Canada's Housing Bubble - An Accident Waiting to Happen David Macdonald - Ren Thomas
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> August 2010 Canada’s Housing Bubble An Accident Waiting to Happen David Macdonald
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Canada’s Housing Bubble:
An Accident Waiting to Happen
down” requirements and shorter amortization
Introduction
periods for new mortgages. The Harper govern-
Canadians are becoming increasingly concerned ment has not completely heeded the banks’ calls
that, like our neighbours to the south, there may although it has made some changes.5
be a housing bubble in Canada. Given the central role housing affordability
While the prospect of a bubble has been played in the U.S. financial crisis that sparked a
downplayed by the Bank of Canada, a number global economic meltdown, it’s important to as-
of economists have warned that Canada’s hous- sess what factors might be playing into a hous-
ing market is overvalued1, which is bankers’ ing bubble in Canada and the depth of the risk.
conservative way of suggesting a housing bub- This report attempts to assess the risk in-
ble may be afoot. herent in today’s housing market by comparing
The CIBC warns a housing correction is in Canada with the U.S. on several key scores. It
the cards, which is a milder alternative to a full- begins by describing the factors that feed into
blown bubble bursting — though there are signs housing bubbles, drawing on the history of Ca-
of trouble on the horizon.2 nadian housing bubbles to put things in context.
For instance, the OECD finds Canada has the It looks at the rising price of housing in Canada,
highest consumer debt to financial asset ratio especially post-2000. Then it creates three his-
among 10 OECD countries, including the U.S.3 toric scenarios to test the size of the bubble and
The Canadian Association of Accredited Mort- locate where it is occurring.
gage Professionals estimate about 375,000 mort-
gage holders in Canada are already challenged
What goes into a housing bubble?
by their current payments and may not be able
to handle higher rates.4 Housing bubbles have occurred in Canada but
And, behind the scenes, Canada’s banks are they don’t happen every day, and they don’t hap-
clearly concerned: This spring they asked the fed- pen automatically.
eral government to legislate both higher “money
C anada’s Housing Bubble 3A housing bubble emerges when housing prices to an overvaluation of house prices, where a small
increase more rapidly than inflation, household number of buyers drive the bidding on the best
incomes, and economic growth. Several factors housing and trigger a price escalation in neigh-
tend to contribute to the growth of a housing bub- bouring markets. This price contagion results
ble: low mortgage rates, access to easy credit, net in a situation where the majority of consumers
immigration and the stock of available housing. are bidding more on houses than they can really
And, as witnessed in the U.S., wild card factors afford, in hopes of living in the neighbourhood
such as sub-prime mortgage schemes in loose- they choose and/or investing in financial assets
ly regulated financial markets can cause major for future economic security.
damage to economies.
Factors such as low mortgage rates and ac-
Housing bubbles: A Canadian rarity
cess to easy credit help draw buyers into a market
they might otherwise not be able to compete in. Generally speaking, the bursting of housing
Canadians haven’t seen mortgage rates this low bubbles is rare in Canada. There have been only
in more than 50 years; the Bank of Canada over- three Canadian housing bubble bursts in only
night rate has never been lower. While housing two cities — Vancouver and Toronto — since 1980.
may be “affordable” based on record low rates, the Vancouver’s first housing bubble burst in 1981,
affordability situation in Canada could change the second declined gradually in 1994. Toronto
rapidly if mortgage rates return even part way had one housing bubble, which burst in 1989.
to their historic norms. Otherwise, inflation-adjusted housing prices in
However, low interest rates are only part of all major Canadian cities remained remarkably
the picture. The number of new houses added, stable from 1980 until 2001. Since then, housing
the changes in population, as well as income prices have been steadily rising to relatively new
and inflation increases over time may also help and possibly troublesome heights. Take a look at
to explain higher house prices. Figure 1. It plots average residential real estate
This study examines the Canadian hous- prices since 1980. Few indicators rise so starkly
ing market over the past 30 years and finds the and so steadily as the national average of hous-
market is more unstable than it has been in over ing prices in Canada post-2000.
a generation. Between 1980 and 2000, housing The graph shows two clear plateaus — one
prices were relatively stable in Canada’s large for the early 1980s, with house prices at approx-
urban centers, despite isolated bubbles in cities imately $75,000 and a second starting in 1989,
such as Toronto and Vancouver. But since the with average prices at $150,000. It also shows
early-2000s, the housing market has been on steadily rising prices in the 2000s.
a steady climb and, in some cases, it exploded, However, looking at broad averages can be
within the blink of an eye, especially when com- deceiving. Although Figure 1 displays a quite or-
pared to historical norms. derly graph line, it has managed to conceal the
The rising cost of housing is one of several three major price bubbles in Toronto and Van-
red flags on the Canadian landscape. Household couver. It has also completely masked rapid, oil-
incomes also play a role in creating housing bub- fuelled housing booms in Calgary and Edmonton.
bles. If everyone’s income is rising in step, house Since it is usually one or two key markets,
prices can rise without jeopardizing affordability. often Toronto or Vancouver, that drive nation-
But if earnings of those at the top of the income al and regional house price averages, this report
spectrum rise much faster than everyone else’s, drills down on housing trends in the six biggest
as they have done in the past decade, it can lead markets in Canada: Vancouver6, Edmonton, Cal-
4 c anadian centre for polic y alternativesfigure 1 Canadian Residential Real Estate Prices
$400,000
$350,000
$300,000
$250,000
$200,000
$150,000
$100,000
$50,000
$0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
source CREA
gary, Toronto7, Ottawa and Montreal. Together When you factor in median incomes, the same
they represent approximately 40% of all real es- historic range appears for housing prices. Hous-
tate sales in Canada.8 ing prices for 20 years, prior to 2000, stayed in a
The graph below shows the average inflation- narrow range of between 3 and 4 times provincial
adjusted housing prices in these cities between annual median income.10 Today, however, hous-
1980 and 2010, reflecting a more volatile mar- ing prices adjusted for income are out of their
ket and registering a brief blip as recession hit historical range, costing 4.7 to 11.3 times Cana-
Canada in 2008 as well as the market’s quick dians’ annual income.11
recovery. Canada’s housing market has shown As well as inflation and income, a variety
remarkable resilience through the worldwide of other factors affect housing prices in a more
economic downturn, quickly regaining ground short-term fashion. Economic growth (GDP) is
in 2009–10 with possible price bubbles in sev- connected to incomes and so may be partially
eral Canadian hot zones. represented in the income-adjusted housing
Between 1980 and 2000, the historical price prices. Unemployment may be a better indica-
range for housing in Canada stood pretty steady tor of potential home buyers’ economic reality.
between $50,000 and $80,000 in inflation-ad- It is more volatile than GDP and, many times,
justed 1980 dollars. But within a brief five-year GDP recovers while unemployment remains
period, 2001–06, all major housing markets in stubbornly high.
Canada shot to well above the $80,000 average Mortgage interest rates also have a signifi-
price point that had been the norm for 20 years. cant bearing on house purchases: higher rates
And just four years later, in 2010, the average may push some buyers out of the market if mort-
price of housing in Canada’s cheapest markets gage carrying costs become too heavy a burden.
topped $100,000 — twice as much as the hous- Down payment requirements and the cost of
ing market floor historically. mortgage insurance may act as upfront impedi-
C anada’s Housing Bubble 5figure 2 Average Residential Housing Prices Adjusted for Inflation (1980$)9
$300,000
$250,000
Calgary Ottawa Edmonton
Toronto Montreal Vancouver
$200,000
$150,000
$100,000
$50,000
$0
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010
source CREA, GMREB MLS Barometer, StatsCan, Author’s Calculations
ments, although these remained fairly constant age change in single family home sales in key
until Canada ushered in more lenient mortgages U.S. and Canadian cities between 1997 and 2007,
culminating in the zero-down, 40-year mort- when the subprime mortgage scandal brought
gages by late 2006, up from 5%-down, 25-year the American economy to its knees.
mortgages. As well, the growth of population There are clear differences between Canada
and average housing stock plays a critical role. and the U.S. when it comes to the housing mar-
Appendix A looks at the Toronto and Vancou- ket. For one, a much higher proportion of Cana-
ver housing bubbles in great detail, taking these dian mortgages are insured by the government
factors into consideration. through CMHC, leaving the big Canadian banks
and investors better protected in the event of
foreclosures.
How Canada Compares with the U.S.
Bankruptcy laws are more punitive in Canada
The recent U.S. housing crash provides a stark and lending criteria is not as lenient. Depending
example of what can go wrong when housing on the U.S. state, lenders do not have recourse to
prices are outside of their historic norms. a mortgage borrower’s other assets in the case of
This report uses the Case-Shiller home price default. Although, a defaulting borrower would
index to track housing markets in nine of the have his or her credit rating seriously affected,
worst-hit U.S. cities: Miami, Los Angeles, San the bank could not gain possession of other as-
Diego, Washington DC, Las Vegas, Phoenix, sets such as savings. In Canada, the banks do
Tampa, New York, and San Francisco. A com- have recourse to a borrower’s savings and other
parable methodology is adopted in the Canada assets in the case of foreclosure, making strate-
Teranet–National Bank House Price Index™, gic defaults here much less likely.
making direct Canada-US comparisons possible. As well, mortgages are not awarded in Can-
This allows us to compare the average percent- ada without employment and income checks.
6 c anadian centre for polic y alternativesfigure 3 Canadian and U.S. Housing Markets
350
Average worst 9
Calgary Ottawa U.S. cities
300
Toronto Montreal Vancouver
250
200
150
100
50
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
source Teranet–National Bank House Price Index™, Case-Shiller Housing Index12
At the height of the U.S. boom, borrowers were for the six major Canadian cities: Vancouver, Al-
often receiving loans with no verification of in- berta, Edmonton, Toronto, Ottawa and Montreal.
come or employment. In previous Canadian housing bubbles, the
Yet some Canadian cities, especially Cal- speculation was isolated to one or two mar-
gary, have reached the same housing highs as kets — Toronto or Vancouver. Even when mort-
the worst-hit U.S. cities. gage rates spiked to over 14% in 1990, the effect
The worst nine bubble cities in the U.S. saw was dramatic in Toronto, whose 1989 bubble
a maximum price increase of 199% between was still deflating, but had little effect in cities
January 1987 and June 2006. In a little under 10 that were not outside of their historic housing
years, housing prices in those cities had nearly price norms. It seems that if house prices remain
tripled. In Canada, Calgary experienced similar within a stable historic range, they are somewhat
growth, with housing prices soaring by 198% be- protected from mortgage rate spikes.
tween 1997 and 2007. Today, all major cities in Canada are experi-
While the worst of the U.S. bubble crisis may encing housing price increases that are beyond
seem far fetched, several Canadian cities have ei- their historic $50K–$80K range. They are all over
ther hit similar highs or are on an unremitting $100,000 in inflation-adjusted dollars. Canada is
upward path. If several factors aligned against experiencing, for the first time in the last 30 years,
housing prices in Canada, a similar crisis could a synchronized housing bubble across the six
potentially occur. largest residential real estate markets in Canada.
To understand the depth of the risk, this re-
port takes the two most recent Canadian housing
bubbles and the worst-hit U.S. housing bubble
cities, mapping them onto the present dynamics
C anada’s Housing Bubble 7figure 4 Price Drops from an Orderly Deflation (Scenario 1)
Calgary Edmonton Montreal Ottawa Toronto Vancouver
0%
-2% -2% -1% -2%
-5%
-7%
-8%
-10% -9% -9%
-15% -14%
-15%
-17%
-18% -18%
-20% -19% -19%
-20% -20%
-21% -22%
-25%
-25% -25% -25%
-30% -29% -29%
Year 1 Year 2 Year 3 Final (3 years, 6 months)
-35%
-40%
Will the bubble burst? nadian cities examined in this study. Scenario 1
increases the 2001 (1998 for Toronto) prices for
What are the odds of the bubble bursting, flam-
each city by 86% to establish a new stable price
ing out fast or slow, versus a slow price modera-
and then decreases the current price to the new
tion — or market correction?
stable price.
This report simulates three possible scenarios:
It stretches out the decline over three and a
(1) The possibility of a market correction through
half years with most of the decline coming in a
housing price deflation, similar to Vancouver’s
particularly bad first year. Prices whipsaw back
experience in 1994; (2) The possibility of a deeper
after the first year’s decline. The next two years
and longer housing crash, similar to Toronto’s
see prices improve slightly, followed by a final
experience in 1989; (3) The possibility of a rapid
drop that makes the first year’s drop more per-
and steep decline, similar to the worst-hit U.S.
manent. While prices do decline from peak to
cities in 2008.
trough, homeowners who held their property
For more details on the methodology see
from the start year of 2001 (1998 for Toronto)
Appendix B.
through the end in 2013 nonetheless would even-
tually see an 86% increase in property values.13
Scenario 1: Under this more moderate scenario, Edmon-
Market correction through price deflation ton — which experienced the largest relative
price increase from its previous stable price in
Vancouver’s 1994 market correction came in the
2001 — would also see the biggest decline. Av-
form of an orderly price moderation — a much
erage house prices in Edmonton would drop by
preferred experience to a full-blown market crash.
29%, from $330,000 to $235,000, over the three-
Scenario 1 replicates the 1994 Vancouver
and-a-half-year period.
market correction and maps it onto the six Ca-
8 c anadian centre for polic y alternativesVancouver started from a much higher start- Scenario 2 increases the 2001 (1998 for Toron-
ing point but, nonetheless, has seen a significant to) prices for each city by 61% to establish a new
boost in prices since 2001. Vancouver home- stable price. It then decreases the current price
owners would experience a 20% drop in the av- to the new stable price five years later.
erage residential property value, declining from Under this scenario, the decline in house
$658,000 to $524,000. prices in each of the six major cities would be
Calgary and Montreal had different starting much more striking than in Scenario 1. While
prices in 2001 but have since experienced similar there is a slight decline in year one, in year two
housing price increases. Calgary would see an prices decline rapidly. By year three, more than
almost 20% decline in prices from $403,000 to- half of the price decline would have set in, and
day to $325,000 in three-and-a-half years’ time. the ensuing years would offer no respite, with
Montreal for its part would see a somewhat larger continuing declines in each year.
decline of 25% with prices falling from $307,000 Edmonton would experience the largest de-
to $231,000. cline, reaching almost 40% — from $330,000 to
Ottawa’s increase since 2001 was relatively $203,000 — over the course of almost five years.
minor. Consequently, housing price declines The first year would be devastating for Edmonton
in that city would be minor too, with only a 2% real estate prices. They would decline by $25,000,
drop. Ottawa would see prices decline from to an average housing price of $305,000 by the
$322,000 to $317,000. end of the first year. Over the total period, hous-
Toronto is often cited as one of today’s worst ing prices would lose $126,000 of their value.
examples of a housing bubble city in Canada.14 Montreal, Calgary and Vancouver would ex-
However, average prices in Toronto are currently perience at least a 30% drop from today’s prices.
second only to Vancouver. The increase in To- Prices in Montreal would drop from $307,000 to
ronto housing prices since their last stable value $200,000. Prices in Calgary would drop from
in 1998 has been moderate compared to other $403,000 to just over $280,000, for a loss of
Canadian cities. The potential decline under this $122,000. In Vancouver, prices would drop by
scenario would be relatively small compared to 31%, from $658,000 to $454,000, losing $204,000
other cities, with average prices declining by 9%, of their value.
from $420,000 to $382,000. In Toronto, prices would drop by 21%, from
$420,000 to just over $330,000, losing about
$90,000 of their value in the process.
Scenario 2: Bubble bursting slowly,
By the end of Scenario 2, Ottawa house pric-
over a period of time
es would have declined by 15%, dropping from
The Toronto 1989 crash was deeper and long- $322,000 to just under $275,000.
er than the Vancouver 1994 market correction While Scenario 2 represents a steep drop in
and it was the worst real estate bubble to burst housing prices, those who hold real estate through
in Canada since 1982. It’s the model for Scenar- the entire boom and bust would see their houses
io 2, simulation of a housing market crash that appreciate 61% despite the significant declines
draws out losses over five years. It’s worse than in the final five years.
Scenario 1 but better than Scenario 3, which is a
full-blown, quick and steep market crash as was
experienced in the U.S in 2008. The declines from
scenario 2 are plotted in Figure 5.
C anada’s Housing Bubble 9figure 5 A Canadian Bubble Burst (Scenario 2)
Calgary Edmonton Montreal Ottawa Toronto Vancouver
0%
-3%
-5% -4%
-6% -7% -6%
-7%
-10% -9%
-12%
-14% -13%
-15%
-15%
-17%
-20% -18% -19% -19%
-21% -21%
-25% -23% -23% -24%
-27% -27%
-30% -28%
-30% -30%
-32% -31%
-35% -35% -35%
-40% -38%
Year 1 Year 2 Year 3 Year 4 Final (4 years, 8 months)
-45%
Scenario 3: dian markets. It assumes the U.S. housing prices
Bubble bursting rapidly and steeply of mid-2009 represent the new equilibrium for
U.S. housing markets. Scenario 3’s effects are
Asset declines in the U.S. market meltdown of
plotted in Figure 6.
2008 were nothing short of historic.
Scenario 3 is not actually the worst of the
Kings of industry became wards of the state,
three scenarios in terms of ultimate price de-
if they survived at all. Massive defaults sprung
clines but it would be, by far, the most chilling-
major leaks in the U.S. real estate market as the
ly rapid. Similar to Scenario 2, there would be a
collapse of the entire international economy
minor decline in the first year but in year two,
became a pressing danger. Housing prices were
housing values would take their biggest hit. Not
at the root of the problem: many large U.S. and
quite three years from the peak, housing prices
international banks and insurance houses made
would have reached their new low.
risky bets that housing prices would go up in-
Under Scenario 3, Edmonton houses would
definitely. As it turns out, it was one of the worst
lose 39% of their value in just over half the time
bets of the past half-century.
it would take under Scenario 2. If Scenario 3
The U.S. housing bubble started to grow in
were to happen in Canada immediately, the av-
1997, much earlier than in Canada, which expe-
erage price of a residential property in Edmon-
rienced stable inflation-adjusted housing prices
ton would drop from $330,000 to just $206,000
until early-2001. While post-crash housing prices
by early 2013, a drop of $41,000 a year.
appear to have stabilized somewhat in the U.S.,
House prices in Calgary and Montreal would
there may be a deeper drop ahead as more risky
drop by approximately 30%. Montreal residen-
low-interest loans reset in the coming years.
tial property prices would drop from $307,000
Scenario 3 maps the rise and fall of the worst-
to $202,000, a $35,000 a year loss for three years.
hit 9 U.S. bubble cities onto the six major Cana-
10 c anadian centre for polic y alternativesfigure 6 Effects of a U.S.-style Housing Crash in Canada (Scenario 3)
Calgary Edmonton Montreal Ottawa Toronto Vancouver
0%
-2% -3%
-5% -4% -4%
-5% -5%
-10% -9%
-15% -14% -13%
-20% -19% -20%
-20%
-22%
-25% -24%
-30% -29%
-30%
-35% -34%
Year 1 Year 2 Final (2 years, 10 months)
-38%
-40%
Calgary housing prices would drop from $403,000 utilizing more lax mortgage rules may not have
to $285,000, a $39,000 a year loss for three years.15 been such a good idea for either the homeowner
In Vancouver, house prices would drop by or the bank that recommended it.
30%, from $658,000 to $460,000, a gut-wrench- While there would certainly be debate as to
ing $66,000 a year loss in property value over whether over-extended mortgage holders “de-
almost 3 years. serve” their fate, there is a group who will cer-
Both Toronto and Ottawa would experience tainly face bigger impacts than commonly rec-
somewhat smaller drops, but on a yearly basis ognized: seniors. It is those who look to their
they remain large. Ottawa would lose 14% or houses as a source of retirement savings who will
$15,000 a year over three years dropping from likely be hit the hardest. Seniors who have paid
$322,000 to $277,000. Toronto would lose 20% off their mortgages and played by the rules may
or $28,000 a year with average house prices fall- be about to see a second hit to their economic
ing from $420,000 to $335,000. security in their golden years, after the collapse
of the stock market in 2008.
Whether the crash is orderly, protracted, or
Who would a housing crash hurt most?
sudden, seniors who can’t wait for a decade or so
What if housing prices do decline and do so rapidly for prices to recover will be most affected. And
as in Scenario 3? Certainly some new homeown- even if they can afford to wait, the sheer number
ers — young families that purchased homes with of people who will be counting on selling their
no downpayment — will find themselves owing homes to make their retirement plans viable will
more than their house is worth. Over-extending mean a buyers’, not a sellers’, market.
themselves with little or nothing down means Irrespective of the circumstance, policy mak-
that higher mortgage rates quickly translate into ers should be keenly aware of the urgency of an
bigger monthly payments. In retrospect, fully overheated housing market. Whether it is re-
C anada’s Housing Bubble 11tiring Canadians relying on the equity in their be rescued from the excesses of the zero-down,
homes or younger Canadians who stand to lose a 40-year mortgages and reset closer to their his-
substantial part of their initial investment, large toric 25-year amortization, housing prices may
fluctuations in housing prices have a profound experience an orderly decline closer to Scenar-
effect on Canadians. That doesn’t mean we have io 1 instead of the full-scale crash envisioned in
to sit idly by, waiting for markets to finish their Scenario 3. Of course, this is dependent on the
recalibrations. Public policies can play an impor- Bank of Canada not pushing up the overnight
tant role in offsetting or accelerating economic rate too fast and the big banks not pushing up
forces that create for a volatile housing market. mortgage rates too high.
Rising interest rates, particularly rising mort- Bringing housing prices down just enough
gage rates, will likely be the main drivers behind to moderate expectations but not so much as to
housing prices in the immediate future, and mort- cause a panic is a delicate balance. Government
gage rates have nowhere to go but up. If mortgage policy makers, the Bank of Canada, as well as rate
rate increases can be kept manageable, under a setters at the big banks need to work together to
1% average increase over the 24 month rolling steer the Canadian market towards a soft land-
average, and if mortgage eligibility can gradually ing. The alternative is not acceptable.
12 c anadian centre for polic y alternativesAppendix A:
Looking At Canadian Bubbles
In order to gain more perspective on the cur- in other major cities resting within the $50,000
rent housing price increase, it makes sense to to $80,000 ($1980) price range. Within this safety
examine in more detail the most recent bub- zone, neither sky high interest rates nor sky high
bles in Canada. unemployment had a significant effect.
Figure 7 examines several other economic As unemployment backed away from its 1981
variables besides housing prices for Ontario and peak, it established a new low of between 3% and
Toronto since 1980 with a view to determin- 4% in Toronto for much of the late-1980s. Interest
ing what other factors may have been affecting rates moderated to some degree over this period,
Toronto housing prices. Real GDP is much less although they still remained high by present day
variable over time than either mortgage rates or standards. Unemployment rates this low have
unemployment. The only real dip in Ontario’s not been experienced since then and the infla-
GDP comes during the 1991 recession. Other tion of the 1989 housing bubble began as unem-
than one brief period, real GDP grew relatively ployment discovered its new lows. The Toronto
steadily over the past 30 years. bubble hit its peak in 1989 just before the Bank
For both mortgage rates and unemployment of Canada again increased interest rates, driving
there have been very significant spikes since 1980. mortgage rates to new highs of just over 14%. The
The decision by the Bank of Canada to crush in- war against inflation began anew at the Bank of
flation arising from the OPEC crisis in the late- Canada, driving Canada into recession and in-
1970s is evident when mortgage rates spiked over creasing unemployment in Toronto from 4% to
20% in late 1981. The massive spike in interest 11% in one year between mid-1990 to mid-1991.
rates caused a massive spike in unemployment The significantly lower unemployment in
reaching 12.4% in Ontario by the end of 1982. Toronto brought a rapid influx of people to the
When relating these changes in the early-1980s province (i.e. population increased much more
to housing prices, there is actually very little ef- than birth rates would otherwise explain). No
fect. Prior to the 1989 Toronto housing boom, doubt more people seeking homes was part of
house prices in Toronto were on par with those the demand side for why prices spiked. The influx
C anada’s Housing Bubble 13figure 7 What Else Was Happening in Toronto
$600,000 25%
Ontario real GDP ($2002) Toronto unemployment Average 5 year mortgage rates
$480,000 20%
Real GDP ($mil 2002)
$360,000 15%
$240,000 10%
$120,000 5%
$0 0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
source Statistics Canada, CMHC, Ontario Ministry of Finance16
figure 8 Net population change Ontario and BC (Year over year difference)
300,000
Ontario British Columbia
250,000
200,000
150,000
100,000
50,000
0
1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009
source Statistics Canada
of people peaked three months after real estate that migration again picked up steam. This time
prices peaked. From that point forward, migra- though, there is not a commensurate increase in
tion to Ontario slowed. It was only in late-1999 housing prices. What is interesting about On-
14 c anadian centre for polic y alternativesfigure 9 Housing Completions: Toronto and Vancouver
30,000
Ontario British Columbia
25,000
20,000
15,000
10,000
5,000
0
1980 1983 1986 1989 1992 1995 1998 2001 2004 2007 2010
source CMHC
tario’s second big migration bump in 2000 is that The housing boom that peaked in 1994 is likely
it marks the beginning of the gradual, yet sub- partially related to the surge in population over
stantial, increase in housing prices that Toron- that same period. Immigration tapered off in
tonians experienced all the way through 2010. Vancouver, pulling housing prices down after
If we look closer to present day Toronto, 1994. It is not until the early-2000s that we saw
mortgage rates have been declining since the an increased movement of people to Vancou-
mid-1990s, allowing Torontonians to carry a ver. While the rate of population growth did in-
larger mortgage for the same monthly payment. crease throughout the 2000s as housing prices
Net migration has remained flat since 2002, as skyrocketed, the inflows never matched those
seen in Figure 8, and is not likely a major factor of the mid-1990s.
in housing price increases. In 2008, the financial However, housing prices are not only driven
crisis hit, immediately increasing unemployment by the demand side. The supply of houses also
and decreasing house prices in Toronto. Interest changes as new ones are built. Figure 9 shows
rates also dropped, in an attempt to stimulate the housing completions for Ontario and BC.
the economy with mortgage rates following suit. Ontario housing completions in Toronto’s 1989
However, while unemployment increased and re- bubble nicely tracked prices. As prices contin-
mained around the 8% level, housing prices also ued upwards, builders rushed to cash in on the
bounced back, setting new highs, likely based on trend by building new units to meet demand.
record-low mortgage rates. As housing prices collapsed following their
If we focus on Vancouver, population influx- 1989 peak, builders found it harder to unload
es from the late-80s through the early-90s like- homes they’d already built and so also cut back
ly helped to drive demand for housing as more on building new ones.
people were competing for the same houses.
C anada’s Housing Bubble 15Figure 10 People per Dwelling is Declining time. Presumably, prices will be bid up if there
Toronto Vancouver are more people bidding on the same number of
Census Year People per Dwelling People per Dwelling houses, perhaps explaining the recent increase
2006 2.7 2.4 in prices. However, the trend is in the opposite
2001 2.8 2.5 direction. The stock of private dwellings is actu-
1996 2.9 2.6 ally increasing at a faster rate than population
source Statistics Canada
growth, meaning more houses are being built
than people are being added to the population.
The trend is happening even faster in Vancouver
Vancouver builders followed a similar trend where prices are higher than in Toronto. Build-
during the 1994 run up in prices. As Vancouver ers are keeping up with population growth and
house prices increased, builders again rushed to then some in these two cities. Likely changing
meet the demand and cash in. New home comple- preferences, such as more Canadians living on
tions hit a peak of over 12,000 units per quarter their own, are driving housing prices despite tra-
in the Fall of 1993, approximately one year be- ditional demand and supply figures are pushing
fore Vancouver housing prices hit their peak in the other way.
1994. As housing prices dropped, builders had
a harder time making a profit on new homes
The 1989 Toronto Bubble
and therefore cut back on housing completions.
More recently, Ontario housing completions The 1989 Toronto bubble is the largest in recent
were on an upswing through the early-2000s, Canadian memory. As the Toronto bubble in-
possibly in reaction to the increases in popula- flated, so did the Vancouver bubble, though it
tion several years earlier in addition to higher did not peak until 1994. While the Toronto bub-
prices. What is interesting is that since that up- ble ran out of steam in 1989, the Vancouver bub-
swing, new house completion has actually de- ble that started only two years later continued
clined even though housing prices are on a tear. to 1994. It is interesting to note that these were
With housing prices now at a new all-time high relatively isolated phenomena. Housing prices in
in Toronto, builders either are not willing or are the other large cities in Canada remained almost
not able to keep up. The new house completion completely unaffected by the run up in prices in
trend in Toronto is actually on a decline. Toronto and Vancouver.17
Vancouver, for its, part has seen an increase In the GTA, housing prices started picking
in home completions from the lows of the late- up steam in mid-1985. Their 1984 average was
90s of approximately 4,000 homes per quarter $95,000. Housing prices hit their peak in April
to almost 10,000 by 2008. However, as housing 1989 at an average price of $261,000, a run up of
prices continue to explode from the 2008 reces- almost 175% in 5 years. The subsequent crash saw
sionary dip, the housing completion trend, as in prices fall 28% from their April 1989 high to a
Toronto, is on a decline. In both cases, the lack new low of $189,000 in August of 1993.
of adequate new houses being put on the mar- As noted in Figure 7, historically low unem-
ket by builders is only increasing pressure on ployment through the late-1980s, drawing in net
housing prices. migration and new demand, likely drove the in-
What is interesting is that once we combine flation of the bubble. Builders tried to keep up
housing stock with population, as in Figure 10, we increasing house completions (Figure 9) through-
find that the average number of people per pri- out, however prices did not relent. The spike in
vate dwelling has actually been going down over interest rates in 1990, combined with the inevi-
16 c anadian centre for polic y alternativesfigure 11 1989 Toronto Bubble by Housing Type
300
250
200
150
100
Detached bungalow Executive detached two-storey Luxury condominium apartment
50
Standard condominium apartment Standard townhouse Standard two-storey
0
1986 1987 1988 1989 1990 1991 1992 1993 1994
source Royal Lepage Survey of Canadian House Prices and Authors Calculations17
table spike in unemployment, deflated the 1989 prices came crashing down. The sale price for a
bubble in short order as the influx of new popu- standard condominium in Toronto dropped by,
lation also dropped off. on average, 39%. All other housing classes were
It is important to note that even though hous- relatively uniform, losing approximately 27% of
ing prices did see a significant contraction be- their value, with luxury condos losing slightly
tween 1989 and 1993, the 1993 price was still sig- more, at -32%.
nificantly above the previous equilibrium level In the run up to the bubble’s peak, average
of approximately $95,000 experienced 9 years 5 year mortgage rates were also climbing. They
earlier. Between the start of the bubble and its reached 12.7% by the peak of the housing bub-
end, housing prices nonetheless appreciated al- ble. However, only a year later mortgage rates
most 100%, with only 42% of that appreciation spiked to over 14%, putting the final nail in the
due to inflation. That new plateau, even in infla- coffin of the 1989 Toronto bubble.
tion-adjusted terms, has not been breached since.
The Toronto bubble was characterized initially
The 1994 Vancouver Correction
by rising prices in the standard condominium
market. The other housing types for their part did Vancouver has stood out for some time as the
not experience the same sort of excesses seen by most expensive city in Canada for residential
condos. While the other housing types did not real estate. Since 1990, Vancouverites have paid
spike as high, they still went along for the ride. more for their homes than any other city resi-
Since condominiums drove the bubble, they dent in Canada. The situation has gotten mark-
were also the class that had the most to lose edly worse since 2001. Despite this dubious hon-
when it burst. Sure enough the highest flying our, Vancouver has not experienced a significant
housing class lost the most value when housing price decline since 1981.
C anada’s Housing Bubble 17figure 12 What was Affecting Vancouver
$180,000 25%
B.C. real GDP ($2002) Vancouver unemployment Average 5 year mortgage rates
$144,000 20%
Real GDP ($mil 2002)
$108,000 15%
$72,000 10%
$36,000 5%
$0 0%
1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
source Statistics Canada, CMHC, Ontario Ministry of Finance19
Instead of a bursting of the bubble, the 1994 the course of the drop, residential real estate lost
peak in inflation-adjusted prices in Vancouver 16% of its value, approximately half of what To-
might be better termed a “correction”. Certainly, rontonians lost in their 1989 bubble.
inflation-adjusted prices declined in Vancouver Of the price deflations examined in this pa-
between 1994 and 1998. However, the decline per, it is clear that what happened in Vancouver
was minor compared to Toronto and prices re- following 1994 is the preferable model. Prices re-
mained relatively high until they resumed their tained much of their value and the decline was
upward climb in 2002. spread over a number of years, although with a
In contrast to the situation in Toronto in gut-wrenching whipsaw in prices in the first year.
1989, unemployment rates remained relatively When the Vancouver data is examined by
stable, rising slightly in the lead up to 1994. Pop- housing type, as in Figure 13, an interesting
ulation growth, however, increased markedly as separation occurs. In particular, lower priced
the bubble inflated, as seen in Figure 8. It wasn’t homes — including townhouses, bungalows and
until 1996, a full two years after the 1994 price condominiums — rose more rapidly in the initial
peak, that population growth rates started to stages but they also retained much of that val-
decline. Interest rates were dropping through- ue following the 1994 peak. Higher end homes
out the early-1990s and it appears that lower in- like luxury condominiums, senior and execu-
terest rates, combined with stronger population tive detached homes did not track the increase
growth, may have been the key components of as closely and, in fact, lost more of their value
the 1994 price peak. following the peak.
Average prices in Vancouver peaked at In contrast to the 1989 Toronto bubble, hous-
$330,000 in August 1994. The low point was ing prices in Vancouver separated by housing
four years later, in October of 1998, when aver- type did not change dramatically between the
age prices fell to approximately $275,000. Over peak in 1994 and the low point in 1998. While
18 c anadian centre for polic y alternativesfigure 13 More of a Correction than a Bubble: Vancouver 1994
200
160
120
Senior executive
80
Detached bungalow Executive detached two-storey Luxury condominium apartment
Standard condominium apartment Standard townhouse Standard two-storey
40
0
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
source Royal Lepage Survey of Canadian House Prices and Authors Calculations20
the average house price did go down, this was dos and townhouses and fewer luxury condos,
more likely the result of changing purchasing weighting the average differently and bringing
patterns rather than a decline in prices. That down the average price.
is to say, Vancouverites purchased more con-
C anada’s Housing Bubble 19Appendix B
Study Methodology
All of the bubbles examined in this paper share is from 1998 and in all other cities it is from
a common form, as seen in Figure 14. Housing 2001. However, each scenario has a different
prices start at a stable inflation-adjusted level percentage change between point A and point
“A”. The housing bubble picks up steam, in- C. For instance, in the Toronto 1989 scenario,
creasing inflation-adjusted prices to a new high the price increase from point A to point C was
of “B”. From that point, the bubble bursts and 61%. This percentage change is applied to each
housing prices deflate to their new inflation- city’s starting A price to calculate the final C
adjusted level “C”. price for each city.
In all of the bubbles examined in this paper, The B point in each scenario is the current
the new average housing price after the bubble average price for each city. For all of the scenar-
burst (point C) is always higher than the initial ios and for all Canadian cities, point B is above
starting price at point A. As such, anyone who point C, although this does not necessarily need
held real estate through the entire cycle from A to be the case. Each scenario then moves the
through C will make money (in inflation-adjust- price down from point B to point C at the same
ed terms), despite a decline between the peak B rate and over the same period as the scenario
to the final price of C. dictates. For instance, the price decline after
Often the process from A to C is quite lengthy, the Toronto 1989 bubble took 4 years 9 months,
requiring a decade or more. so that time frame is reflected in how Canadian
To construct real-world scenarios from his- cities respond under this scenario.
torical events, the key variable is the percentage The benefit of this approach is that cities that
change from price A to price C. The percentage started with higher average prices, like Vancou-
change between A and C is inflation-adjusted ver and Toronto, will remain higher even after
and re-inflated using an assumed inflation rate the bubble bursts. As well, cities where house
of 2ppa. prices have increased the most, like Edmonton,
The starting stable price A for each city is the have the most to lose when the bubble bursts,
same for each scenario. In Toronto, that price even though their absolute price level may be
20 c anadian centre for polic y alternativesfigure 14 Basis for Scenarios
$250,000
B
$200,000
C
$150,000
A
$100,000
$50,000
$0
lower. Finally, cities like Ottawa that have seen no decline in price in some scenarios, as the drop
more moderate price increases will see almost from point B to point C is minimal.
C anada’s Housing Bubble 21Notes
1 http://www.yourhome.ca/homes/realestate/ 8 Comparing CREA number of sales for residential
article/799961--canadian-housing-market-correc- real estate in Vancouver, Alberta, Edmonton, Toron-
tion-in-the-cards-says-economist to, Ottawa and Montreal to the number of Canadian
2 http://www.theglobeandmail.com/report-on-busi- sales for residential real estate.
ness/economy/nearly-20-of-homes-overvalued-report/ 9 Prices are adjusted by the CPI for the city specifi-
article1580185/#article cally. All prices are adjusted to $1980. Housing pric-
3 http://my.texterity.com/cgaresearchreports/ es for Montreal from 1/1/2008 forward are obtained
debt2010#pg42 from the GMREB MLS Barometer, prior to that point
Montreal prices are obtained from CREA.
4 http://www.theglobeandmail.com/report-on-
business/rising-mortgage-rates-rising-trouble/ 10 Based on the median after-tax income of total un-
article1563265/#comments der 65 economic families. Statistics Canada Custom
Tabulation: Survey of Income and Labour Dynamics.
5 These include variable rate borrowers needing to
qualify at fixed rates, refinancing can now total only 11 It may however that wealthier Canadians who did
90% of a home’s value and rental properties will need capture much of the income growth over the past 30
to be purchased with at least 20% down. years have been enabled by this additional income to
speculate in real estate markets, thereby pushing up
6 “Vancouver” throughout this report refers to great-
prices. The concentration of income with wealthier
er Vancouver and not merely the municipality of
Canadians does not significantly alter the median in-
Vancouver.
come, but it would create an additional pool of capital
7 “Toronto” throughout this report refers to the GTA that might be used for real estate speculation.
and not merely to the municipality of Toronto. This
12 Instead of utilizing average prices as in previous
includes the CREA MLS data from Toronto, Bramp-
graphs, Figure 3 uses the American Case-Shiller
ton, Durham Region, Mississauga, Orangeville and
methodology which compares the average percentage
York Region
change in the sale of single family homes over time.
Comparable Canadian data is available through the
22 c anadian centre for polic y alternativesTeranet–National Bank House Price Index™. Both moving average municipal seasonally adjusted un-
are adjusted for 1997=100 to match the start of the employment rate is used. Statistics Canada only be-
American inflation adjusted price expansion. These gins publication of municipal unemployment rates
prices are not inflation adjusted. starting in 1987.
13 Not adjusted for inflation 17 Again this may be related to the fact that immigra-
14 See for instance, Garth Turner’s blog www.great- tion largely targeted these two largest Canadian cities.
erfool.ca 18 Royal Lepage Survey of Canadian House prices
15 Readers may note that under Figure 3 Calgary converted to an index with 100=1986. Figure 11 ig-
prices had risen substantially more than other cities nores the initial starting points of each of the hous-
compared to the worst 9 US cities and as such might ing classes and instead sets them to an even value of
be expected to see the largest drop under Scenario 3. 100 to determine which housing type had the largest
However, Figure 3 has a start date of 1997, but infla- relative change in price during the bubble.
tion adjusted prices in Calgary stayed stable until the 19 The provincial seasonally adjusted unemployment
start of 2002. As such, some of the initial run up in rate is used until 1987 at which point the three month
Calgary prices between 1997 and 2002 is not included average municipal seasonally adjusted unemployment
in Scenario 3 in order that the start point represent rate is used. Statistics Canada only begins publication
the last time that prices found a stable equilibrium. of municipal unemployment rates starting in 1987.
16 The provincial seasonally adjusted unemployment 20 Royal Lepage Survey of Canadian House prices
rate is used until 1987 at which point the 3 month converted to an index with 100=1997
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