U.S. vs Canadian Home Prices

Here’s a report by BMO Nesbitt Burns comparing the U.S. and Canadian housing markets.  The author poses the question of whether Canada is two years away from a U.S.-style correction.  (See the chart)

Concern is building because Canadian home sales have dropped 13% versus one year ago.  Price gains have slowed to 1.8% annually.

"It’s a bit unnerving to see how Canadian performance is starting to look like that of the U.S…" says BMO economist Doug Porter. 

Indeed it is.  On the other hand, it’s important to note that anagrams (comparisons of chart patterns) are far from reliable.  That’s because the factors influencing such charts are part random and part country/economy-specific.  The hiccup in Canada’s housing market could therefore theoretically end tomorrow, despite the recent similarities between American and Canadian price charts.  (Although, honestly speaking, we’d be surprised if it did.)

If you’re shopping for a mortgage, try not to let any of this affect your decision.  Studies have shown that there is virtually no way for most mere mortals to time the housing and credit markets.

Sources:  Globe Investor; Bank of Canada

  1. I really doubt that there will be a US market type correction. The economy in Canada is slowing, and that is causing a slowdown in the Canadian housing industry.
    The US correction was a culmination of factors, one of the big ones was the borrowing habits of Americans. Canadians are much more conservative in their borrowing habits. There are far fewer variable rate mortgages, and a huge deal fewer sub-prime mortgages and interest only mortgages.
    While I anticipate a small correction in Canada I don’t see there being a collapse like in the States.

  2. You think the economy is causing a slowdown in the housing market… What about affordability? In most major markets, two professional incomes won’t buy you a family home. And if you think our borrowing habits are any different from Americans, just Google for “canadian consumer debt” and do a little research. It’s at record levels, and is climbing much faster than income growth, which in real terms has been stagnant since the 80’s.
    Housing market corrections and crashes are happening all over the world – UK, Ireland, Australia, US, Spain… You can repeat “we’re different, we’re immune” all day long, but that doesn’t make it true. Isn’t everywhere different? I’d prepare for the possibility of more than just a “small correction”.

  3. I would echo the comment about it being unwise to attempt to time the markets. It just doesn’t work unless you’re clairvoyant.
    Would also note that above all else, a house is more a home than it is an investment for the vast majority of people. Unless you downsize upon retirement (which the research says is rare), move to a lower-cost region, or decide to become a renter later in life, you’re never going to realize your “gains” – your heirs will.
    And while you’re holding off and fretting about how much that house you want is going to be worth in 5 years, you’re going to be sitting in your apartment, annoyed with your noisy neighbours, crappy 20 year old appliances, and less than adequate temperature control. Or maybe you like renting more than I did. ;)

  4. I think that most people who believe in housing bubbles (wherever they may be) value real estate with rent-to-price and income-to-price metrics.
    So if they judge these metrics to be “way out of whack” they don’t buy until they judge them to be “back in whack”. So it’s not really a question of timing the market, more one of waiting it out.
    People who employed this reasoning in California/Florida/Britain/Spain in the last few years have saved themselves ridiculous amounts of money.
    On the other hand, people who didn’t buy when prices were just “kinda high” have had to sit a long time waiting for markets to “get rational”. In fact in the US one could argue that the bubble-bloggers were so right that they will now be destroyed along with real estate investors and the economy in general.
    A lot of it comes down to lifestyle of course. A newly married couple is probably wise to buy right away even if their monthly costs are somewhat higher than renting. But when that cost is double or more monthly and the mortgage is suddenly 40 years instead of 25, it’s not exactly stupid to start asking some questions.

  5. Hi Al: That’s largely true. On the other hand, with people saving less these days, a lot are relying heavily on home price appreciation. More and more, folks will undoubtedly extract this value with things like home equity loans and reverse mortgages.
    Hi Tom: Choosing to wait is kind of like choosing a time to act, no? I’ve always considered a conscious decision not to buy now, but to wait till later, “timing.” But semantics are often debatable I guess.

  6. “I’ve always considered a conscious decision not to buy now, but to wait till later, “timing.” But semantics are often debatable I guess.”
    Yeah, what I am really trying to get at is the idea that the “housing debate” seems to always be a bunch of guys who outline “fundamental” reasons for their buying or not-buying vs people who employ a reasoning best summed up by the phrase, “the trend is your friend”…
    For the later group, “market timing” seems like a pretty stupid idea because you cannot tell when the trend will end, just that the trend is likely to continue for some time, since thats what makes it a trend.
    I have noticed that those who advise against “trying to time the market” are always coincidentally advocating that you buy now.
    I sold out of the stock market early on in the year and remember reading some articles saying that what I was doing was pretty stupid. “Since you cannot time the market, its better to be in all the time and enjoy the long term benefits” was the argument.
    But I remember thinking that by this line of reasoning, there can never be any excuse for not buying anything ever.
    But yeah, the more you wade into this stuff, the more you end up arguing about definitions I guess…

  7. An additional thought:
    Lets say, the bears are right (in whatever locale) and prices fall precipitously. Anyone who prices Real Estate based on “fundamentals” and believes that prices got “irrationally” high will also probably think that on the way down, prices can get “irrationally low”.
    So for them, there will be a temptation to “time the market” by speculating on exactly where the bottom will be. After all, why buy a house for the “fundamental” price when there is a foreclosure crisis in your area (say you are in Phoenix for example)?
    There is a chance that a desperate lender will let you have a house even cheaper than the desperate seller down the street if you wait just a little longer!
    I’ve got this weird feeling that in the press, the bull and bear arguments are going to switch on the other side of the cycle :)

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