The Atlantic – “How real is Canada’s housing bubble? More real than any other country’s.”


“Canada has a new worthwhile initiative. After years of booming prices, that bastion of politeness north of the border is looking to avoid a catastrophic housing bust for something more, well, boring. Initiatives don’t get more worthwhile, and perhaps not more difficult considering Canada just might have the biggest housing bubble in the world right now.
Not exactly boring, eh?
The distinction between higher prices and bubbly prices isn’t as subjective as it might sound. Like any other financial asset, there should be a fairly steady relationship between the price of housing and the stream of income — rent — it produces. Should be. The chart above, from The Economist, looks at the price-to-rent ratios across different countries, and measures how under-or-overvalued housing is, with negative numbers corresponding to the former and positive ones to the latter.”

“ keeping rates where they are and slowly tightening mortgage requirements, Canada hopes to engineer a more gradual price decline that won’t set off a vicious circle. In the best case, prices wouldn’t fall, except below the rate of inflation, so that real prices decline without hitting household net worths. This strategy is hardly unique — China has done the same the past few years — but it has the very Canadian name of “macroprudential regulation”.

– from ‘The Biggest Housing Bubble in the World Is in … Canada?’, The Atlantic, 25 Jan 2013

Yes, we have a big RE bubble.
Noteworthy, again, for the mention in the international press.
It is our considered opinion that a soft landing, particularly in markets such as Vancouver’s, is an impossibility.
Our market has been completely dependent on rising prices to draw in buyers.
Stagnant or falling prices will beget falling prices. Yes, that’s a circular, self-reinforcing effect, and that is why the downdraft, once established, will be so powerful.
– vreaa

36 responses to “The Atlantic – “How real is Canada’s housing bubble? More real than any other country’s.”

  1. According to CPI rent measure rents have been increasing below inflation for over two decades. That may be but I have specific examples of rents increasing at or above CPI.

    Just be cautious using price-rent as a statistic.

    • At close to 80% price-rent, rents would have to be way, waaay off to suggest that Canada’s housing market is not highly overvalued.

      • Am I understanding this correctly? The are saying our Canadian home values are 80% above norms compared to rents (on average)? Is that correct?……anyone?

      • Correcto. i.e. if rents stayed flat, prices would have to fall 44% for the two to match.

      • I see Vancouver as 70% overvalued using a conservative measure. I do not use CPI because it seems to underestimate rental growth for same units. Worthy of consideration, what does CPI really measure?

      • The graph shows *Canada* 80% overvalued. If using the same methodology, is Vancouver overvalued more or less than that?

      • Right on the money, Bubbly. That was the question in my mind when I read the number representing our national figure and it did not quite make sense. How can we be 80% high nationally? Based on which cities? We know Vancouver is already skewed so far towards purgatory it can only suggest that this city is 110 or 120% out of balance.

        I am questioning the validity of the data in the chart.

      • –> Farmer

        Vreaa has repeatedly predicted (and I agree) that Vancouver is due for a 50-67% peak-to-trough correction. This implies that Vancouver is overvalued by 100-200%.

      • …And to carry on our discussion about RE as one of the major topics of discussion amongst Vancouverites, I believe RE is hitting cult, nay, religious status amongst the masses.

        To talk it down is like siding with the devil, “blasphemer” they yell as the old hags screech “burn him at the stake”.

        Instead of giving one tenth of our income (tithe) we gladly give 10 times our income.

        We erect giant signs with crosses, that say “East Van” (god’s country).

        REligion: The new organized crime.
        Jehovah’s witnesses got nothing on this when random strangers are leaving post it notes on people’s doors with an intent to buy.

        God save us.

      • But not necessarily the overvaluation relative to rents. That is what I am disputing. The number looks too high to me at first glance. Perhaps some more light can be shed on this by looking more closely at the price/rent charts we saw yesterday for Vancouver. Then we need a napkin for some serious calculations…..

        Where are the math whizzes when we need them?

      • Farmer,

        The data from this chart of prices to rent looks like it comes straight from the Economist article,

        I don’t know how they calculated rents, but I respect the magazine and would have to trust that their calculation are somewhat reliable and close to the truth. Keep in mind that an 80% overvaluation doesn’t mean we’re going to see an 80% drop. As mentioned, this would call for a 44% drop in cross Canada prices which doesn’t seem outside the realm of possibilities to me.

        If Vancouver was say, 160% overvalued based on (twice as much as Canada), that would call for a 61.5% drop in Vancouver. Just throwing this # out there, but I don’t think a 61% drop is crazy. I think its at the high end of the likely possible drop we see, but I do think its possible.

      • I used CMHC rental survey, which is a reasonable proxy for “same unit rents” since it surveys mostly older vintage purpose built stock. I’ll link to a post I did a few months ago on the rented accommodation vs CMHC discrepancy when I find the link.

        CMHC rents have appreciated 20% more iirc compared to cpi in past 20 years (don’t quote that). That’s about a 1-2% annualized gap.

        The best measure we can get is first looking at cap rates compared to like investments, but on a relative basis we can look at same unit price and rent to compare. Anyone who rented or rented out units in the early 2000s could provide baseline data then we can compare to similar units for rent today vis a vis their appraised/mkt value. That would give us a good measure of apples-apples.

      • UBCghettodweller

        yvrhousing- I like your style. While well controlled experiments are nearly impossible in the real world when it come to economics (hell, it’s hard enough in the laboratory,) I think that analysis looks pretty sound. Well done.

  2. …”Our market has been completely dependent on rising prices to draw in buyers.”…

    Well… not ‘completely’, ED… there is also a significant political/ideological component to the phenomenon… [“Public bad. Private Good!”]…

    [CBC] – Vancouver’s Canada Post block sold to investment firm

    …”The future of an entire city block in Vancouver’s downtown core is now up in the air, after Canada Post finally let go of its signature mail processing plant. The Canada Post building at Georgia and Hamilton street has been sold for an undisclosed sum to the British Columbia Investment Management Corporation (bcIMC), a pension fund management company.”…

    • Yes, Nem, but notice that that component appears to be on hold now that prices have stalled (possibly circular, admittedly).
      The point is that, yes, demand is multifactorial, but, at stratospheric price heights, the major reason, the only reason, for ‘getting-in’ is that one anticipates even higher prices.
      Ever buyer a momentum player; every buyer a speculator.

    • 130M CAD, that’s going to be some expensive mixed use down the line.

      I need a haircut. So do these developers.

    • The site was bought by bcIMC (BC Investment Mgmt Corp), which manages government operating and reserve funds, and all BC pension funds (municipal, bc gov’t, hospital, teacher, etc). Price was rumoured to be btwn $130M and $160M. It’s a full, large block downtown with an existing 700,000 sq ft structure that can likely be retained and modified (similar to the Sears bathtub). My feeling on the price is that it’s fair or low, especially with the long time horizon that these institutional investors operate under.

      bcIMC has $95 billion under management.

      • 95B AUM… not exactly ChumpChange… and certainly a ‘tad’ more toonies in play than Nem’s modest ‘prop desk’… my guess is they’ll partner with an established developer [Barney&TheBentalls?]; raze the interior… maintain the exterior shell/facade as a palliative to the HeritageVote and stick some NeoBrutalist glass monstrosity like the LondonShard on top of it all…

        Pretty much the only way to make it pay… albeit, agreed, a pension fund’s time horizon and prudential outlook would normatively preclude ‘quick flips’…

        Alternatively, perhaps they’ve already lined up a provincial/federal anchor tenant?… It wouldn’t take an enormous leap of imagination to envisage a lurking PPP deal (e.g. Surrey’s BillionDollarGendarmerie).*

        Time will tell. Definitely one to watch.

        I wonder what they’ll do with those enormous ArmorialCrestsRoyale, though?

        “Shamed be he who thinks evil of it”

        [NoteToEd: Call me a conspiracy theorist… but my elephantine memory seems to recall a ‘quiet’ little ProvincialPressRelease of last June: “Patients and health-care professionals can have confidence that our government is addressing the renewal of St. Paul’s Hospital,” said Health Minister Michael de Jong… Hmmm… ]

  3. Keep in mind that the Canadian price-to-rent ratio in The Economist chart is for the country as a whole. Vancouver’s ratio is much, much higher. While the federal government might be successful in engineering a soft landing in those parts of Canada that haven’t had the same degree of excess, the situation in Vancouver will probably be quite different. Real estate is local. We could have a huge price collapse in Vancouver, while cities like Windsor and Thunder Bay, and smaller towns, might go relatively unscathed. And within Metro Vancouver there could well be a range of outcomes. I could see price declines on the West Side being quite spectacular compared to other parts of the Lower Mainland.

    • Froogle, my opinion is that if we only had owner occupiers and no speculation the government would be able to engineer a soft landing as owners wouldn’t rush for the exits when appreciation stalls. If we look at markets in Canada where speculation is rampant (YVR, YYZ), these areas are likely to be hit hardest, the “middle parts” of the country where there is less speculation and mostly owner occupiers will probably not get hit nearly as bad. If you could track the degree of market speculation by city, I bet you it would be inversely proportional to the size of the crash.

      • Froogle Scott

        Yes, that’s probably correct in general terms. A large base of owner-occupiers is undoubtedly inherently more stable than a mix of owner-occupiers and outright speculators. The wrinkle, however, comes with the ‘Spot the Speculator’ type of owner-occupiers that vreaa has been featuring over the last couple of years. I wonder how much of a factor those type of owners have been, nation-wide. That said, I imagine the speculative element of owner-occupier purchases is significantly more pronounced in Vancouver, TO, Calgary, than it is in smaller centers.

      • you nailed it.

      • The middle part of the country is where Saskatoon and Regina are, yltnboomerang, and both of them are on the very bubbly side. Kevin (saskatoonhousingbubble) had some good charts suggesting that appreciation of homes in the flat-lands were higher in percentage terms than even Vancouver although they don’t come close in absolute terms. A mean reversion there would be very mean indeed.

      • I am so sure about that Froogle. The reason I say that is because not so long ago I was living in small town Saskatchewan. Speculation was rampant and cheap homes were being snapped up by money from both East and West for investment purchases and rentals. Houses that were worth little more than 10k for years were suddenly fetching a hundred. Some of the stupidest speculation I have ever witnessed in my entire life was happening right before my eyes in the middle of bloody nowhere. I am talking about homes that shot up in value a thousand percent or more in some cases. You would shake your head in disbelief if you saw what was happening. And out there on the bald flat prairies some Realtors actually had the balls to say “they are not making land anymore” when any fool could drive ten minutes out and pick up a quarter section with a farmhouse for the same price as a small town home. I am talking about a village of only 500 people. There are simply no brains when speculation is in play.

    • The best way to define a speculator is to define a non-speculator; that is anyone who purchased a home willing to consume it and lose money, like buying a car. I don’t see any difference between an owner and property investor, to an oil producer to and day trader. They all speculate on future price movements regardless if they consume the asset or not.

      • UBCghettodweller

        Can I steal this and use it as my own?

        This is one of the best definitions that I’ve ever read about speculators when it comes to real estate.

        In which case my parents are very much in the non speculator camp even though they’re home owners. Their house is a place to live and spend money on upkeep only (while maybe doing a few renovations themselves so it’s exactly the property they want.) They don’t even factor it in to their net worth calculations.

  4. Living in Victoria

    I have started reading your fascinating compendium mostly because there is no reality in the city I live in, sleepy little Victoria. In Victoria, we had a couple of “bear” blogs, once upon a time. One drank the koolaid, bought a house and shut ‘er down. The other–oh, well, he also bought a house. But left the blog up. But it’s been totally taken over by homeowners and real estate agents. Those few bears who continue to put up information are ridiculed by this loudmouth minority, so I’ve more or less given up reading it. My point is that this belief in the infallibility of home ownership, and that no one can lose with a “real estate investment,” has reached such a hyper-religious pitch in pockets of Canada, like my little town, that there can be no softness in the landing. Only the cement-hardness of the sidewalk they fall on, after they are pushed out their figurative condo windows by reality, will wake these believers up. If they survive. Till then, hey, it’s different here. They aren’t making any more land in Victoria. Everybody in Canada wants to live here. Prices will never come down.

    • You are right about Victoria, LIV. It is in deep waters already and sales have plummetted since last year. Actually Victoria led the charge and is only awaiting price declines to match its sales crash. Hold onto your seat, pal… will rival Vancouver in percentage price declines as the housing correction gains momentum. There is nothing under that market but a lot of vapour and dead air space.

  5. The idea of engineering a soft landing is a nice one, but I think they are too late to be able to centrally manage such an outcome. After the years of high single, and double digit gains to the Vancouver market, it would take a very prolonged period of prices holding (or increasing under inflation) for a balanced sector to present itself again.

    Unfortunately I cannot see anything other than a relatively rapid drop in prices, over a 2-3 year period, and certainly can’t envisage 10-15 years of stagnated prices.

  6. theboywhocriedbubble

    I met with a personal finances and retirement advisor at my bank this morning. He started off the discussion by asking me what I wanted to do with my money in the next few years eg. take a vacation , buy a house or a car etc. I snapped into bear mode and said I will not be purchasing RE anytime soon and succinctly delivered my rationale about the current housing situation in Canada and more specifically in Vancouver. He was astounded that I knew so much about the current real estate situations across N. America and actually said he was quite impressed at my knowledge of the current market conditions. He affirmed my thoughts and quickly replied that he and all of his financial advisor pals , family and friends he could convince had sold their Canadian real estate over the last 6 months or so and bought places in the up and coming bull markets of the USA. He suggested that we diversify our portfolio and do a bit of the same. This guy and his buddies know the deal and jumped off at the right time so why is this info not being passed on to the average joe ?

  7. About Hong Kong and Canada. Why are they similar?

    Why are Housing Units so Small in Hong Kong?

    "In Hong Kong, the great attractiveness of housing has not been its size, quality and other attributes but its long-term appreciation potential."

    Why there is Speculation in the Market for Pre-Sale Housing Units (Part I)

    "The public often believes mistakenly that speculation causes property prices to rise. And when Government intervenes to curb speculation this mistaken belief is unfortunately reinforced. In reality, speculation is the result of anticipated property price increases and it is such anticipation that drives up property purchases."

    Why there is Speculation in the Market for Pre-Sale Housing Units (Part II)

    It appears we've imported an experimental concept that our regulators have no knowledge of, with regards to the risks that comes with it.

    • UBCghettodweller

      OK. Everyone. Yes. Everyone on this blog, because you actually give a damn and are unusually well read and educated compared to the average internet user and even more so compared to the average Vancouverite when it comes to real estate. Read the links that were posted.

      Really, even if you conclude that the analysis is complete BS. The ideas alone are worth considering.

  8. Cap rates for Vancouver are some of the lowest in the world so I was told by an investor more than ten years ago. The reason, apparently, was that the property appreciation (due to wealthy immigrants) and very low risk (a very high percentage of lifetime renters) more than makes up for the difference between other markets. Now that Vancouver cap rates have dropped below bond rates, it’s pretty obvious that the motivation to buy Vancouver property is based on other rationale.

    By comparison, cap rates in Calgary for most rental properties have remained fairly constant from 10 years ago at much higher levels than Vancouver. That is rents have increased at roughly the same rate as the capital appreciation of the property.

    What do Canada, HK, Singapore, and Australia have in common with respect to being in the top 5 of most over-valued property markets in the world?

    The bottom line is that if it’s HAM, forget about cap rates and income ratios: they just aren’t relevant while China’s credit bubble contines to expand.

    • “forget about cap rates and income ratios”

      LOL. Just like PE ratios didn’t matter in the late 90s. How did that end?

      • Yeah – that’s right. Buying tech stocks gave you a safe inflation and political risk hedge with a Visa to a country with free heath care and tax payer paid education system.

        I’ll spell it out for you in black and white: there’s a difference between equity driven RE markets and income driven RE markets. Cap ratios don’t work if it’s not the income stream that’s being purchased.

        Furthermore, in terms of PE ratios, why do some investors buy Amazon at 500x earnings. Has gold gone up for 12 consecutive years because it’s rental yield?


  9. There is a lag period from a drop in volume of sales and actual house prices. Vancouver has experienced drop in sales for sometime with a big disappointment in the 2013 spring sales that RE said would pick up and didn’t. Also with the new court ruling, speculators who buy before they are built with the plan to sell once completed are still on the hook if prices drop and developers are behind on the delivery date. What people don’t understand that there is a huge correction on the way for Vancouver but the debt always remains.

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