Housing prices in Canada and the possibility of a burst housing bubble were back in the news during this past week. A report by Capital Economics said that housing prices in Canada could fall by as much as 25 percent over the next three years as a result of a loss in market fundamentals that include record levels of houshold debt and overvaluations relative to incomes. Of course, we probably think that housing busts are the kind of things that only happen in other places but they have happened in Canada in the past - the early 1990s in Toronto and Calgary come to mind. They have also happened in our more distant Canadian past on a scale that might surprise you.
My experience with this sort of thing is based on historical data. I've been collecting estate files and wealth information for a number of years now and one of my data sets is annual probated wealth data for the Thunder Bay area over the period 1885 to 1930 and it includes the real estate valuations of the deceased's estate. This time period includes the wheat boom era that saw the growth of entire new cities in Western Canada and an associated real estate boom that came to a crashing halt after 1912. Prices were fueled by a speculative frenzy that was the result of the belief in cities like Regina, Winnipeg, and even Thunder Bay that they were all going to be the "Chicago of the North" and there was massive overbuilding as well as zoning of land that ultimately lay empty for years.
Using my data for the twin Lakehead cities of Port Arthur and Fort William (now Thunder Bay) I have constructed a Locally Weighted Scatterplot Smooth using STATA of real estate value per decedent versus year (1,645 individuals). The smoothing is done to highlight the long term trend in the value of real estate over this entire time period as using only the annual averages show a bit more variation.
As the Figure shows, the smoothed real estate value per probated decedent in the twin cities climbed from the mid 1880s and peaked in 1912. In 1890, the value of real estate was about 900 dollars per person - this rose to 4,400 dollars by 1912. Then came the bust, brought about by the tightening of credit and the war which dried up immigration and prices dropped - and continued dropping for a long time. There was a brief rally right after the war but the drop resumed and real estate per decedent bottomed out at about 2,800 dollars (remember, all these values are nominal - the drop looks even steeper if inflation adjusted dollars were used). From 1912 to 1925 - the value of real estate held per person fell by about 36 percent. Increases then resume after 1925 during the Roaring 20s but the data ends in 1930 and I suppose we can all guess what the Great Depression might have done to this rally.
Anyway, it took a long time for the results of this housing bubble to work their way out of the local economy in Port Arthur and Fort William. The value of real estate dropped and stayed down for decades. At the Lakehead, it was not until the resource boom and baby boom of the postwar era that real estate values began to climb again. The anecdotal evidence suggests that a similar process was underway during this time period in other Canadian cities particularly in the West. I am planning to eventually construct similar data for Winnipeg. Anyway, the collapse of real estate values and the associated wealth effects are not a pretty process. A 25 percent drop over three years as predicted by Capital Economics has precedents in what has occurred in our past. Oh, by the way, Happy Canada Day or as it used to be referred to in the past - Happy Dominion Day.