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This is an interesting data set Livio -- but as you note, the trends in real estate in Thunder Bay appear to reflect broader changes in the economy. First there was the wheat boom, and then the long post-boom crash lasting right up until the post-wwii resource boom.

I wonder how this compares to more recent booms, such as those in the 1970s or 1990s in Calgary and Toronto? Vancouver had some boom-bust cycles as well.

Just a thought but could it be that the Canadian economy has faster cycles now than it did at the turn of the 20th century? For instance, if you look at Calgary's housing booms, they seem tied to the Alberta petroleum industry, with a big crash in 1983. Housing prices recovered by the end of the decade as the petroleum industry perked up.

That is an interesting question regarding the length of cycles - I don't know if the average duration of a cycle has shrunk. The post WW2 economy does seem to be less volatile in terms of the size of the fluctuations but even that could be a function of poorer data quality before WW2 rather than a dampening of the post war business cycle.

The prices seem highly correlated with immgration - which in these years was mainly headed to Western Canada (and in the east to main urban centres) - it would probably be clearer is these were not nominal prices.

What is always missing from these studies is a catalyst. The US housing bubble was created by very bad lending practices that quickly unraveled once borrowers realized they couldn't make even their first payment. So what exactly is the catalyst for the bubble to burst in Vancouver. Canadian lending practices are rock solid and most (over 75%) new mortgages in Vancouver are not high-ratio. Also, demand has far outstripped supply in Vancouver this year, even at very high prices. At one point there was only 3 months of existing home supply on the market - a balanced market typically has 5-7. For prices to really fall, there would need to be a major demand shock or a massive supply shock. You may recall that we had a rather large demand side shock in 2009 that doubled the provincial unemployment rate and sent prices about 15% lower, only to meet more than enough demand to push prices even higher in 2010. If a doubling of the provincial unemployment rate isn't enough to prick a bubble, then what is? Furthermore, I'm not convinced that higher mortgage rates will be enough to prompt a a spike in listings since even as mortgage rates rise, its unlikely that they will settle much higher than 6.5-7% (meaning 5-5.5% discounted), hardly enough to push borrowers to the margins of default where they are desperate to sell.

Moreover, it shouldn't shock anyone who has studied the BC market that prices and common valuation metrics don't track in Vancouver since big parts of that market are not driven by local fundamentals. BC attracts 5500 immigrants per year under Canada's immigrant investor program - about half of the Canadian total - which requires a minimum of $1.6m in wealth (800K before Dec2010). So perhaps 2200 new millionaire households every year, all locating in basically three pricey sub-regions of Vancouver. Note that these are not "foreign investors" as the media always reports - they are residents of Canada who have chosen to move their families to Vancouver for the relative safety of their family(insert gangland war joke here)and their capital, as well as good schools, and important cultural ties. With higher volume of sales in high-price neighborhoods, the "average" price in Vancouver has been highly distorted. More accurate measures of home prices like median and benchmark prices show a much lower rate of growth in home prices this year. Plus, the incomes of these neighborhoods may not reflect the true affordability - these houses are unaffordable for most Vancouverites, but not for newly rich mainland Chines investor class immigrants.

This isn't to say that the average price in Vancouver isn't too high, it almost certainly is, but merely pointing out that its too high and therefore must fall massively in a short period of time is pretty lousy economics.

And I don't mean to impugn Livio's post, but rather that of Capital Economics.

There is a lot of exogenous demand in Vancouver that could dry up or even reverse. Could that be a catalyst?

Well, a lot of that exogenous demand occurs at the high end. If that demand went away, or even slowed from it's current pace, the average price will come down sharply. However, this could merely be a normalization in the distribution of sales. In fact, if overall demand rose so that high priced homes were a lower share, average prices would fall.

If so, it would be the least destructive bursting of a housing bubble in history.

Mish was on to all this six months ago. See:


Wealthy Asians and equity laden retirees have been coming to BC for decades. So that effect is a constant that was already priced into the market. Therefore, it doesn't explain why prices have doubled or more during the past decade. For that, I suggest low interest rates combined with CMHC willing to underwrite much more risk since about Y2K is the major factor (not only in BC but throughout Canada).

Can you get data on the ratio of real estate wealth to non real-estate wealth? It would seem to me that such a measure would help distinguish between a general boom and one concentrated in real estate (an aside, but wouldn't Thunder Bay's prosperity be driven more by the forestry sector than wheat). That, by the way, is what worries me about Vancouver more than the absolute rise in real estate prices. If rising demand for housing is driven by an influx of wealthy immigrants, we shouldn't see housing prices outpace incomes/wealth by as much as they have (then again, as a young renter, its the boom, not the bust, that undermines my interests).

What we've seen generally in Canada and elsewhere is a shift in the relative weight of real estate in investment portfolios since the 1970s. I'm not sure I know why, either. Lower interest rates? Do resource booms tend to increase the relative value of land?

The forestry sector - especially pulp & paper- in Thunder Bay is dominant after WW1. Prior to WW1, there is saw-milling but the grain transhipment role, the port, grain elevators and railways is the dominant activity. By the 1930s, there were over 30 grain elevators lining the waterfront and the Lakehead was the largest grain-port in the world. By the way, real estate as a share of total wealth for the Port Arthur-Fort William decedents rises from about 30 percent in 1885 to over 45 percent by and stays there from about 1905 to 1920 and then comes down after 1920 to below 40 percent.

Prices going up and then going down does not mean that a bubble occurred, particularly if those movements played out over decades.

As I noted in the similar thread a few days ago, housing prices move almost as randomly as asset prices---those who ignore the basic economics of the market and become overly confident in their ability to forecast are likely to lose money or even embarrass themselves in public:


It is not obvious that current prices are not explicable by current fundamentals no matter how many times people at banks or consulting firms issue reports such as this one to the media. The analysts issuing these reports seem to think that changes in rent-to-price or income-to-price ratios must indicate a bubble is occurring, but they are mistaken. The most sophisticated of these analysis involve regressing prices on incomes, interest rates, and maybe some demographic characteristics and examining the residuals, but even then we can't detect bubbles---even after the fact, much less contemporaneously---with much confidence because of unobserved fundamentals and other econometric difficulties.

It would be interesting to see the three-year forecasts Capital Economics made in 2008, 2009, and 2010.

I've done some preliminary econometric work for BC prices - using error correction to a "fundamentals" price determined by labour force growth, per capita real disposable income and real mortgage rates with short-term dynamics governed by the sales to new listings ratio. The fundamentals price in BC is perhaps 20% under the current price but the estimated error correction is very slow, maybe 2%-5% per quarter. However that gap can be filled by both falling prices and rising incomes and labour forces growth. For prices to fall quickly in a short period of time, there needs to be a jump in new listings and a fall in demand prompted I guess by rising mortgage rates since no other catalyst is evident. I'm dubious that a gradual increase in rates (maybe 150bps over 2 years) is enough, but I could be wrong.

Very interesting, I wish we had better access to more historical data.

I have a question: during the "bust" described above, what should a savvy investor have invested in instead of real estate? I am reading with particular interest as I live in Toronto and must decide whether to buy a home or keep renting and invest my down payment.

@name_withheld: I have similar questions; I'm working on a post on the theme.

I can't comprehend the handwringing and fretting over a "housing bubble". Really, we aren't the United States. US lending practices were rotten, as Name_withheld said, and the creation of securitized loans embedded the value of housing into the broader money supply in a way that was reckless and dangerous.

That's not the way the housing market works in Canada. Default insurance means that bad loans can be contained on bank's balance sheets and should not have a catastrophic effect on bank capital and the broader money supply that the rest of the economy uses. Sure housing can decline and there will be pain, but housing has declined before and we got through it. Scale matters. A decline in housing that doesn't take the money supply down with it is bearable. Unpleasant, but manageable.

Besides, as a person who wants to buy a house in the next decade or so, I want housing prices to decline or any appreciation to be moderate, thank you very much.

Why should a 29-year old want housing to go up when that is only going to cost me more money?

I think that part of the concern of a housing bubble is that, in a way, it is like a pyramid scheme... in the sense that people who get in early make money, while those who get in late end up losing their investment, but also in the broader economic sense that it is circular - increasing prices and construction leads to more jobs - the people who have these jobs or benefit from them in turn feed the cycle. When the bubble bursts, not only do the people who bought homes lose equity, but if the construction sector has become the dominant industry in the economy, then in effect the whole economy collapses.

You can't build an economy on ever increasing construction industry jobs. This has been part of my worry about Toronto - where demand for housing is high because of immigration, so there is always demand for more housing, but because of globalisation and the shifting of jobs to india, china etc., and our high dollar due to resource exports from the other provinces, essentially Toronto is growing far faster than the ability of the economy to provide good (non-construction) jobs...

in a way similar to New York between the 1950s and the 1970s - there aren't enough jobs in finance and all though creative industries (that Richard Florida is always on about) to make up the slack.... Toronto is getting bigger but poorer, unlike, say, cities in Alberta where underlying economic fundamentals drive economic growth which in turn fdrives population growth. Prosperity should, and does, drive population growth, but population growth does not drive prosperity.

As a young home owner in Ottawa, with an interest in economics (accounting is my actual speed) I have actually decided to sell my home based on the current risks. I note three in particular:

1. An interest rate increase could decrease the demand in the market, this slippage would almost definitely translate into a price decrease. Thus, having bought recently at a relatively high price I would be "under water."

2. As economic fundamentals slip (as real GDP fails to hit potential GDP, or potential GDP itself declines) unemployment may well rise further. The fact that babyboomers are staying in their jobs, partially due to recession based equity losses, and job creation isn't keeping pace with the number of people entering the labour force would also serve to slacken demand as the market will saturate (new home starts will decline as people can afford homes will have bought them).

3. The current debt situation in Europe (how the EU missed the trick Greece played via Goldman Sachs to enter is beyond me) may well cause global credit issues. Decreased export demand could push many economies into recession but would certainly push back growth in those that don't see an outright recession.

At this point my safest option appear to be to take my profit (that there appears to be a fair bit after less than 2 years further suggests a bubble) and run. Name_withheld's reference to Mish is quite apt, the banks will not rain on their own parade by actually ackowledging that fundamentals do not support current real estate valuations in many Canadian urban centers. Why would they? They can just wait and force the CMHC to take their losses a la Freddie and Fannie.

@ T_Accounting: The EU didn't miss the trick - from what I understand the accounting used to hide the debt through swaps was sanctioned by EuroStat and in wide use in Europe (pioneered in Italy?)

@T_Accounting: What is the rest of your strategy -- you'll take your profit and run where? Are you going to invest in a way consistent with your belief that housing prices will drop soon? Honest question.

My own house in Saskatoon was built in 1912 by a Methodist minister speculating on the land boom. He would have had to hold the property for at least 30 years to get his original investment (in current dollars) back.

Overall I believe the Canadian real estate market will end up being much better than that here in the USA. Not only is Canada in much better shape financially and fiscally but you have a much better sense of balance with regards to utilizing your natural resources while still taking into account for conservation.

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