Will Canada's Housing Slump Play Out Like America's?

Year-over-year increases in house prices continue to decelerate in Canada, from 10% in March to -0.6% in December. This is the first month since the 1990s where the change at the national level was negative. Leading the slide were Calgary house prices (-7.6%), followed by Vancouver (-1.5%), and Toronto (-0.6%). The other three cities in the index remain in positive territory: Montreal (5.4%), Halifax (4.6%), and Ottawa (4.2%).

The readings come from a new index of resale-house price changes, the Teranet–National Bank National Composite House Price Index. It is considered a less biased measure than currently used measures because its repeat-sale methodology controls for changes in the mix of houses over time.

An analysis by Worthwhile Canadian Initiative blog may be of interest to those concerned about a U.S.-style meltdown in Canada. The first chart below compares U.S. and Canadian house price trends (measured by the repeat-sale methodology). It shows a less extreme rise for Canada and so far, much less of a correction. The second chart shows the ratio of house prices to gross national income, which reveals Canadian house prices shot up a lot less than U.S. house prices relative to incomes. Thus, the correction in Canada is likely to be much milder. (Click to enlarge)

Comments

[Roscat:]

Good article: great analysis and conclusion.

Many of us may have wished that the US housing market had a slower ascend to remain consistently growing over the years instead of bubbling up at times with disastrous consequences for many.

Feb 26 04:43 PM

[Thomas J. G...:]

Somebody said Canadian banks are solid as a rock because there is no mortgage deductability in Canada. Is that true that the banks there are in good shape? I guess if their housing prices haven't fallen that far, that's why.

Feb 26 06:26 PM

[ltd10:]

Thomas - Our Cdn banks just reported pretty nice earnings today and are quite solid. Google CIBC, Royal Bank of Canada, Bank of Nova Scotia, Toronto Dominion and you should find that info. And no, our mortgage interest is not deductible. But these banks also had much less exposure to the mess going on in the U.S. system.

Feb 26 08:05 PM

[rber:]

The numbers you posted above are typical for those markets during a downturn. Calgary oil bubble is bust. Vancouvers real estate speculation mini bubble is bust and Toronto's manufacturing bubble is bust due to what's going on south of the border. Most of the other major centers are based on well diversified local economies and despite the banking industries pleas to the government to loosen rules our government turned up their nose (thank goodness for that). We will therefore not experience the national housing meltdown going on in the US.

Feb 26 10:54 PM

[P. Kalven:]

Sales volumes are down and the markets are stagnant, but prices are in a slow decline by comparison to US market; primary reason Canada's housing market will fair different from US is that less than 5% of Canadian Mortgages would be classified as "Sub Prime". As well the Canadian Housing and Mortgage Corporation provides insurance to the banks on consumer premium basis for any property with less than 25% equity and CMHC is the only entity that can pursue the consumer after the fact in the case of default. So the process of foreclosure follows a slower linear path, with the home owner having a period to sell the property, then the bank, then the CMHC.

It would be fair to say that the delay in the speed of the process helps to minimize the impact of the foreclosed property value on its surroundings.

There is anticipation in the market of an increase of foreclosures, but it is expected to be in commercial and those residential properties bought at the height of the housing bubble; bear in mind in most Canadian markets the significant gains in housing took place in less than a 18 month period at volumes just above area normal, so the exposure of the entire market is more limited than in the US where the gains covered a number of years.

It is worthy to note that New Home Builders in Alberta in Western Canada are sitting on large inventories and have adjusted New Construction to a prescribed level due to depletion of absorption in an effort t to reduce overall inventory to sustainable levels. As well there is still a considerable price gap between the cost of New Housing over Resale Housing.

Disclosure: Licensed in the Trade of Real Estate in Alberta

Feb 27 11:56 AM

[CLH:]

Because Canada is a less dynamic society then America it will take longer to have a true correction, but it will come.

Feb 27 02:16 PM

[OldLimey:]

Even 'dynamism' has sensible limits. Maybe Canada identified them.


On Feb 27 02:16 PM CLH wrote:

> Because Canada is a less dynamic society then America it will take
> longer to have a true correction, but it will come.

Feb 27 02:58 PM

[auto44:]

My guess is that canadian banks were not forced by their govrernment to make loans to dead beats that they knew could not pay them back. Most people in the U S believe that bankers caused this problem. It was our politicians. It started during the Carter administration and grew through the adminstrations and congresses ever since then until they finally broke the system. Now our banks are about to be nationalized/scoialize... and I suspect this was the goal all along.

Feb 27 06:20 PM

[wildfirexx:]

Canadian house prices, (especially in western canada) didn't start climbing until about 2 years after they started in the united states...
and they didn't start dropping until recently...so we have a long ways to go yet...
And since home sales are still at record lows, and foreclosures are on the rise, it just a matter of time before the big banks begin to feel the pinch.

Feb 28 12:00 AM

[Real Estate...:]

Thanks for the analysis. Do you think it's still a good time to buy? When do you think the prices will start to rise?

Apr 04 03:24 PM