Friday, September 2, 2011

American Home Prices vs Canadian Home Prices

Canada Housing Bubble posted the link to the above chart yesterday over at Daily Markets (click to enlarge).

The chart shows how the Canadian home price index (Teranet–National Bank National Composite House Price Index) compares to the 20-city Case-Shiller Composite Index for the United States.

When both indexes are adjusted to equal 100 in January 2000 you find that from 2000 to 2005, home prices in the U.S. doubled (+100%), while Canadian home prices increased by only 50%.

Since then, U.S. home prices have fallen by 30% and Canadian home prices increased by another 40%.

Compared to January 2000, U.S. home prices have appreciated by 41% and Canadian home prices are up by 112%.

As Daily Markets notes, the main question all real estate observers are asking is: Are Canadian home prices in an unsustainable bubble headed for a future major correction or crash? Or are the home price increases in Canada sustainable?

The rise in U.S. home prices during the early 2000s was dramatic and occurred because of  massive government interventions in the housing and mortgage markets.

In Canada we had a lower but more sustainable rate of home price appreciation. The height of our housing bubble came later than the Americans because the hard core intervention didn't start here until 6 years later. The Conservatives gave us the zero down, forty year mortgage. They allowed Canadians to raid RRSP's for down payments. They created the Home Reno Tax Credit. They gave us the first-time buyer's closing cost gift and they instituted the infamous 'emergency interest rate'.

As we said yesterday, Harper's Conservatives have given us more pro-real estate initiatives in the last five years than Canadians have seen in the last quarter-century.

As a result CMHC has gone from backing $100 Billion in mortgages in 2006 to over $800 Billion in 2011.

And as you can see by the chart, our market has been propelled even higher than that experienced by the Americans.

It really shouldn't come as a surprise then that since our real estate market didn't start receiving it's hard core juicing until 6 years after the Americans started jacking theirs... that our collapse may not start until 6 years after the Americans imploded (2006 vs 2012).

Our home price increases are not sustainable. And we will not escape the same experience as the Americans, the Irish, the British and now... as we have started to see this year... the Australians. 

The cycle merely needs time to play itself out.

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