The chart above from Bloomberg shows Canada’s housing investment as a percentage of gross domestic product, and the declines in inflation-adjusted house prices that follow when this ratio tops 7 percent.
“Canada may be on the cusp of a “severe” housing correction as real estate investment surges above a tipping point relative to economic output, according to George Athanassakos, professor of finance at the Richard Ivey School of Business. “Eventually, everything boils down to demand and supply,” Athanassakos said in a telephone interview from Western University in London, Ontario. “Whenever this ratio goes over 7 percent, it signifies overinvestment in housing and two or three years later, we have a severe correction.”
Canada’s housing market is booming as historically-low interest rates fuel purchases, driving up home prices and adding to record household debt. Canada’s ratio of housing investment to GDP has averaged 5.8 percent over the last 50 years and is currently at about 7 percent, based on Statistics Canada figures as of the third quarter of 2011, Athanassakos said. Housing investment includes spending on new homes, renovations and real estate transaction fees.
U.S. housing prices plunged by a third between the peak in July 2006 and November 2011, according to the S&P/Case-Shiller Composite-20 Home Price Index. By comparison, Canadian housing prices rose 30 percent in the same period, according to the Canadian Real Estate Association.
“We have experienced bubbles and busts before in Canada, it’s nothing new,” Athanassakos said. “I don’t know why this time would be different.”
– from Canada Housing Poised for ‘Severe’ Drop, Doug Alexander and Ilan Kolet, Bloomberg, 17 Feb 2012 [hat-tip ‘Told-you-so-in-2007’]
We’re joking a bit about the “#47” thing — but there do seem to be an awful lot of articles in the US and international press about a Canadian housing bubble.
We haven’t been headlining all of these articles, but this one is noteworthy because of its focus on the ‘third’ fundamental, namely ‘price’ to GDP. (The other two fundamentals, of course, are price:rent and price:income). By all of these measures Vancouver RE is overvalued, likely by a factor of 2 to 3.