I’m currently working with some data to show the historic relationship between house prices in Canada and various other factors such as inflation, population growth, immigration, income, mortgage debt, rents, etc. I’ll share the data as I complete it and then compile it into one giant post that will become the next primer.
Today I’ll share a couple of the graphs I’ve compiled examining house prices and per capita GDP. The house price data is from CREA resales and must be ordered from them at a cost. To calculate GDP per capita, I used data from the World Bank (GDP) and Stats Canada (population).
I’ll let the first two graphs do all the talking…
For these last two charts, I was curious what the correlation would be between year over year (Y/Y) changes in house prices and the year over year changes in per capita GDP.
What I want you to notice is that the two data series have a correlation of 0.366 or moderate. However, if we subdivide the data series into the periods 1980-2000 and 2001-2010, we find that it tells two very different stories.
The data sets for the 1980-2000 period highlighted in yellow were more strongly correlated with a coefficient of 0.5312.
Yet the data set for the 2001-2010 period highlighted in green was weakly correlated with a coefficient of 0.1502.
My position has been that our current credit bubble had its origins in the aftermath of the dot-com bubble and the associated tanking of interest rates. At that time it was nothing but a mild overvaluation. But gas was thrown on the fire between 2004 and 2009 as the loosening of mortgage lending standards and a new prevailing mentality towards housing took hold. The combination of shifting mass psychology and cheap, readily available credit has been the fuel for the made-in-Canada housing bubble.
More to follow…