Fellow blogger Ben Jones consistently argues in his The Housing Bubble blog that a real estate bubble in housing prices can be found not only in the United States but also in many countries around the world. I’ve made earlier posts about the bubble and what I intend to do about it?
I wanted to take another look at this issue after a lunch-time chat with a co-worker. She maintained that home prices only increase, which is not true according to MLS data. In fact, real (inflation-adjusted) home prices in Toronto are still below their last peak in 1989.
It is undeniable that home prices have been on a tear recently. In Ottawa, for example, after remaining virtually flat for much of the nineties, home prices have recently trended as follows: 2.4% (1999), 6.6% (2000), 10.3% (2001), 14.1% (2002), 9.0% (2003), 7.8% (2004). Over a 15-year period (1990-2004), raw home prices in Ottawa have increased about 66%. Healthy? Yes. Bubble? Probably not.
Another way to look at home prices is to compare the price of an average home with median household income. In Ottawa, the average home is priced at $235,678 and the median household income was $62,130 in 2000 (last census data available). So, it takes roughly 3.5 years of median household income to buy an average home. Again, home prices seem reasonable by this measure.
What about affordability? It is clear that home prices have risen sharply due to historically low interest rates. Royal Bank publishes detailed research on housing affordability (% of pre-tax household income devoted to home ownership including mortgage payments, taxes and utilities), which reveals that affordability at 34.2% is still at historical lows across Canada. In Ottawa, carrying costs at 30.6% are also close to historical lows.
Some economists use P/E ratio to determine if housing prices are in a bubble. Using data from Royal LePage, a detached bungalow in parts of Ottawa costs about $221,000, pays about $3,100 in taxes and rents for about $1,700, which yields about 7.8%. Not bad, when you compare it to 5 year fixed mortgages at 4.8%. In 2000, a similar bungalow yielded 9.8% when interest rates were close to 7%.
While it is possible that pockets of housing bubbles might exist, my analysis shows that most home prices in Ottawa (which is a typical market in Canada) are not in any bubble.
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20 responses so far ↓
1 Big Cajun Man // Apr 27, 2005 at 10:36 am
Good point Arbee, watch for my rant about the ludicrously high property taxes I pay in the city of Ottawa (taxes seems to be my theme for the month).
Taxing someone because of the perceived value of something just makes no bloody sense to me!
C8J
2 Van Housing Blogger // May 3, 2005 at 12:13 am
I agree that Ottawa is pretty reasonable. Rents are about the same as in Vancouver - but Vancouver prices are more or less twice those in Ottawa. Check out the P/E ratios I calculated at
http://van-housing.blogspot.com/2005/04/vancouver-p-e-ratios-are-high.html
VHB
3 Sunny // May 3, 2005 at 7:38 am
Two great things about Ottawa:
1. Your median income is really high. Even in Canadian dollars.
2. Your rents are strong too.
I’d buy in a heartbeat there. Can’t say the same for Florida, for example. In Florida, cut your median income by a about 40% and your rents in half. Would you buy?
4 burbanman // May 3, 2005 at 10:26 am
I cannot believe the daffiness on this topic.
Statistics don’t lie.
Several weeks back there was a lovely graph in the Ottawa Citizen that showed net migration in Ottawa and Hull. The Ottawa graph looked like Nortel’s stock price since 2000…down, down, down. Ottawa is losing people at an unprecedented rate. As their severence packages have run dry, people are only now realizing that the high tech just isn’t coming back to Ottawa. People are moving on.
Did you see the OBJ this week? Some editorial comments in there about the bubble. OBJ pulled their punches I sure because their run on ads mostly by those with vested interest in RE…like Minto advertising brand new townhomes and terrace homes for RENT. Guess what?…they’re not selling.
The RE market has been flat for nearly a year now. Check out Royal LePage’s stats on resale for the last 12 months. Flat.
Check out MLS vs Grapevine. You’ll notice some interesting trends. Delusional FSBOs listing for outrageous prices, but the Realtors already know something’s afoot. On MLS, the same houing types are priced so much lower. Inventory is piling up. Stats don’t lie.
What do I suggest? Well, for one thing the bubble which certainly does exist is clearly leaking. The drum is beating to sell.
No bubble? Come on, get real.
5 Canadian Capitalist // May 3, 2005 at 11:59 am
VHB: I agree that housing P/E in Vancouver is high. I used to live in Vancouver, it seems to me prices there are always high!
Sunny: I won’t buy in Florida. I’m not saying there is no bubble anywhere. In fact, average home prices in both coasts of the US make me really wonder.
6 Canadian Capitalist // May 3, 2005 at 1:21 pm
burbanman: I am not saying that there won’t be a slowdown in the Ottawa RE market. Forecasting is a tough business and few ever get it right. All I am saying is there is little evidence of a RE bubble in Ottawa. You can make an argument that the strength in the past 5 years is simply “catching up” to fundamentals. Raw prices remained stagnant for most of the nineties. I guess we’ll have to disagree about the Ottawa housing bubble.
7 burbanman // May 3, 2005 at 2:09 pm
“You can make an argument that the strength in the past 5 years is simply “catching up” to fundamentals.”
I’m sorry but you appear to be drinking too much Kool-Aid. For anyone awake during the 1999-2001 orgy that awakened consumerism in Ottawa, I think we caught up and surpassed fundamentals by a landslide.
But, as you say, I guess we’ll have to disagree about the Ottawa housing bubble. ;->
8 Canadian Capitalist // May 4, 2005 at 1:07 pm
burbanman: Thanks for visiting and the vigorous debate. Cheers!
9 RE Bust // Oct 4, 2006 at 4:58 am
This reminds me of a time few years ago here in Ottawa.
I remember myself warning people about dot com bubble burst about a year before market chrashed. I was treated like an idiot. I kept my money, my employment and my sanity. Others did not. The amount of bs I heard when people patronizingly explained me why laws of economy doesn’t apply to them was entertaining.
History repeats itself. As well as 13-18% rates.
Meanwhile, people with wealth in mind, who can’t do neither math nor economy beyond the “tenant covers mortgage payment”… hmmm… for now are… are in denial.
However, when the simple math combined with a bit of history does start taking effect, I’ve seen people freaking out. The results are that flippers and those who saw that they are just renting a house from the bank are obvious: I noticed (with a feeling of great satisfaction) the number of the houses for sale and the number of the “New Price” posts.
It is not a question of whether it is going to burst. It is a question of for how long and how hard it is going to crash.
Also, a big question is: how much the nation will be hurt due to combined efforts of the “get rich quick?
The F*’ed Borrowers will be very jealous observing people throwing money on savings accounts while the rate is crawling all the way to 18%.
It is a free country and government will not be accountable for FBs’ investments and making ATM machines out of their properties. So, don’t even expect that rates will be frozen forever. Would not hurt to research on economy in general and specifically on why we didn’t go into recession as it had to happen after the dot com bubble.
Fasten your seat belts. It is going to be a bumpy ride. Meanwhile, those who believe in “get rich quick” and “I will be wealthy” or “house renters are loser”, can chant that mantra - it obviously helps and occupies brain in between watching plasma TV. ‘Cause what if your brain asked you to buy a serious book on economy and math?
10 Blazer // May 4, 2008 at 7:32 pm
This article was clearly written by somebody on the “buy a house” bandwagon.
11 Blazer // May 4, 2008 at 7:38 pm
Don’t you think MLS might be slightly one-sided?
12 Walker // May 4, 2008 at 7:47 pm
It might not show in Ottawa just yet, but I promised it will…
Canada’s housing boom is ‘officially over’:
http://www.financialpost.com/story.html?id=452827
Existing home sales tumble 13 per cent:
http://cnews.canoe.ca/CNEWS/Canada/2008/04/17/5316961-cp.html
Housing sales tumble across Canada:
http://www.reportonbusiness.com/servlet/story/RTGAM.20080417.wcrea0417/BNStory/Business/home
13 Traciatim // May 4, 2008 at 9:46 pm
Wow, how did I miss out on this conversation. I did a little digging of my own back in February for a post over at four pillars:
http://www.four-pillars.ca/2008/01/31/why-sub-prime-crisis-has-not-affected-canada-yet/
I think we’re well in to bubble territory in many cities. Here was my comment from then:
As an example of what I’ve done here I’ll be showing one example of my home city in Saint John, NB. ‘The Daily’ lists the annual median income for 2005 as $57000 in Saint John. If I add in the average Canadian income increase of 2.1% for two years we get an annual 2007 income of around 59400. This puts the ‘target home price’ at somewhere between 118,800 and 178,200 (2 - 3 times median salaries). The CREA website shows my homes city average selling price as $135,193. This puts the average home at around 2.3 times median salary; making a nice affordable city. I Don’t mean to toot my own horn, no one wants to live here cause it is known as the anus of Canada for a reason.
Lets look at some other cities:
Halifax, NS
Median 2007 Income: 67400
Target Home Price: 134,800 - 202,200
Actual Average Selling: 209,000
Cost Ratio: 3.1
Montreal, QC
Median 2007 Income: 61100
Target Home Price: 122,200 - 183,300
Actual Average Selling: 242,000
Cost Ratio: 3.96
Toronto, ON
Median 2007 Income: 64400
Target Home Price: 128,800 - 193,200
Actual Average Selling: 395,000
Cost Ratio: 6.1!
Saskatoon, SK
Median 2007 Income: 66300
Target Home Price: 132,600 - 198,900
Actual Average Selling: 255,000
Cost Ratio: 3.8
Calgary, AB
Median 2007 Income: 78600
Target Home Price: 157,200 - 235,800
Actual Average Selling: 400,000
Cost Ratio: 5.1
Vancouver, BC
Median 2007 Income: 61300
Target Home Price: 122,600 - 183,900
Actual Average Selling: 566,000
Cost Ratio: 9.2, holy freakin cow!
It’s interesting to see the numbers in front of you. I think the prices in a few places are simply out of control. That can’t be sustained for long periods of time for obvious reasons.
14 Traciatim // May 4, 2008 at 9:51 pm
Keep in mind in cities like Vancouver the average sales price listed on the CREA website now is 616496, an 8.9% increase over what I picked up in February. Who’s willing to bet median salaries didn’t increase by near the same amount?
15 Canadian Capitalist // May 4, 2008 at 10:46 pm
Blazer, Traciatim, Walker: This post was written three years back. Of course, things are slightly different now as affordability has deteriorated since then.
16 Traciatim // May 5, 2008 at 6:31 am
Oh, that’s how I missed it. I didn’t even bother looking at the year. Hey CC, How is Ottawa’s ‘cost ratio’ these days, has it gone really skewed like many of the other cities?
17 Canadian Capitalist // May 5, 2008 at 11:14 am
Traciatim: That’s a great table and should make an interesting post. Here’s the data for Ottawa-Gatineau:
Median family income: $84,554
Target home price: $169K - $254K
Actual average selling price: $272,618
Cost Ratio: 3.22
18 Canadian Capitalist // May 5, 2008 at 11:48 am
Traciatim: Correction on the above. Median household income in Ottawa-Gatineau is $66,612, so the cost ratio is 4.09. Sorry for the error.
19 Traciatim // May 5, 2008 at 12:54 pm
No problem. Actually, after I posted that I found a really great page over at money sense magazine, they did all of the work for us.
http://list.canadianbusiness.com/rankings/bestplacestolive/2008/housing/Default.aspx?sub=n2&df=bestcities&sc1=3&d1=a&sp2=1&eh=ch
or
http://tinyurl.com/68wcj3
They both should link to the same place. It contains some great data over there. Now the question becomes, is it the ones that are above three that need to come down, or is it the ones below three than need to come up in price?
I also don’t know when they collected their data, but the Ottawa-Gatineau area faired really well, listed as 2.93 on their chart.
20 Canadian Capitalist // May 6, 2008 at 1:36 pm
Traciatim: I noticed the story in MoneySense magazine (I’m a subscriber) but thanks for the link to the website. I’ll mention it in the weekly roundup.
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