Canada's Housing Bubble

Mar 12, 2010 Phil Izzo blogs.wsj.com

House prices across the globe still have room to fall, but the U.S. may be in better shape than other developed nations, according to an International Monetary Fund research article.

In the article, Prakash Loungani notes that house prices in major economies declined an average of about 5% in inflation-adjusted terms from 2007 through 2009. But he looks at some key metrics to determine if the global correction has ended.

One measure is how much house prices have risen compared to rents, and another shows how much they jumped compared to incomes. In many countries those ratios are still far above long-term averages. Based on this and other data, Loungani concludes: “house prices in many countries still have room to fall.”

But the U.S. is hardly in the worst position in the developed world. In fact, it looks to be in pretty good shape. Compared to rents, houses aren’t too far from the average of the pre-boom years. Canada, Sweden and Spain are in much worse positions. Meanwhile the ratio of house prices to incomes is actually below the 1970-2000 average.

To be sure, housing, like politics, is all local. The U.S. has seen some bubble areas hit much harder than the rest of the country, which affects the average. The massive discounts on condos in Florida could be offsetting still expensive houses elsewhere in the country.

There’s also no guarantee that just because houses are running closer to the long-run averages that they will stay there. Germany and Japan have ratios far below the mean for 1970-2000, and they didn’t experience the bubbles that other countries saw in the 2000s.