Canada is in a housing bubble
Flash Point: The Future of Housing in Canada
 | By Guest Column Ian Nunn (Bio and Archives) Friday, December 7, 2012 | Print friendly | Subscribe | Email Us |
the POOG
We came across this interesting graphic today from Business Insider titled CITI’S MATT KING PRESENTS: ‘The Most Depressing Slide I’ve Ever Created’. It shows a country’s dependency ratio on an inverted scale versus the county’s house price index.
Figure 1. The dependency ratio (dark line, inverted right scale) versus the house price index (light line, left scale) for six countries.
The six charts for specific global markets that have gone through a recent housing bubble suggest that the dependency ratio forms an envelope that the house price index moves inside of.
Where Does Canada Fit In?
While some such as Mike Shedlock have argued that Canada is in a housing bubble (Housing Bubble Comparison: US, UK, Canada, Spain, Australia, Japan; Hosed in Canada; Housing Crash is a Given; also read Is Canada’s housing bubble about to burst?), others, notably government officials, have downplayed this notion while warning and acting against the risk of a bubble happening. We will try and get a sense of how Canada compares to the other six economies.
Figure 2 is a chart of Canada’s dependency ratio, courtesy of Statistics Canada.
Figure 2. Canada’s dependency ratios.
Since we are not inclined to invest the energy in capturing and manipulating the data, we ask the reader to mentally invert (flip over) the green line. Further, to compare Canada to Australia in Figure 1, ignore the part of the data in Figure 2 from 2031 on. The ratio moves from about 90 in 1971 to an estimated (inverted) peak of about 58 in 2011 before falling to around 75 in 2030. Australia moved from about 57 to 48 in 2008 before returning to about 63 in 2030. If we could match scales, the start-to-peak difference for Canada at 32 is much steeper than the peak-to-end span of 15 for Australia. Canada’s chart would actually be closer to Ireland’s.
Elsewhere we track Canada’s house prices (Tracking Canadian House Prices) and have noticed a possible downturn off a top this summer.
Figure 3. Canada 11-city house price index, 1999 to present.
Source: Teranet - National Bank National Composite House Price Index ™
The takeaway point is that if the Canadian housing market behaves similar to the markets in other prominent Western countries, Canada’s house prices are in for a long correction.
Items of notes and interest from the web.