‘Clear evidence of a bubble is lacking’—really?

The CMHC’s optimism about Canada’s housing market seems, well, inflated


eric dickman/flickr

Earlier this week the Canadian Housing and Mortgage Corporation published its 2011 Annual Report–which reads like a 184-pages long effort to brush off concerns about Canada’s housing market. “Clear evidence of a bubble is lacking,” the document proclaims at one point, after liberally sprinkling the words “solid,” “sound,” “responsible” and “prudent” throughout the previous 30-some pages.

Well, signs of a bubble are rarely “clear.” As Finn Poschmann, of the C.D. Howe Institute, told Bloomberg on Tuesday, it’s always difficult to tell whether a bubble has formed until it goes “pop.” This is partly why bubbles, especially in real estate, continue to happen even though you’d think someone at some point would have learned the lesson.

But let’s take a closer look at the CMHC’s no-bubble-no-worry argument. The housing agency seems to argue that the housing boom of the last decade was largely warranted by the fundamentals, i.e. important and independent underlying demographic and economic factors. Specifically, among other things, the CMHC notes that:

1. There are ever more people living in Canada (who supposedly need a place to live in): Canada’s population has increased by nearly six per cent between 2006 and 2011–the highest rate among G8 economies–and by over five per cent in the previous five years, the report says.

2. Canadians are getting better jobs (hence they can supposedly better afford their mortgages): In 2011, the CMHC writes, the unemployment rate fell from eight to 7.5 per cent and full-time employment rose by 1.5 per cent, while part-time work declined 0.3 per cent. “The compositional change in full-time positions will support Canada’s housing sector,” the agency concludes.

3. Canadians also keep getting richer: Reads the report: “Incomes grew in 2011 because of the economic recovery and the resulting improvements in the labour market. Income will continue to grow at a moderate pace in 2012 and be supportive of housing.”

4. Interest rates are going to stay low for the foreseeable future (so that the swelling ranks of people living in Canada with better jobs won’t have to worry about being able to continue to afford their mortgages): “The Bank of Canada has kept its target for the overnight interest rate at 1.0% since September 2010 and has indicated that it is likely to remain at 1.0%,” reads the report.

All four points seem questionable. For starters, Canada’s population seems to have been growing at a fairly steady rate since well before the housing boom of the last ten years (data come from Statistics Canada):

Compare that to the increase in housing prices over the same period (data come from the CMHC via StatsCan):

Though Canada’s population grew at roughly the same rate between 1995 and 2001 as it did for the next decade, the price of new houses throughout Canada remained virtually flat between 1995 and 2000 but rose considerably between 2001 and 2011.

The disparity between the growth rate in population and housing prices is even more striking if one considers that the supply of houses also increased much more rapidly in the last decade than it did in the previous five years:

In an abstract world without monetary policy, household debt and wealthy Chinese investors, such a spike in the housing supply would have led to lower–not higher–housing prices, given that the demand for houses seems to have kept growing at a steady pace.

Let’s turn now to the claim that Canadians are getting increasingly better jobs. How does the CMHC explain why housing prices barely dipped between 2007 and 2009 even as Canada’s unemployment rate shot up from six to over eight per cent during that period? And even though it’s true that the share of full-time jobs increased in 2011, some analysts are warning that in 2012 the wind is turning. A CIBC report issued this week notes that “the changing composition of employment is likely to work to lower the quality of employment in the country along with the bargaining power of workers–limiting gains in labour income.” Not much to prop up the housing market there, it seems.

Also, incomes have hardly kept pace with housing prices. As Canadian Business noted in January: “Median home prices are currently at 4.6 times our gross median household income, but Demographia, an urban planning research firm and consultancy in the U.S., argues that prices become unaffordable when they exceed three times income.”

Finally, the third claim–that BOC “indicated” it’s going to keep interest rates at one per cent through 2012 is simply not true. Governor Mark Carney never explicitly said he’s going to leave the key rate unchanged. The CMHC later acknowledged as much, though it noted that almost everyone expects interest rates to stay where they are until at least 2013. Even that is questionable–some investors forecast a rate hike later this year–but, regardless, why overstate the case?

As Gordon Isfled wrote in the National Post, “it’s not often a Crown corporation bangs its drum loudly, appears to question market sentiment and misrepresents the central bank’s monetary policy — all in the same day.” And yet, “Canada’s housing agency did just that.”


‘Clear evidence of a bubble is lacking’—really?

  1. Population growth is a lousy metric to use. Immigration is a better one. Why? Because children don’t buy houses, but adults do. So how you can say that ‘demand has grown at a steady pace’ without a single metric there that actually looks toward demand, I don’t know.

    Your jobs argument is almost reasonable, except that you’re arguing that there should have been a collapse before, and things may get worse in future, but neither of those speak to what the situation is right now. ie, maybe there was a bubble between 07 and 09, but because employment picked up, it leveled itself out, and although banks are warning the employment situation may worsen in the future, that says absolutely nothing about there being a bubble now.

    For your third argument, the problem with using a national median is that Toronto is not Vancouver is not Calgary is not Winnipeg is not Drayton Valley is not Dildo, or St. Johns, or Quebec City or Whitehorse, or any of those other places. Not even those who are strongly against a bubble are saying there are no problems in certain specific areas such as Vancouver or the Toronto condo market, but when you start talking as if those conditions are the same across the nation, you stop making sense.

    Carney’s unlikely to raise rates until 2014 at the earliest, as that’s when the Fed has indicated it is most likely to keep its rates low until. And anybody with an ounce of finance acumen understands that Carney, for all his bluster, simply can’t raise the rates so long as our largest trading partner is keeping them super low without completely devestating basically everywhere in Canada that isn’t an oil producing area.

    You’re right, though it’s not often “a Crown corporation bangs its drum loudly, appears to question market sentiment and misrepresents the central bank’s monetary policy — all in the same day.” And it hasn’t happened here either.. at least not when you remember that Canada is bigger than Toronto, and that the central bank’s monetary policy is being helmed by someone who actually works in finance rather than journalism.

    • Using immigration as a metric has its own flaws. Do no children immigrate here? And on the other hand, do Canadians have so many children that it skews all the statistics? Remember, born Canadians are dying out. So don’t assume that population growth in Canada comes from children being born – without immigration there would be NEGATIVE growth.

    • Population growth is a lousy metric
      I would imagine changes in demographics are more important than both immigration and population growth. Autonomous boomers are buying condos in retirement homes (where there’s always a nurse on-call), and the younger generation is moving out of their parents’ homes and into condos/single-family homes. I work in the construction industry, and the condo sector (from what we’ve seen) is principally fueled by these 2 groups. Retirement-home groups are currently one of our biggest clients, along with suburban condo developers catering to the young-adult crowd.

      • Historically, peaks in the number of 45 years olds consistently predict the peak of the stock market. My dad has a great chart in his office showing the birth rate lagged 45 years. The chart is from 1995, but accurately predicts the current crisis… Demography is destiny!

    • “For your third argument, the problem with using a national median is that Toronto is not Vancouver is not Calgary is not Winnipeg is not Drayton Valley is not Dildo, or St. Johns, or Quebec City or Whitehorse, or any of those other places.”
      Sure, but if you are arguing there is a bubble, using a national median is a conservative choice. What is more, this idea people have that a crash in Vancouver and Toronto will be primarily localized does not hold muster. The Canadian economy is pretty integrated. When real estate crashes in our largest cities:
      A. it puts pressure on banks – even if they don’t collapse – to conserve credit, as they take a bath on their own real estate holdings, mortgage defaults, etc.
      B. it depresses the spending of urban homeowners, hitting industries all around the country.
      C. since the CMHC is on the hook for so many mortgages, we also may need a fiscal contraction (more taxes or less spending) in order to pay for massive bailouts.
      In the US in 2007 there weren’t problems with every single mortgage, or even every sub-prime mortgage. There were specific problems with a new class of mortgage-backed securities. The thing about bubbles is that they don’t generally just inflate and then correct to their fundamental value. Due to financial linkages between different assets/institutions, and the political implications of a bubble bursting, they have broad, snowball effects on the economy as a whole.

  2. I don’t doubt anything the author has presented here, but this is starting to sound like the case of the boy who cried wolf.
    We’ve been hearing for years about the imminent bubble bursting, and we’re still talking about it. Macleans in particular has been alluding to it since at least 2007 (after a quick Google search; it’s possible they’ve been warning about it even before 2007):
    Hopefully, the market won’t crash as it did in the US or parts of Europe, and perhaps (who knows?) maybe this year it will. But how much longer shall we tolerate the constant wolf-crying before the credibility of the media is called into question?
    This is the most drawn-out market crash (five years and counting!) that I’ve ever seen.

    • Are you kidding? I live in Vancouver, so I hope the market crashes big time. We need a huge correction. If the affordability index is 3x income, and Vancouver/Toronto are over 9x income, I would rejoice if we had a collapse. Maybe I could buy something better than a trailer home with our six figure family income.

      • Maybe a major stock market crash, would also help your case. With luck you might be the only one left standing and have your choice of foreclosed properties.

    • Bubbles can last a long time. The NASDAQ bubble lasted from 1997-2000. The US housing bubble lasted from about 1997-2006. The stock market bubble of the 1920s lasted about a decade. This is because, while unsustainable in the long-run, bubbles can be propped up by people taking on more debt (which is definitely happening in Canada), or government actions (eg. the expansion of CMHC backing for mortgages).
      No, you can’t predict exactly when a bubble will burst (although some actors, like hedge funds, and NOT like homeowners, can flee fast enough to still make money). But it makes sense to point out clearly unsustainable processes as they unfold. Take a look at the Case-Shiller index – for housing prices to outpace incomes (much less inflation) would be a historically unique happenstance. Why is this time different? Why is Canada different, given that similar runups in prices abroad have resulted in the same outcome: a crash?

  3. The CMHC’s argument is ridiculous.

    Population growth is completely irrelevant. As long as housing starts increase at the same rate, population growth should have no effect on prices.

    When it comes to incomes, the whole point is whether prices are rising faster than incomes, as this post points out, and they obviously are.

    Additionally, interest rates may rise and fall, but over the long run you can expect them to average the same. So to claim that there is no bubble because they’re low is to be sticking one’s head in the sand. Low interest rates will only prolong a bubble, they won’t prevent it. In fact, you could argue low interests will fuel a bubble, like gasoline fuels a fire.

    Now, it’s also clear that not all of Canada is experiencing a bubble. But to me it’s unquestionably that many places are, and the epicenters are Vancouver and Toronto.

    To me the surest sign of a bubble is when price increases are accelerating. So instead of a linear increase, you see a concave shape to the increases. And that is exactly what we see here:

  4. After ten years working in accounting & not-for-profits, I have a strong suspicion that property speculation and concentration of ownership in the rental market is driving rent up, which in turn drives up property values. If you can divide a house up into two units and average a thousand dollars rent per unit (say $12,000 up & $800 down), the rental value of the property justifies a half million price tag. In other words, you need a high five figure income to get a starter home.

  5. CMHC uses is social housing arm to leverage new multi-builds of mixed income. So a builder can get a significant portion of a project covered, and or an insurance flexibilities, for offering a % of units below market price (CMHC considers it “affordable housing” if it is only $1000 below market price by the way.) The very same builders are allowed to set up non-profits that can lend money to people as down payments to get them to purchase units – and in some cases these organizations continue subsidizing the mortgage payment for five years, all the while the interest rate is low. What it boils down to is that CMHC has created an artificial demand on the market, and driving up prices, by allowing virtually anybody to become a home owner without down-payments and over longer amortizations.

  6. Clearly this is nonsense. When you have to pay over $500,000 for a beat bungalow in Vancouver (not to mention of $1,000,00 for a better place) there clearly is a distortion of prices – way too hot and heavy. The pressure has nothing to do with what CMHC trying to sell. The clear facts are that a young couple (or very few other couples) have the income to afford such housing unless they cash in on an already inflated property. All of which helps them little if they are transferred from a relatively low cost housing area. Is it a bubble? Yes because it will inevitably collapse because of its lack of stability. You can only import so many wealthy Chinese to keep it up