Stephen Gordon – Worthwhile Canadian Initiative Blog
I’ve been having difficulty finding ways in which we can directly compare the US housing market débâcle with what’s going on in Canada, but I’ve recently been made aware of two new data sources:
* The Teranet-National Bank Housing Price Index, which appears to be a Canadian equivalent of the celebrated Case-Shiller index: the methodology makes use of how repeat sale prices (that is, sale prices for the same house) have evolved over time.
* Statistics Canada’s Cansim Table 380-0062: Gross National Income (GNI) at market prices. This series takes into account the considerable increase in buying power generated by the improvement in Canada’s terms of trade.
We’ll start comparing apples to apples and oranges to oranges below the fold.
Here’s a graph of the Teranet-National Bank composite index along with the Case-Shiller 10 and Case-Shiller 20 composite indices; all three are scaled so that January 2000 = 100:
Canadian and US house prices
When the US housing bubble finally popped at the end of 2005, prices had doubled in the space of six years, but they had increased by only about 50% in Canada.
Of course, rising house prices isn’t a problem per se: if increasing housing prices reflected households’ increasing ability to pay higher mortgage payments, then there wouldn’t be much to worry about. But of course, that wasn’t the case in the US: employment and real incomes have more or less drifted sideways since 2000. Things have gone much better up here.
So here’s a graph of the housing price indices divided by GNI per capita; these ratios are all scaled so that 2000Q1 = 100:
Canadian and US house price to income ratios
Between 2000 and 2006, house prices had doubled in the US, but nominal incomes (a proxy for ability to pay) had increased by only 50% – hence the current mess. But in Canada, the increase in house prices only slightly outpaced the rate of growth of GNI.
I’m not sure what to think about the latter part of that graph. As a faithful reader of Calculated Risk (and this is the first moment I’ve been able to create to express my inexpressible sadness at the passing of Tanta), I’m aware of the fact that there’s a considerable amount of excess housing inventory that has yet to be absorbed, so the US price-income ratio probably has a lot more to go before the housing market starts to rebound. But I’m not aware of a comparable series for Canada.
What I take from this is that although housing is extremely unlikely to be a source of growth for the Canadian economy for 2009, it’s hard to see how it’s going to be a drag of a size comparable to what’s going on in the US. As I mentioned earlier, any prediction of a severe recession in Canada has to have a home-grown component: I don’t see how the housing sector is going to provide it.
Stephen Gordon is a professor of economics at l’Université Laval in Quebec City, Canada and a fellow of the Centre interuniversitaire sur le risque, les politiques économiques et l’emploi. He is co-author of the blog site, Worthwhile Canadian Initiative.
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