Wednesday, February 29, 2012

All of Canada Is in a Bubble - The Myth of Containment

"We’ve never had a decline in house prices on a nationwide basis. So, what I think what is more likely is that house prices will slow, maybe stabilize, might slow consumption spending a bit. I don’t think it’s gonna drive the economy too far from its full employment path, though." -- Ben Bernanke, July 2005

The Canadian housing market is moving firmly from denial to anger and bargaining based on the sudden appearance of the mantra of "the bubble is only in Ontario and BC" (or Vancouver and GTA) not the whole country. (So . . . it really doesn't impact things? I guess is the subtext . . .) Well, whether the subtext can be supported or not is academic. This desperate bargaining is just plain naive.

Teranet latest numbers are out for December 2011. They are charted below in all their glory. Let's take a look.
Canadian Cities House Price Index History
Here we have all of the Teranet Cities and the two Composites. Yes, there is some variance. So let's zoom in for a closer look.

Canadian House Prices All Cites compared to growth in GDP

Well, some interesting things emerge. One, all cities have greatly exceeded the growth in GDP, just since 2005. (All charts are indexed to 100 on the same month). Interestingly the drop in Toronto prices during the Great Recession returned prices to the sustainable growth level, but just briefly. It's the only city that managed this.

Second thing to notice is the pairing of Vancouver and Toronto as the guilty parties doesn't make any sense. Winnipeg wins the day for most bubbly prices relative to 2005. Vancouver is second, but well into a price slide. Toronto is no where to be found with the top dogs. It is packed into a bundle well below the composite grey lines, battling it out with Ottawa and Victoria, both of which are sliding, Victoria with gusto.

Also problematic is Quebec and (just below the composites) Montreal, which no one ever lists with Toronto and Vancouver, which is strange when you look at the actual numbers. Montreal easily has Toronto beat for hot prices.

Every city on this chart has grown substantially in excess of national GDP (although one could argue that select cities may be undergoing an economic structural change (such as due to resource extraction (how long will that last?))), but in places like Edmonton and Calgary, you will notice that's long since been priced in and, in fact, caused massive overshoot, which is still being worked out of the market. 

Contained? Keep bargaining dreaming.

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