Thursday 10 October 2013

Canada's Housing Bubble in Three Charts

What is the main driver of increasing home prices? Rising incomes or debt?

In nominal terms, the average household mortgage debt in Canada rose by 38% from $137,000 in 2006 to $190,000 in 2011. At the same time the average home price in Canada and Toronto rose by 36% and 32% respectively. In contrast, incomes (nominal - unadjusted for inflation) grew by only 10%. When adjusted for inflation, incomes only grew by 2% between 2006 and 2011.

Without increased household indebtedness home prices in Canada would never have reached where they are right now. The Canadian housing bubble was fueled by debt.

A recent piece by The Business Insider included this chart produced by BCA Research:

As pointed out in a tweet by Ben Rabidoux, the comparison of U.S. vs Canada's household debt-to-income is not apples to apples as both incomes and debt levels are calculated differently in each country. However, Ben further added "...but yes, Canada is worse by any measure."

Eventually the Canadian consumer will begin to de-leverage. Once that happens, I expect a severe recession - way worse than 2008.

The following two graphs were made by Ben Rabidoux and posted on his Twitter account. The first chart compares residential construction as a percent of GDP, while the second chart looks at the percent of the labour force employed in construction in the US and Canada.

Once the shit hits the fan, the construction industry will be hurt the most in my opinion. It doesn't take a genius to realize that.

Toronto will be hit especially hard. New condo sales were at 13 year low this past August. Housing starts are in a free fall right now. In few years - once all the towers currently under construction are finished - all the plumbers, welders and dry-wallers will be competing against each other for the limited number of jobs available. Prices will fall, and unemployment will rise.

Note on calculations:
- income grew by 10% between 2006 and 2011 - derived from CMHC real income data and transformed into nominal terms via BOC inflation calculator.
- average mortgage per household calculated based on the National household survey data. Total mortgage debt was divided by the number of households with mortgage for 2011 (5,286,070).
- Average home prices in Canada was calculated using OECD and DFED data. Toronto average home prices growth was calculated using TREB data.


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