FEBRUARY 29, 2012
If I read another ridiculous article proclaiming that Canadian real estate can defy fundamentals in perpetuity simply because we have a measure of population growth, I'm going to bang my head against a wall!
This is the third time I've written about this topic. New readers may want to check out these two prior posts to see why this 'argument' is completely ridiculous:
I won't rehash the content of those posts, but suffice to say that anyone focusing solely on demand (pop growth) is missing 50% of the supply/demand equation. Population growth and house prices do not exist in a vacuum. If sufficient supply is being brought to market fast enough to satiate new demand, we would expect that population growth should have a negligible effect on house prices on a macro scale. Additionally, factors such as availability and cost of credit have a far more significant impact on house prices at the macro level.
Never one to leave it at that, allow me to present some charts that nicely sum up what some folks are missing:
Chart 1: Population growth alone does not mean house prices will defy fundamentals indefinitely. In terms of cumulative population growth, some of the hardest-hit regions in the US experienced population growth in the ten years leading up to their bust that puts the population 'boom' in Alberta (and certainly other provinces) to shame. To see how far large cities in these states have fallen from peak, check out the chart in this post.
Chart 2: Housing starts relative to total population in Canada has been higher in the past 10 years than the US experienced in the 10 years leading up to its bust.
We've built an average of 208,000 new residential housing units annually in Canada over the past decade against demographic demand of 165,000-185,000 annually. What is unsustainable, by definition, will not be sustained. See the last chart for why this is important.
Charts 3/4: Additionally, if we look at the level of housing starts in Canada over the past decade relative to the change in population and compare that to the US in the 10 years leading up to their bust, we see that Canada again has outpaced the US.
Chart 5: The logical argument would then be that perhaps Canada has less total dwellings relative to population than the US had and has simply "caught up". Let's not let the facts get in the way of a good story. Below is the total Canadian housing stock in 2011 versus total US housing stock in 2006 when their bubble burst. As you can see, we have more residential dwellings relative to population than the US had at bust. This is important considering that an estimated 13% of all US homes are now vacant despite low vacancy rates pre-bust. This excess supply or overbuilding has often been cited as one of the factors that exacerbated the US bust. I'd suggest that if they had an overbuilding problem, we may too.
By the way, before you argue that our vacancy rates are low, please read the following post: Are vacancy rates a leading indicator of house prices?
Finally, and as an aside, consider how this level of residential construction buoys both the economy and the labour market. We have more Canadians working in the construction industry as a percentage of our labour force than the US did at peak:
Note that a 'soft landing' in which prices stabilize and construction levels normalize would mean shedding 2% of the labour force, likely leading to a double digit unemployment rate. This is one of the many reasons I think it will be difficult to orchestrate a soft landing in housing. Our economy is simply too levered to this current boom. The car is going 150....on black ice.....and regulators think they can tap the brakes and slow it down in an orderly manner. I'm far from convinced.