Thursday, December 10, 2009

Canadian Housing is a Bubble, says Rosenburg

One of the better known analysts who is bullish on Canada, the loonie and overall Canadian economy has a somewhat surprising take on the Canadian housing market. Dave asks, if the Canadian market is in a bubble? And the answer is yes, even though he is somewhat more conservative in his estimates of the over valuation.

This adds to the list of commentators (Shilling, Mish, numerous bloggers) whose voices have not yet produced cacophony unpleasant enough for the BOC or the Feds to do anything about it. But if they don't do anything now, they'll have to do something in the next few years.
It's a funny and tragic commentary on the human emotions-most of us will continue to merrily believe "it can't happen to us, until it happens." The bubble has burst in the US, Spain, Ireland, UK and several other parts of the world. But where it hasn't, the unflinching confidence in real estate and 'we are different' thrives.

From today's Breakfast with Dave:


It sure looks that way. At a time when personal income is down around 1% in the last year, we have seen nationwide average home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appreciation is back to where it was in 1989. Of course, back then, interest rates were far higher but then again, the economy was in the late stages of a phenomenal multi-year economic expansion, not making a transition from deep recession to nascent recovery.
While the Canadian economy is recovering, overall growth is still barely above zero as manufacturers grappled with excess inventories, a strong currency and a soft domestic demand picture south of the border. Employment conditions have improved, but are hardly that healthy, as we saw in the November jobs report where wages and the workweek were both down despite a constructive headline number (half of which were in the education sector, an inherently difficult area for statisticians to adequately seasonally adjust).
In answer to the question as to whether prices are in a bubble, all we will say is that when we ran some models showing Canadian home prices normalized by personal income or by residential rent, what we found is that housing values are anywhere between 15-35% above levels we would label as being consistent with the fundamentals. If being 15% to 35% overvalued isn’t a bubble, then it’s the next closest thing. We are talking about 2-3 standard deviation events here in terms of the parabolic move in Canadian home prices from their lows. So if it walks like a duck …
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