Tracking Canadian House Prices: July 2016

This article uses data on Canadian house prices taken from: Teranet – National Bank National Composite House Price Index ™ unless otherwise noted. The index is published monthly on or slightly after the 12th of each month at www.housepriceindex.ca. The 6-city index includes Vancouver, Calgary, Toronto, Ottawa-Gatineau, Montréal, and Halifax, while the 11-city index adds Victoria, Edmonton, Winnipeg, Hamilton, and Québec City.

As the August 12, 2016 Teranet newsletter (Communiqués tab) summarizes (note that this link is for the current issue only) (emphasis added):

In July, the Teranet–National Bank National Composite House Price Index™ was up 2.0% from the previous month, the second largest July increase since the Index series began in 1999. The advance was not very broad-based; prices were up in only seven of the 11 metropolitan markets surveyed. Gains exceeded that of the countrywide index in the four markets that have been driving it in recent months: Victoria (3.8%), Toronto (3.1%), Hamilton (2.4%) and Vancouver (2.3%). Gains were also noteworthy in Ottawa-Gatineau (1.7%), Winnipeg (1.6%) and Montreal (0.6%). Prices were flat in Edmonton and down from the month before in Calgary (-0.1%), Halifax (-0.4%) and Quebec City (-1.6%). The Quebec City drop cancelled the 1.7% advance of the previous month. For Vancouver it was the 18th consecutive month without a decline, with a new record set in each month. For Toronto it was the 14th rise in 15 months, with new records in each of the last six months. Prices have set records in each of the last five months in Hamilton, in each of the last three months in Victoria and in the last two months in Winnipeg, after seven consecutive monthly rises in that market. In Montreal, five consecutive monthly rises have taken prices above their previous peak of July 2014.

With the good transit link between Toronto and Hamilton and the high house prices in Toronto we are not surprised to see explosive growth in the Hamilton market.

Table 1 below shows the monthly (mom) and annual (yoy) percentage changes in prices measured by the two indices.

Table 1. The monthly and annual changes in the six and eleven-city Teranet indices.

National Composite House Price Index™ for Jul. 2016
Index
Level
MOM
% Change
YOY
% Change
6-city index 195.53  + 2.15% + 12.03%
11-city index
193.36
 + 2.01%
 + 10.92%

The graph of the composite index in Figure 1 shows a continuing linear trend suggesting the Canadian housing bubble is intact although current growth has picked up strongly. Clicking on an image will open it in a new tab or window allowing it to be enlarged.

Figure 1. Composite 11-city index for the last year, linear trend added in blue.

home prices

Figures 2 and 3 give a graphical picture of the cities in the two indices.

Figure 2. Charts of the 6 eastern cities in the 6-city and 11-city indices.

Figure 3. Charts of the 5 western cities in the 6-city and 11-city indices.

Figure 4. The cities in the indices are shown on this map.

Clicking on the map takes you to an interactive version and web page that shows the latest index data. Clicking on any city creates a chart of that city’s data. Current values are shown in the right-hand sidebar.

A monthly communiqué is available from the site or by email subscription.

Studies and Articles on Canada’s Housing Bubble

There has been a flurry of articles on Canada’s housing bubble in the last couple of months, three examples of which appear below.

Jesse Ferreras is the latest to write on Canada’s housing bubble in the The Huffington Post, June 20, 2016.2016: Canada’s ‘Housing Bubble’ Is ‘Going To End In Tears’: Capital Economics.

Ten days before this Huff Post article, Canadian Business published: Canada’s banks sound the housing bubble alarm, finally.

The Globe and Mail published: Yes, there’s a housing bubble. No, Ottawa has no clue what to do.

Going back a bit in time, an article in the Wall Street Journal by Michael J. Casey, Dec 11, 2013 quoted a Deutsche Bank study that did a global comparison of housing markets and found Canada’s was most overvalued at 60%. (A Worldwide Ranking of the Most Over and Undervalued Housing)

The BoC in their Bank of Canada Review – Winter 2011-2012, perform an in-depth analysis of hosing in Canada. In the following chart they show the increase in Canadian house prices:

The amount of mortgage debt carried  by Canadians is shown by the following graph:

The next chart shows the extent that individuals have increased their level of personal debt relative to their income. This is clearly unsustainable but the fact that the chart has shown no downturn indicates that Canadians have not learned any lesson regarding their levels of personal consumption.

The main conclusions of the study are:

  1. Increases in home-secured debt, particularly home-equity extraction (increases in mortgage debt and draws on HELOCs on existing houses), contributed the largest share to the rise in total household debt in Canada between 1999 and 2010.
  2. A significant share of the funds borrowed against home equity was used for consumption and home renovation.
  3. Household indebtedness constitutes an important source of risk to household spending, since it makes households more vulnerable to substantial negative economic consequences in the event of a correction in house prices.

The IMF published an extensive review of housing in Canada in December, 2011: Canada: Selected Issues Paper. Country Report No. 11/365 Country.

Their main conclusion is (emphasis is theirs):

Our econometric findings suggest that house prices are higher than the levels consistent with current fundamentals in a number of Canadian provinces and that a correction in house prices would have measurable effects on consumption and output through wealth effects.

Summary

Sources worldwide have been talking about a housing bubble in Canada for years. A linear growth in prices is not characteristic of the late phase of bubble growth which tends to be exponential. Still, the growth parallels the growth in household debt. Current levels are unhealthy, unsustainable and exist only because the global financial markets are totally screwed up by central bank monetary policy including zero and negative interest rates associated with massive money creation.

We look for a massive correction in both and at some point, a return to historic levels of interest on money and mortgages.

Additional Information

The Canadian Real Estate Association.

147.91

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