JUNE 23, 2011
We've spent a great deal of time analyzing the drivers of house price appreciation in Canada. We know the usual suspects...the ones that drive house prices in normal times. And we've examined them all and found them wholly unable to account for the unprecedented rise in house prices in Canada: Rents (cities and provinces), Incomes (cities and provinces), GDP (part 1 and part 2), Inflation. House prices have massively outpaced them all.
We've also examined the supposed drivers of real estate appreciation: Population growth and immigration. The reality is that these two have a negligible effect on real estate values except in situations where land use regulations are highly restrictive. It's supply and demand, baby! Population growth increases demand, but don't think for a second that our construction industry in Canada isn't just as motivated by profits as any other industry. Demand will not go unmet....unless restrictive land use regulations are in play, in which case they contribute to boom-bust cycles (reference this gem by Leith Van Onselen for an excellent read). Further to that point, check out the construction activity in Canada's larger cities. It's been plenty to satiate demographic demand.
And just for fun, we examined how demographics gave real estate a 0.5% annual tailwind for the past 40 years. That party is now over. Demographics are now estimated to exert a 1% per year drag on house prices going forward. Bummer.
My position has long been that the driver of house price appreciation in Canada over the past decade has been primarily the result of the unprecedented expansion in debt caused by the loosening of CMHC mortgage insurance requirements and the removal of the maximum insurable mortgage ceiling....facilitated by a falling interest rate environment, a new mass perception of the 'investment worthiness' of real estate as an asset class, and the emergence of housing as a form of conspicuous consumption. But if we boiled them all down into one word, it would be this: DEBT! And the pace of debt accumulation is not sustainable... ergo, the pace of house price appreciation is not sustainable. Nor are house prices at current levels relative to underlying fundamentals.
Not convinced? Behold!....presented without further commentary...
...well okay. Maybe one last comment for
Sams Mango the naysayers. Good luck finding a more obvious relationship using any other variable.