Canada's Housing Bubble

Mar 23, 2010 Scotiabank Group

A Decade For The Record Books

The performance of Canada’s housing market over the past decade has been exceptional by virtually any measure. Real home prices increased an average of 5.2% annually from 2000 through 2009, representing the strongest decade of real price appreciation in at least 50 years. Housing starts averaged 201,000 units annually, the highest level of new home construction since the 1970s.

It is time for Canadians to reset their housing market expectations. We expect 2010 will mark a transition year as the boom of the ‘aughts’ gives way to a sustained period of more subdued housing activity over the coming decade.

For one, the market is starting off the ‘twenty-tens’ with somewhat higher home prices relative to long-term fundamentals, as well as a higher-than-normal level of unsold new housing stock. Considering a number of housing metrics, including the IMF’s housing valuation model for Canada, we estimate that average prices are currently about 10-15% above their underlying ‘fair value’. This contrasts with the start of the 2000s when housing in Canada appears both undervalued on average and underbuilt.