Tuesday, January 26, 2010

Vancouver the biggest bubble in the world.

A new report on world housing is out....



Toronto housing severely unaffordable.

Montreal housing seriously unaffordable.

This excellent report uses housing prices to median family income as a measure. Now, I acknowledge that this measure does not take into account different tax policies, interest rates, demographics, weather, etc… However, big picture, this is an excellent tool to use.

In fact, Canada has poor tax policies, already rock bottom interest rates, poor demographics, tons of available space (we have one of the lowest population densities in the world), mediocre demographics, and poor weather in the opinion of most people.

If you adjusted these values to reflect these factors, our rating would be even worse. For example, the US has lower tax rates and a mortgage tax deduction, less available space, better demographics and better weather.

The report also has some unconventional thoughts on high-density versus low-density urban planning. This is beyond my area of expertise, so I will not comment, although I do like unconventional thinking, and moving back to the suburbs from the city, their arguments have a sympathetic ear in this blogger.

I take some issue with the report`s argument that the reason that many markets are unaffordable is land use policy (which roughly corresponds to supply). This is definitely a factor. However, the more important factor is that we are currently in a mammoth housing bubble. This bubble was caused by many factors, and land use policy is likely a minor factor in my view. The bubble was caused by a great credit boom that has spanned generations. Housing was (and still is, in Canada) psychologically deemed to be a safe investment that can not lose money. It is perceived to be the best investment class, despite little long term proof of that hypothesis. Over a decade or two, housing can be a good investment, but from today`s nosebleed levels, housing (or any other nosebleed asset class) is doomed to be a poor performer for years, and more likely, for decades.

By taking a snapshot at any given moment, we can make a determination (as this study does quite well) regarding whether housing is affordable or not. However, without the fullness of time or a full market cycle, it is nearly impossible to make reliable conclusions.

I believe that once the housing bubble in Canada deflates, it will bring housing prices back in line with affordability. In fact, periods of overvaluation are usually followed by periods of undervaluation. This same study done in 2000 or 2020 would yield very different results, and if it does, I doubt it will be because land use policies have changed materially.

I had suspected that Australia and Canada had the two biggest housing bubbles left in the so-called developed world. This report backs up this suspicion. Almost all other countries (UK, US, Spain, Ireland) have seen their bubbles deflate or start to deflate.

What do Australia and Canada have in common? Both are commodity countries.

The commodities and risk trade that reflated in 2009 (partly retracing the 2008 losses), has allowed Australia and Canada:

  1. Strong export pricing which has lead to
  2. Strong asset inflows and currency appreciation which has lead to
  3. Low interest rates (as inflation is not an issue in this deflationary environment) which has lead to
  4. “Relatively” mild recessions and relatively low unemployment which has lead to
  5. No bursting of the housing markets (unlike the non-commodity housing bubbles)

I missed the call on Canadian housing in 2009, but I believe that both Australia and Canada will play catch-up in the coming years:


  1. The commodity deflation and recession will restart in 2010 which will lead to lower export pricing and lower exports
  2. Strong asset outflows and currency depreciation which could lead to
  3. Higher long term interest rates as sovereign risk worries kick up (Not 100% sure about this one as the deflationary headwinds are quite strong)
  4. “Relatively” severe recessions and relatively increasing unemployment (due to point 6)
  5. A bursting of the housing markets as unemployment rises and personal savings increase and the same debt retrenchment that has happened in the US shows up in the Great White North.

The fact that Canada had a sharp recession in 2008/9 without its housing bubble and only a partial deflating of commodity prices is very worrisome for the next leg down.


Neil said...


This is truly a great post! The pdf you included is jam packed with tons of housing information in a logical format. I live in northern lower Michigan and I have serious concerns about possible hyperinflation in the U.S. (with debt deflation happening over the next 5-10 years). I have thought about moving to Canada, Toronto in particular, but the housing information I have come across is eye-opening. My perspective, I believe, is similar to yours in that I now share the opinion of the Austrian school of economics, having been indoctrinated in Keynesianism from my college years. Along with my other blogs I appreciate your infrequent, but information dense posts. Thanks for sharing this information on your site.

Anonymous said...

Vancouver hosting the winter Olympics is not an inconsequential factor in the extreme overvaluation of its housing stock. Of course this ebullience has spilled into all other major metropolitan areas by varying degrees. I seem to recall that the first leg down in commodities started when the Beijing games ended. I would not be surprised if the end of the winter games coincides with the beginning of the end of the Canadian RE bubble for at least a generation.

Jonah A. Libster said...
This comment has been removed by the author.
Jonah said...

This is a VERY important post. In Toronto real estate agents are telling everyone real estate is a guaranteed investment. This irritates me because of course there is no such thing, especially in a recession. With jobs still on decline and many full-time jobs being converted to contract or part-time, the ability to pay such inflated prices will sharply decline. We need articles like this to sober up a population drunk on credit (the average Canadian has 145% debt in credit cards/loans). Thanks. PS: tried to donate, but something missing in the PayPal setup but I'll try another way to donate to your blog.