $1600/mo owned by a nice Chinese couple residing in San Fransisco.
It's no surprise. The party's over and everyone knows it. Asset prices couldn't keep rising! Canada has a serious debt problem that needs to be addressed, just as bad as Australia. But at the moment it’s not even being acknowledged. Why not? Could it be that if we acknowledge the debt and the need to deal with it, we have to acknowledge its cause? And could it be that the cause is too unpalatable to reveal? Could it be that successive Australian governments, along with business, have been running a Ponzi scheme with our assets, our resources and our future? It's unsustainable. Auction results in Australia have utterly collapsed. No government wants house price growth to slow but it's unavoidable now. Slow growth undermines the short-term share price of big business (and CEO remuneration), as well as the electoral performance of the government. So to facilitate growth, the Government turns a blind eye to the fact that a significant proportion of demand fuelling “growth” is debt driven; debt-financed demand has constituted around 20% of total demand in the Australian economy. The best way to keep growth on the up and up is to keep everyone spending and money cheap. Consumers are told that spending is the right thing to do by businesses that profit from consumer expenditure and by governments who bask in the glory of booming growth figures. The availability of cheap credit and consumer binges drives up prices, so more debt is needed to keep the spending going. People feel wealthier as their house prices have gone up and they have more stuff, but they don't realise that housing affordability is worse that it has ever been. They think their house will fund their retirement, so they are happy to spend more and save less. Everyone is happy – particularly business and government - so long as the spending binge continues – and money can be found to keep servicing the mountains of debt being accumulated. And therein lies the rub. How is all this debt to be financed?
Zoran Slaveski
Australian Population Ponzi
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Prices aren't really rising, they are polarizing. There are tons of trailers and mobile homes on the market, and if you get out of commuting distance from one of the major cities, land is free. You just need a float plane to get to it.
Labour and fuel costs are prohibitive, so all you can build in the north are shacks and cottages. Even with all that limestone, you can't afford to hire people to make a proper castle out of it.