If Not a Bubble, Then What?

JMaddock — February 20, 2012

I recently came across this article, arguing that there is no bubble in Canada’s real estate market, yet concluding with a very telling prediction:

“Apart from some overheated niches in the market … we’ll more likely see home prices that simply go sideways for several years, allowing incomes to catch up.”

It seems that even though real estate prices were pushed into a bubble by too much easy credit over the last several years, politicians, central bankers, and establishment analysts still aren’t willing to admit it. Instead, they’ll keep interest rates tantalizingly low and provide even more easy credit, just to deliberately jack up other prices and make sure house prices “go sideways for several years,” rather than experiencing a correction.

But as house prices “go sideways for several years, allowing incomes to catch up,” the real value of real estate will, by definition, be going down. Thus, whichever way you look at it, Canada’s housing market is in a bubble. The government and central bank just don’t want to admit it. They’d rather transform the whole economy into a bubble to match.

Comments

Todd Kuipers says

Given that the housing market is not amenable to arbitrage, I’d suggest you could say that in certain areas in the country the bubble in real estate prices (driven by below market rates of interest) may be in danger of popping.

The most likely significantly inflated housing markets are those where average home price to median income ratios are exceptionally high. Right now Vancouver is the worst in the country (I’ve seen ratios quoted as high as 10 to 1, vs Calgary at about 4 to1).

You can see some stats in this report
http://www.rbc.com/newsroom/pdf/HA-1125-2011.pdf
where affordability is measured by contributions of household income to housing. You’ll see Vancouver is as much as twice as high as other major metro areas.

This isn’t to say that housing prices aren’t inflated (again through central bank subsidized lending, and subsidized loan default insurance), but some areas are highly unsustainable, where others haven’t hit the point where mass defaults are highly likely.

— February 21, 2012

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