Canada's Housing Bubble

Analysis of the real estate bubble in Canada --

Housing bubble theory deflated Print E-mail

Dec 06, 2010 Myke Thomas SunMedia

In early November, The Economist magazine released a report saying Canada’s housing market was overvalued by “almost 24% and should be watched very cautiously in the coming year.”

The conclusion was based on a formula comparing prices to rent, a methodology immediately disputed by BMO economists Earl Sweet and Sal Guatieri.

“In our view, comparing house prices with personal income, rather than rent, provides a superior methodology,” they said in a report.

“Comparing the current ratio with the long-term trend suggests Canadian house prices hit a peak overvaluation of 18% in late 2009.

“However, a 3% decline in (seasonally adjusted) prices so far this year, coupled with continued moderate income growth, has reduced the estimated degree of overvaluation to a less worrisome 11% in (the third quarter of ) 2010.”

The Economist’s evaluation suggests the Canadian housing market is in bubble territory, but not so, say Sweet and Guatieri.

“All things considered, the Canadian housing market does not appear to be in a bubble and is unlikely to suffer a U.S.-style collapse,” they said. “The media and some analysts remain glued to the idea that the Canadian housing market is a bubble ready to implode a la the U.S., Ireland, Britain and Spain, where prices have dropped 22% on average.”

Well, ouch on the media observation, but I guess there is some truth to that, and certainly about certain analysts, but is there really a Canadian housing market?

Local dynamics make each city’s housing market different — house prices in Vancouver and Toronto are, on average, decidedly higher than in Calgary, which in turn has higher prices, on average, than Regina or Saskatoon, or even Edmonton, for that matter.

Information about ‘national house prices’ has to be evaluated carefully, as well — the value of homes is driven up or down by demand, which is much higher in Toronto, Vancouver, even Winnipeg, than in Calgary.

As a result, prices are higher, year-over-year, in those markets, but not here.

The asking price for a new home in Calgary at this time last year was slightly higher than this year and statistics from the Calgary Real Estate Board released this week indicate the average single-family home resale price last month was about 2% lower than November 2009.

Actually, there is a national housing market — it exists in the hallways and vaults of Canada’s banks and other institutions that lend money for mortgages, and as the last two years have proven, those organizations are strongly averse to taking the same kind of risks that have brought down housing markets in the U.S. and Europe.

Or, as finance minister Jim Flaherty told the House of Commons last week, “the evidence is not there that Canada has a housing bubble. In fact, the evidence with respect to affordability of mortgages in Canada is solid and we have a stable market.

“It’s a long, long stretch to compare our housing market with that of Ireland.”

Myke Thomas is the Homes editor and can be reached at 403-250-4324 begin_of_the_skype_highlighting              403-250-4324      end_of_the_skype_highlighting or This e-mail address is being protected from spambots. You need JavaScript enabled to view it

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