Canada's Housing Bubble

Just like Americans, Canadians are a very, very optimistically biased society. Look - you can have a conversation about a housing bubble in Great Britain, and they'll say 'oh is that right? Let me see the data'. If you have one in Canada it's World War 3. They hate you! They hate you for years! 

So let's put our biases aside and take a look at some data.

So what is the Canadian housing bubble? 

Simply put it's an unprecedented rise in real estate prices!

The average home price in Canada increased by 137% since 2000. 

canada average home price graph

Steep increases in price can be observed in every province:

Saskatchewan                                        Alberta
saskatchewan average home price graph
 Nova Scotia                                   Newfoundland
nova scotia average home price graphnew foundland average home price graph

British Columbia                                    Ontario
british columbia average home price graphontario average home price graph

Manitoba                                     New Brunswick
manitoba average home price graphnew brunswick average home price graph

Quebec                                                     PEI
quebec average home price graphpei average home price graph

And in every major city:

Calgary                                            Winnipeg
calgary average home price graphwinnipeg average home price graph

 Edmonton                                       Gatineau
edmonton average home price graphgatineau average home price graph

 Halifax                                                Hamilton
halifax average home price graphhamilton average home price graph

 Oshawa                                             Montreal
oshawa average home price graphmontreal average home price graph and property bubble

 London                                              Kitchener
london ontario average home price graphkitchener average home price graph

 Kingston                                             Ottawa
kingston average home price graphottawa housing bubble and average home price graph

 Quebec                                                Regina
quebec average home price graphregina average home price graph

 Saguenay                                             Saint John
saguenay average home price graphsaint john average home price graph

 Sudbury                                           St.John's
sudbury housing bubble and average home price graphst.john average home price graph

 St. Catharines                                        Sherbrooke
st. catharines average home price graphsherbrooke average home price graph

  Saskatoon                                     Thunder Bay
saskatoon average home price graphthunder bay average home price graph

     Toronto                                         Trois Rivieres
toronto housing bubble average home price graphtrois rivieres average home price graph

 Vancouver                                       Victoria
vancouver housing bubble and average home price graphvictoria average home price graph

Realize that housing booms and busts have occurred before. But those cycles were hidden from plain sight due to inflation.

Measuring home prices without adjusting for inflation is like measuring the length of a pen with a ruler that constantly shrinks or expands. Thus it is important to adjust real estate data for inflation to see the true value of dwellings over time. And I did just that:

toronto home prices adjusted for inflation graph

vancouver home prices adjusted for inflation graph

calgary home prices adjusted for inflation graph

edmonton home prices adjusted for inflation graph

montreal home prices adjusted for inflation graph

ottawa home prices adjusted for inflation graph

regina home prices adjusted for inflation graph

winnipeg home prices adjusted for inflation graph

victoria home prices adjusted for inflation graph

Now you may say that the increase in home prices does not necessarily equate to a housing bubble. And you would be right.

Housing bubbles occur when home prices rise significantly faster than the underlying fundamentals. 

You can read the full list of fundamentals here. Below I will focus on long term anchors of property prices.

One such anchor is income.

median income in canada

The story of income growth in Canada can be summarized by one word and one word only - stagnation. 

Between 1980 and 2011, home prices in Canada have doubled (adjusted for inflation) while incomes remain the same. If you graph incomes versus real estate prices you would get the following graph:

According to TD, Deutsche, OECD, and IMF home prices in Canada are overvalued against incomes by as much as 32%

Another anchor of property prices is the relationship between home prices and rents. 

price to rent ratio canada

Against rents Canadian real estate is overvalued anywhere between 60% to 88%. 

But how about the interest rates? After all mortgage rates have been falling for over three decades now. 

mortgage rate graph canada

You might be surprised but interest rates are not the main driver of real estate prices. In the long term there is no significant correlation between home prices and interest rates

Furthermore, if you were to believe that interest rates drive property prices than you must also assume that if interest rates rise then housing prices will fall. 

What really drives home prices is society's perception of where the prices are heading. The history of past price growth reinforces future price appreciation. 

Bubble thinking means thinking that the trend in prices will continue. 

But don't get me wrong - low interest rates inflated this bubble further than it would have otherwise, hence the record debt levels and very low debt service ratio.

CMHC certainly played a role as well:

Question is, what will happen when the interest rates inevitably rise! Perhaps the next chart might give you a clue.

Just like home prices, the average household mortgage in Canada significantly increased.

Furthermore, since 2000 home renovations replaced hockey as the new national sport. Canadians started competing against each other for best looking granite counter top and most expensive kitchen.

But with stagnant incomes how did Canadians manage to finance all those renovations? 

In sum, just like everyone else, Canadians fell in love with real estate. What a waste of money! Instead of investing in a house of cards we should have invested money in R&D and manufacturing instead of making the FIRE (finance, insurance and real estate) industry the largest industry in the country. Once Canadian housing enters a bear market so will the economy!

Finally let's conclude by comparing the Canadian housing bubble to the one that happened in the United States. 

canada housing bubble

canada housing bubble

- this article is a work in progress and much more content will be added later
- all the graphs will be updated on quarterly basis
- the opening paragraph was me paraphrasing Jeremy Grantham

If you have suggestions of what to add to this article leave a comment below. I want to make this page a summary of Canada's housing bubble. So please criticize constructively. Thanks!


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