Friday, December 11, 2009

Rosenberg: Is the Canadian Housing Market in a Bubble?

In today’s Breakfast with Dave, Rosie discusses the Canadian housing market:

It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.

While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).

In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …

Source: Breakfast with Dave, Gluskin Sheff, December 10, 2009


david said...

There seem to be a lot more people using the 'B' word lately. It will be interesting to see if this has any affect on the housing market before the interest rates rise.

After all bubbles are largely held up by faith. If people start to think this may not be such a great time to buy a house we could start to see things change. The real question is if the potential buyers are reading things like this.

vreaa said...

I suspect that we'll pretty rapidly move into a period where prices are falling and everybody is saying that they knew it was a bubble all along.

Thanks, mohican, for quoting the full Breakfast with Dave article, it added a few important bits omitted from the G&M article, especially the bit about this move being a 2-3 SD event.

JimTan said...

Here's some fundamentals for you!

Agents Will's stats for the week - 100% sale/list.

ReductiMat said...

Jim, that's the same thing you said about Pets.Com circa 2000.

patriotz said...

The real question is if the potential buyers are reading things like this

I think the answer is no. But bubbles burst not when potential buyers change their minds, but when the market runs out of buyers. And that will inevitably happen because long run supply exceeds long run demand at today's prices, by a long shot.