Monday, June 3, 2013

The Canada - United States House Price Gap - Something's Gonna Give

A recent report by BMO's Doug Porter looks at the growing gap between house prices in the United States and Canada.  For at least two and a half decades, house prices in the two nations tracked each other, however, as the median price for a home in the United States began to fall in early 2006, Canada's housing market went in the opposite direction.

Here is a graphic showing the divergence with Canada's mean home sales price in red and the U.S. in blue:

By the early part of 2013, an average American home sold for $233,000, down from $275,000 during the housing boom, a decrease of 15 percent.  In Canada, over the same period of time, the average price for a home has risen from $250,000 to $378,000, an increase of 51 percent.  Canada's housing market did readjust downwards for a very short period of time in the early part of the Great Recession but has pretty much climbed since then although there has been moderation in the level of growth over the past year.  Right now, the housing price gap between the two nations is a stunning $145,000 or 62.2 percent, well up from the average of 10 percent or less during the period from 1999 to 2006.

Just to show what an outlier Canada's housing market performance has been over the past few years, here is a look at the global house price index from the 2012 IMF international housing study:

Here is a look at the nations with falling and rising house prices noting that Canada is among the losers on a year-over year basis for the second quarter of 2012:

Such was not the case in 2009 - 2010 as shown on this bar graph:

Canada was among the few winners and, as shown on this graphic, saw house price increases between 2008 and 2009 rise by more than what economic fundamentals would have suggested:

This graphic will give us some idea of where things might be heading for Canadian residential real estate:

Active listings are very high across the nation, particularly in Vancouver, Ottawa, Montreal, Quebec, New Brunswick and Nova Scotia with all markets favouring buyers.  Fortunately, for the Canadian market, low interest rates are putting little pressure to sell on current homeowners.  As well, unlike the United States, there is a tiny fraction of homeowners that are delinquent more than 90 days on their mortgage payments so banks are not under pressure to foreclose on huge numbers of homes at the current time.

In the past 11 years alone, Canada's residential real estate market has seen a doubling of prices, a trend that is unlikely to continue given that:

1.) Median family income has stalled in real terms since 2006:

2.) The number of echo boomers expecting to buy homes for the first time is projected to drop over the next five years:

The greatest unquantifiable factor facing homeowners is interest rates.  With five year fixed mortgages available for just under 3 percent currently as shown here...

...a return to  rates seen just five years ago could create financial stress for highly leveraged homeowners and first time homebuyers will certainly be excluded from the market unless, of course, prices readjust to more earthly levels.

Just ask American homeowners.  They know all about unrealistic housing market valuations.  They didn't see it coming either.

1 comment:

  1. Interesting analysis - I also find that Canada home prices to be higher as our property taxes on homes are generally lower, I think the GTA is around 1% of assessed value, whereas most jurisdictions in the U.S. are around 2%. Also, the cost of hydro and utilities are slightly lower. This is just my thoughts from the family/friends I have in the States.