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Update On The Canadian Housing Bubble: Musings On "Then And Now"
Alexandre Pestov, whose insightful work of deconstructing the Canadian housing bubble has been presented on Zero Hedge on several previous occasions (link), has released his Fall update. In his words: "This paper is written as to address the paraphrasing of “housing market in Canada is not identical to that of the US" as “no housing bubble in Canada”. Instead of dissecting the US housing market crash for answers, this report examines our current housing bubble in Canada against the backdrop of the 1985-1989 housing bubble in Canada. In fact, our specific Canadian situation will most likely be the force behind housing market’s unwinding." As always, this is required reading for our Canadian readers as well as everyone else who trades the CAD, and has an interest in the Canadian economy.
The Elusive Canadian Housing Bubble: Fall 2010 Musings: Now and Then (pdf)
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Awesome research - thanks!
http://www.bloomberg.com/news/2010-09-29/canada-home-prices-gain-for-the...
I thought the RE would drop months ago. Don't know what to think anymore.
More disinformation... the report is over two months old, the "increase" in July was 0.5% (the 4th consecutive decline... Aug and Sept will surely be down), and it highlights year over year gains (the gains are last years news).
Prices are falling across the country, and should continue to fall... but I suppose it was worth a try (to pump up a seriously broken market).
Freddie Mac...leading a downward spiral in home prices because, well, they simply can't fight the math, even with unlimited tax-payer backing, and no matter how politically intolerable the outcomes. You're dead, Fred.
I think the report assumes a slow steady recovery in the US, Canada's overwhelmingly largest trading partner (70%+). Good luck with that.......
good point. Carney continues to reiterate and warn of the obvious - the dependency of theCdn economy on the US economy.
Too bad there aren't more jobs in Montreal. Great city, cheap houses.
stupid comment. How about `lots of jobs, expensive houses`!
Which Montreal are you talking about?
EDIT - this was to answer a question above that linked to a bberg article about house prices going 'up'.
It's one of those stats that are meaningless unless you know how it came about. The only important one imho is what a house went for vs what the listing prices was.
Put another way, let's just say there's an awful lot of luxury multi-million dollar houses on the market right now. Along the Niagara Parkway, or the waterfront in Oakville/Burlington it seems the bigger and more extravagant the place the more likely there's a For Sale sign out front.
Those expecting a Canadian housing "crash" will be disappointed. The lending standards were better, and the govt oversight was far better than the US. Also there's only 30 million people there and natural resources are abundant. Yes, prices will fall, but it will be nothing like the US.
And be careful about buying into analysis from an entity called "Three Bears Research." The result of their analysis is preordained.
Thank God Canadian credit bubbles are different than every other countries' credit bubbles.
The implications of your last 2 sentences are hardly fair to the author, particularly in light of the fact that the tone of his research conclusions appears to align well with your own. To wit:
"...no sign of an impending price collapse"
"...Canada doesn't have the combination of factors that triggered a wave of defaults and foreclosures seen in the US..."
"...suggests that home prices will decline, although as not as violently as the home prices in the US..."
I am curious as to how these concluding sentiments differ from your inferences ("The lending standards were better, and the govt oversight was far better than the US" and "Yes, prices will fall, but it will be nothing like the US"), and to such an extent that it is warranted to castigate the author and assume inherent bias.
Yes, but that would imply Prof read more than a cover page.
Maybe not Canada wide, but Vancouver is in bizarro price territory. I see 50%+ dropoff there.
I absolutely concur. I was in Vancouver a year ago, and happened to peruse prices in some of the real estate and house listings ---- "surreal" was the first word to come to mind, but even that word does not do full justice to the obvious, glaring insanity of Vancouver housing prices. They will be lucky if they see ONLY a 50% fall in prices over the next few years. But being Canadians, who are convinced that they are SO different (and hence, superior) to Americans, they will deny the crash of their bubble all the way down --- all while silently whipping themselves with their never-ending national (and ugly nationalistic) inferiority complex vis a vis the USA.
More bubble talk on Canadian real estate -
The author zeros in on affordability ratios to help substantiate his argument. He makes the following statement "An average Vancouver household (that is a family of usually two income earners, not a single person) spends over 70 cents of every pre-tax dollar they earn on house ownership costs."
Too bad he didn't bother elaborating on the definiton of affordability and how RBC defines that. Not to say that this ratio is to be ignored but it is not what Pestov implies, specifically affordabilty as defined by the Royal Bank of Canada refers not to what people are actually paying but what they would have to pay if they were to newly enter the market. Specifically the ratio calculates median pre-tax household income against ownership costs made up of mortgage/taxes/utilities based on median price amortized based on 5yr rates at the time for 25 years with a 25% downpayment.
Pestov goes on to apply an adjustment to the RBC numbers (page 12 exhib 3.2). RBC's numbers reflect affordability in relation to cost of ownership based on the 5yr fixed etc at the point/year measured. He appears to be trying to differentiate between mortgage carrying costs based on interest rates vs. principle amount i.e. house price. Someone should inform Mr. Pestov that affordability is fungible i.e. he's double counting and completly missing the intended point of the affordability ratio
Those who are calling for a crash or bursting of a housing bubble in Canada seem to believe that the dynamics of the Canadian housing market are similar to that of US markets such as California, Arizona and Florida.
In his exhibit 4.2 Pestov combines CS data with data from other sources to create the graph. Not to dispute what he is saying but I would need to see the underlying data tables and assumptions. Importantly it would be interesting to see the real and nominal pricing data. Focusing on Toronto in exhibit 4.2, I am hard pressed to see a "bubble formation" vis a vis the CS 20 and other US markets. The graph would suggest that there was and is no bubble in Toronto, in fact some markets continue above or close to the Toronto market e.g. Boston with Toronto following the CS curve (except for the bubble) see the attached blow-up.
http://oi53.tinypic.com/wwd6av.jpg
Vancouver is held up by all of the pundits as evidence of a "housing bubble in Canada" even though it's just a couple of million people i.e. a third the size of Greater Toronto. I am no expert on the dynamics of the Vancouver market but would suggest that a comparison to San Fran using real numbers as opposed to rate of change graphs would be a useful excercise notwithstanding, Van is a unique location with unique demograhics. By the way what's a condo going for in Manhattan these days? 7 figures I suspect.
I agree. Buying apples in Canada at 3x the cost of apples in Florida is totally sustainable...... </s>
actually produce in Canada from my experience is generally cheaper than in FL - not at all uncommon in winter to have tomatoes and peppers on the shelves at Publix imported from Canada - anecdotally, Toronto probably has some of the lowest food prices on the planet
and did you know those tomatoes are picked by mexicans?
legal mexicans who go home when the season finishes.
I am having a hard time following your argument on misrepresented affordability measures wang.
"Pestov goes on to apply an adjustment to the RBC numbers (page 12 exhib 3.2)" - page 12 illustrates Price to Income/Rent figures, but those are from CREA & Statscan, and exhibits 3.2.1/3.2.2 are income figures from Statscan.
If you are referrring to the RBC figures in 4.4.1 (Affordability) and 6.2.1 (Mortgage Carrying Cost), both those look unadjusted from the RBC source materials to my eyes. Moreover the points hardly at odds - Affordability includes operating costs and is for provinces and major cities, while Mortgage Carry Cost applies to all CMAs and uses only available information - and the methodologies used by RBC are similar with noted exclusions.
Could you elaborate on your comment?
sorry for the confusion the page 12 exhibit refers to his main analysis (linked in the article) to which this article is an update
someone wrote a fairly extensive (if flawed) comparison of the 89 bubble to the current circumstance (note CCPA would be similar to any of the US progressive think tanks)
https://s3.amazonaws.com/policyalternatives.ca/sites/default/files/uploa...
By the way what's a condo going for in Manhattan these days? About 1/2 of that in Vancouver, relative to the fincancial capacity of city residents.
ya I forgot about the banker bonus factor - and besides doorman buildings are few and far between in Van -
In other words, "this time (place), it's different". Riiiiiiiiight.
Perhaps you should not be looking at the level of Vancouver housing prices, but at the runup in them over the last 10 or 20 years.
a bottom line conclusion to my mind is , SO WHAT ? A flat or soft housing market for a year, or three, isnt going to crash the Cdn economy. So many different factors at play in Canada that will preclude a serious crash in real estate values. Way too much excitement on this issue. It is important I think to keep a clear mind about the radically different economic impacts of a CRASH , compared to a re-alignment.
Last time it took 10 years, on better fundamentals. RE was the sector that kept the Canadian GDP is the positive territory. A great number of people live off growing real-estate sector. Do the math.
Yes, it's different here.
+1