Canada’s Real Estate Bubble

Food for thought from Mike Shedlock (Mish):

Thoughts on the Canadian Housing Bubble

In response to Mish Videos - On the Edge with Max Keiser when I mentioned the Canadian housing bubble, I received numerous emails from people telling me that Canadian banks were in better shape than the US, that lending standards on houses were tighter, and how commodities would support home prices.

Perhaps banks are in better shape but that does not mean they are in good shape. But the real reason we can say Canadian housing is in a bubble is the same reason the US was in an identifiable bubble:

Home prices are standard deviations above rental prices and wages. That may not be true of every city Canada (it was not true in places like Danville, Illinois either), but judging from housing prices in Toronto, Vancouver, etc, it is crystal clear Canada is in trouble.

I cannot quantify exactly how many standard deviations above norm the major Canadian cities are, but a look at home prices and acceleration in appreciation is telling in and of itself. In the US, homes prices to wages and rent were a whopping 3.5 standard deviations from the norm at the peak.

Canadian home prices are a bubble waiting to pop. When the bubble does pop, it will take as long to fix as in the US, 6-8 years minimum, perhaps way longer, depending on how big the bubbles got in each location and the speed of the declines.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Comments:

I have maintained that much of Canada has been in a bubble for several years now, particularly in Alberta where I reside.

It does not make sense for real estate prices to double or triple in some cases in a matter of 6 years or so.

Yes, interest rates have been low which contributes to asset price increases.

Yes, financing has been more available than ever before due to lower down payments and longer mortgage terms.

The problem is wages have not risen to the extent housing and land prices have increased.

There is a simple formula to see if the housing market you live in is in bubble territory:

Take the average household income and multiply by 3. If this number is greater or equal than the average house price than the market you live in is Not in a bubble.

When one sees average house prices at 4 times or more the average income level, watch out. A correction is coming.