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Canadian Housing Really Overpriced

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Posted by The Housing Bubble

on Friday, 17 September 2010 01:00

TrendlinesAustraliaCanadaUKUSARealEstateBubblesChart100831

Click the chart or HERE for a Big Chart
The Canadian average home price detached from the long term Price/Family-Income ratio of 2.7 way back in 2001.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive homes w/o increasing their mortgage payments.  Subsequent irrational exuberance has swept the P/I ratio to an unsustainable bubble high of 3.5 in 2010.

The year-to-date annual price of $340k is 30% ($79k) above the trend line.  As shown by the trajectory in chart#1, and assuming a 2010 Peak, it is probable new highs for the annual price will not be set 'til 2017.  Unlike Australia, the UK & USA, Canada's real estate sector only just recently commenced its inevitable correction.  In comparison, the USA Housing Bubble was 32% ($69k) above the P/I ratio trend at its peak in 2005.  We are observing the peak in real time!

With an annual avg price of $340k vs $173k in the USA, this was second month where Canadian homes were a tad short of being double the price of a similar home in America.  In summary, the Canadian Realty Bubble has transitioned from $67k (27% above trend) in December 2009 to $79k (30% above trend & 3.5 ratio) in July.  Using monthly data, July's average national price was down $17k from the peak in May.

Canada Backgrounder ~ (rev 2010/8/31) TrendLines Research first drew attention to the topic of Canadian Housing Bubbles in 1989.  Although that particular Bubble was only $53k, it was actually a more severe event as the average price of the time was an unprecedented 55% above the Price/Income ratio long term trend ... almost double the current episode (30%).  Families were paying an astonishing 4.2 x's their Income.

Rather than the recent rapid 3-year correction (-22%) witnessed in the USA (annual figures), average home price fell a mere 6% in our first realty bubble.  It took ten long years for the Canadian average price to surpass the 1989 high.  Considering the momentum in play within the present economic Recovery, it is not unreasonable to expect a repeat of that long-term sideways correction ... with perhaps an absence of new highs 'til 2017.  It would be prudent for CMHC to temporarily increase its down-payment requirements for high-ratio insured mortgages to 10% (from 5%) until the downside risk dissipates.

This recommended action may be difficult in an environment where economists for four of Canada's largest banks have been unequivocal in recent weeks that "there is no real estate bubble in Canada".  They join the Gov't of Canada and the Bank of Canada (see our Wall of Shame below) in their reassuring albeit misrepresentative rhetoric.  We heard their same chorus of rationalizations in 1989 & from their counterparts south of the 49th in 2005!  Both events posed an assault on the Disposable Income of consumers, and wealth effect ramifications resulted in imminent Recessions within twenty-four months in both instances.  As elaborated in our Canadian Recession Meter, failure by the Bank of Canada & CMHC to address a winding down of the Canadian Housing Bubble could easily turn the expected 2012Q2 economic downturn into a full fledged Recession.



Australian median home prices had already detached from the long term Price/Family-Income ratio of 3.2 way back in 1997.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/I ratio to an unsustainable bubble high of 4.8 in 2007.

The year-to-date annualized price for 2010 of is $415,000.  2007 is considered the Bubble Peak as price in that year was 50% ($143k) above the trend line.  The 2010 trend target is $331k.  As shown by trajectory in the chart, it is probable new highs for median Home Price will not be set 'til 2017.  In summary, the Australian Realty Bubble has transitioned from $82k (26% above trend) in December 2009 to $84k (25% above trend &  4.0 P/I ratio) in July.  Using monthly data July's median national price is down $15k from the high three years ago.

UK average home price had already detached from the long term Price/Family-Income ratio of 2.0 way back in 1997.  The onset of record low interest rates shortly thereafter enabled consumers to buy more expensive Existing Homes w/o increasing their mortgage payments.  Subsequent irrational exuberance swept the P/I ratio to an unsustainable bubble high of 4.9 in 2007.

When the annual price peaked in 2007 @ $181k, it was £104k (134%) above the trend line.  In its third year of correction, average Price still exceeds the long term trend line by £84k (103%).  As shown by the trajectory in chart#1, it is probable that new highs for the annual price will not be set 'til 2045.  In summary, the UK Realty Bubble has transitioned from $76k (94% over trend) in December 2009 to $84k (103% over trend & 4.3 P/I ratio) in July.  Using monthly data, July's average national price was down $11k from the peak in 2007.


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