A regional look at Canada’s housing bubble: Part 2

Note to my readers:  Due to some technical problems, I was not able to make any posts this weekend.  My apologies.

In part 1 of this mini series, we examined house prices from BC east to Ontario.  Today we will examine provinces east of Quebec.  As mentioned before, Quebec resales data is not owned directly by CREA, so I’ve had to endeavor to obtain that data from the realtor association in Quebec.  I’m hoping to have that data later this week to complete the series.

New Brunswick

By and large, New Brunswick house prices look fairly valued on the basis of GDP per capita.

Not too much to be concerned about here.  Housing has largely paced the level of economic expansion, perhaps even lagging slightly from the late 90s onwards.

Nova Scotia

Once again, nothing to be particularly alarmed by here.  Housing may be marginally over extended, but certainly not meaningfully.

Prince Edward Island

PEI is an interesting case.  Once again we see that the particular starting point has a significant impact on the overall trend.  In this case, housing lost some 30% of its value in the three year period after 1981 (the start of the graph).  Using 1981 as a starting point yields a graph that indicates serious undervaluation in real estate on the island.

This is rather curious.  If we look at house prices divided by GDP per capita, we note that in 1981 at the start of the graph, housing on the island was 7 times GDP per capita, or roughly 75% above its long-term mean.  The subsequent correction brought house prices back in line with underlying GDP.

Once again at the risk of being accused of data mining, I advanced the start date.  If indeed PEI was correcting from a level of pre-existing overvaluation in 1981 as the above chart suggests, then it would make sense to advance the time line.  What a difference three years makes…

Based on the metric of GDP per capita, house prices in PEI reflect fair valuation and perhaps an degree of undervaluation.


On the basis of per capita GDP, house prices in Newfoundland are by far the most reasonable in Canada.  In fact, they appear to be significantly undervalued.

The fine folks in Newfoundland can sleep easy knowing that a nation wide housing bust will likely impact them marginally.


On the basis of per capita GDP, there seems to be a clear east/west divide between the ‘overvalued’ provinces and those that appear fairly valued by this metric.  What may surprise some of my readers is that this line seems to lie east of Ontario, as most provinces from Ontario to BC exhibit significant levels of housing overvaluation.

Using the data from this post and the previous post in this series, we can arguably divide the provinces into two groups:  The overvalued/bubble provinces and the undervalued/fairly valued provinces.  The provinces seem to break down as follows:


BC, Alberta (arguable based on starting point), Manitoba, Ontario

Combined contribution to Canadian GDP: 70%

Undervalued/Fairly Valued:

Saskatchewan, New Brunswick, Nova Scotia, PEI, Newfoundland

Combined contribution to Canadian GDP: 10%

Unknown/Not Calculated:

Quebec (I’m working on getting house price data for Quebec), Northwest Territory, Yukon, Nunavut.

Combined contribution to GDP: 20%, of which Quebec accounts for nearly 19%.

The point here is that the provinces that we should be concerned about represent a whopping 70% of our GDP, and possibly as high as 90% depending on how fairly valued Quebec real estate is.  This should concern us.  As so often discussed on this blog, falling house prices are a catalyst for retrenching consumers, falling employment, and weak economic growth.

It is highly unlikely that any political party will have the political will power to address this issue.  Indeed, if early election promises are any indication, all major parties will likely be all too willing to shovel more money at the house-owning electorate:

“Among the Liberals’ new proposals was a green renovation tax credit worth $2,025 for expenses of up to $13,500 on new windows, doors and roofing.”

Yet more fuel for Canada’s HGTV addiction.  The data continues to suggest that significant overvaluation exists on a nationwide basis.  Regionally, most areas of the province seem to have engaged in some levels of irrational exuberance.  I’m continuing to work with the data.  Up next, another look at the role of mass psychology by examining new mortgage originations as a percentage of total population.  Stay tuned!




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15 Responses to A regional look at Canada’s housing bubble: Part 2

  1. Kevin says:

    great work as usual.

    I just wanted to quickly comment on Saskatchewan, as I have been following the Saskatoon housing bubble quite closely. 1981 saw a housing bubble and a commodity bubble as well in Saskatchewan. Now, thirty years later, there is a definite housing bubble and commodities are quite robust as well. As GDP and house prices have grown, wages have not.
    According to RBC a household income of 70,000 in Saskatchewan buying an average bungalow with 5% down over 25 years would take almost 50% of income. Saskatoon’s median multiple is at 4.3, one of the worst in the country. And Saskatchewan is 39% above the long term average in regards to house price to incomes.

    There is a reason why places like Saskatoon are using “innovative mortgages” and free down payments to get some first time buyers into home ownership because the traditional way does not work anymore.

    Different calculations will produce different results. But you know that and have done an excellent job at probing the housing bubble in Canada from every different angle.

  2. jesse says:

    The Liberal’s proposed continuation of the homeowner green tax credit is an interesting segue into continuing what John in Ottawa and Ben were discussing on a previous thread: how owner-occupied housing quality has increased based on relatively stagnant incomes. It leads me to wonder how much value these initiatives provide when a house is to be sold.

    These initiatives are geared towards owner-occupied housing. Rental housing is unlikely to see benefit. Any guesses as to why?

  3. Etienne says:

    Paid monthly series for Quebec are only available back to 2002.
    I don’t know where to source data prior to 2002, I have asked the fciq, waiting for an answer

  4. Sams Mango says:


    @ Ben, look at the historical prices, it’s doesn’t look out line for a reasonable growth rate of doubling in 21 years. However, today people might look at this story in shock and awe – at the million spent with a line up to pay it.

    • Yes the 80% gain in 8 years is clearly indicative of a normal house price appreciation….particularly when incomes, GDP, and inflation gains have amounted to about a third of that total.

    • jesse says:

      “The one thing we can say with high degree of certainty is that over a thirty year mortgage interest rates are not going to be at the same level as they are now, they’re going to be higher, and that Canadians, individuals, should be comfortable that they can service their debt at higher interest rates”
      – BoC Governor Mark Carney, November 2010

      In life nothing is “certain” but we can get pretty darn close.

  5. John in Ottawa says:

    The last property I bought in Ottawa proper, before amalgamation, was in the exact geographic center of Ottawa on Colonel By Drive. Apparently, some professor at Carleton University worked that out on a slow day.

    I paid $495,000 for it in 1997 and sold it in 2003 for my asking price of $749,000 on the day it listed. I have no idea what it would sell for today as the new owner promptly tore down the beautiful 110 year old cape cod and built two houses on the lot. Apparently, it was the property that was worth 3/4 of a million dollars. Go figure.

    It is pretty apparent from the article that the house Sams Mango references at 51 Melrose Ave has gone through a major and very expensive renovation since 2003. Add about $200,000 to the 2003 base price of $650,000 and the appreciation of 3%/year to $1,162,000 begins to make more sense and falls in line with the appreciation of 2.8%/year from 1990 to 2003.

    Like my old Ottawa neighborhood, Melrose Ave is desirable and the land is valuable. This house probably didn’t sell to the same “house horny” crowd as first time home buyers in Milton. Some houses really are worth what people have to pay for them. I wouldn’t be at all surprised if the new owner paid just three times annual income. Perhaps less.

  6. @Sam

    “why do houses have to be a function of that?”

    You mean why do houses have to be a function of incomes, inflation, and GDP? Isn’t it obvious. Sure interest rates are a significant factor, but if housing has been driven overwhelmingly by interest rates and not loose, abundant credit and a shift in mass psychology, the future is even more bleak for housing. There’s only one direction that interest rates will be moving over the longer term…

    • Sams Mango says:

      Are you not in the deflation camp? The point is that in the long run, the prices are well in line with your factors of input to computer fair value.

      From here, maybe we go down a touch, stale, etc…and then 5-10 years, we will probably have a kink again and everyone will debate it again…

      • “the prices are well in line with your factors of input to computer fair value”

        All evidence to the contrary. Exactly what factors are you looking at?

        With regards to the ‘kink’ you refer to, I assume you mean the deviation from underlying fundamentals. I’d remind you that by many measures of fundamental value, the current ‘kink’ represents an unprecedented deviation from underlying fundamentals.

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