Canada's Housing Bubble

Jan 25, 2010 Garth Turner greaterfool.ca

Some wag wagered in a post on Monday my next piece would be on affordability, now that Canada has been judged to have the most unaffordable real estate in the world.

Damn straight.

If you’ve heard me speak, read one of my books or stumbled on this site, you know my conviction that Canadians are property fools. Yesterday I demonstrated how we roll over and pay almost twice the price Americans do for shelter. Now comes fresh, steaming evidence we lead the planet in delusionary behaviour. Especially in BC and the GTA.

In case you missed it, the latest Demogaphia survey – a research document comparing houses in Canada, the US, the UK, Australia and elsewhere – has pegged Vancouver, Kelowna, Abbotsford, Victoria and Toronto among the global elite when it comes to house values. Trust me, this is a list you do not want to be on.

The media (as usual) missed the point of this document. It’s not that homes in these places, led by Vancouver, are the most expensive in the world. They aren’t.  Rather that they’re the least affordable. The difference is huge. Expensive houses in expensive cities like Hong Kong and London are affordable to the wealthy residents who live there. That’s why they cost a lot – since those are global centres of economic activity.

Vancouver, in contrast, ain’t. A regional city in a mildly interesting but second-tier country.

So why are Vancouver and Toronto two of the most unaffordable cities in the world? Because the cost of houses is totally out of whack with what people in those communities earn. In other words, high prices without economic justification – which means they’re unsustainable.

Demoghaphia considers a city affordable if the average house costs three times the average income. If it exceeds four times, it’s moderately unaffordable. Past five times, seriously unaffordable. Beyond that it’s comedic. So, Victoria at about eight times and Vancouver at over 9 times income are off the scale. This doesn’t mean the housing in those cities is world class, internationally desirable, glam, or destined to keep rising. Instead, it probably means the locals are nuts.

The more interesting question, then, is how this happened.

And it’s one we’ve already answered.

The current housing bubble has been caused by emergency interest rates engineered by the central bank. It’s the result of government-backed mortgage insurance which lets people without money buy houses. It has been pumped, promoted and pimped by the mainstream media, populated by home-owning producers and editors and run by advertising-starved, indebted corporations. It’s been desperately promoted by the feds through tax incentives and blanket approvals by the minister of finance. And it’s been fueled by self-dealing lenders, realtors, developers, real estate boards and huzzah-huzzah marketers who have told people, buy now or buy never.

In contrast, it has not been the result of an increase in disposable incomes, an influx of new investment and jobs or economic growth. And that’s why the thing cannot last.

At 9.3, Vancouver’s officially ready for the big one.