Canada's Housing Bubble

Feb 26, 2010 Alex J. Pollock blog.american.com

The Canadian housing finance system, and Canadian banks, have come through the financial crises of 2007 to 09 in far better shape than their U.S. counterparts. A recent American Enterprise Institute conference discussed, and Mark Perry has nicely summarized, a number of factors making Canada’s mortgage credit practices more conservative and less vulnerable. A tempting presumption would be that the housing market is accordingly less price-bubble prone.

But Canadian house prices have experienced an aggregate inflation since 2000 equal to that of the U.S. house price bubble, in both cases, of about 90 percent. Here are the comparative house price indices:

housingcanada

U.S. house prices increased by 90 percent in about six years, followed by a dramatic drop, which took them back to their long-term trend line. Canadian house prices had the same aggregate increase in about eight years, then a sharp but modest correction, followed by renewed increases to a new high in 2009.

The average annual increase during the 2000 to 2006 U.S. run was over 10 percent, obviously an unsustainable rate. The trend nominal annual increase is more like 3 percent. In Canada, the 92 percent price increase in 2000 to 2009 is an average annual growth of about 7 percent, less extreme, but still unsustainable. In this context, the Canadian government has recently taken steps to raise mortgage underwriting standards.

What are we to conclude? That a long-running house price boom can avoid a credit bust with more conservative housing finance practices? Or that mortgage credit problems for Canada nonetheless lie ahead, as house prices ultimately correct? If the latter, should we expect a much less severe downer?

Stay tuned to this most interesting North American experiment in comparative housing finance.