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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