From Nick's absolutely wonderful post:
Real bubbles are unstable; they burst when you prick them. They don't spontaneously revert to their original size. Soap bubbles aren't like tennis balls. If the bubble metaphor means anything, it has to mean that. If asset price bubbles aren't unstable, and don't burst when you prick them, or re-inflate immediately, then the bubble metaphor is useless.
Below the fold, I'm going to provide some context to support the claim that the Canadian housing market looks more like a dented tennis ball than a burst bubble.
In a recent speech, the Bank of Canada's David Wolf offered these remarks:
Canada has not had the over-investment in housing that has created the need for painful adjustments in the United States and some other countries. The steady growth in housing investment (that is, the construction of new housing units) in Canada over much of the past decade was due largely to strong employment and sustained income growth supported by rising commodity prices. There was also a degree of catch-up from under-investment during the 1990s.
Emphasis added. For the most part, discussions about whether or not the Canadian housing prices were generated by a bubble during the 2000's haven't paid much attention to what happened before. This is probably a mistake. Here is a graph generated from The Economist's very useful gadget:
Although the 2000's was a good decade for the housing market, it followed an extended period of soft prices and weak demand following the housing bubble of the late 1980's.
Of course, the notion of a national housing market is a bit misleading. So let's take a look at three cities that play major roles in narratives about the housing market over the past decade: Vancouver, Calgary and Toronto. For each city, I've tracked down data for 'newly-completed and unoccupied housing' (Cansim Table 027-0010), which appears to be the best measure of inventories that I'm likely to find. These numbers are available for houses (detached and semi-detached) and multiple units, and I've graphed them against the Teranet house price index.
First up is Vancouver:
Throughout the 1990's, there was a significant excess supply of housing, and this kept a lid on prices for the better part of a decade. Once that inventory had been worked off, prices started to increase. Inventories rose as the recession hit, but to an extent that was nowhere near as important as during the mid-1990's. The reduction in prices seems to have been enough to absorb that extra supply, and now prices are on their way back up.
On to Calgary:
The sharp increase in prices in 2005-06 and the subsequent fall looks more like a standard story of supply and demand than a bubble. Tens of thousands of people moved to Calgary, exhausting the available inventory and driving up prices. Construction companies responded to the increase in prices by building more housing, bringing prices back down.
And now Toronto:
The data start two years after the peak in 1990, and we see that if there ever was a story of an overhang depressing a housing market for a long period of time, it is Toronto during the 1990's. The Teranet index isn't available for much of this period, but we can assume that prices had to be low enough to absorb all that excess inventory. Compared to the earlier part of the sample, current levels of inventories can hardly be considered to be consistent with what we'd expect after a bubble had burst.
And so it goes. Across the country, housing prices during the 2000's resembled a tennis ball that had been flattened during the 1990's and was returning to its usual form. So it shouldn't be surprising that after a sharp, brief whack - one much less severe than that of the early 1990's - housing prices are rebounding again.