JULY 07, 2011
Readers of this blog will recall that a few months ago, I did a two-part series on house prices and income growth in Canada. My philosophy is that when better data becomes available, we analyze it. In this case, that first series used a data set from Stats Canada that unfortunately only extended back to the early 90s.
However, I have been able to access a great data set from the Conference Board of Canada: Personal disposable income. This data set actually goes back further than the house price data set. Personal disposable income is a great measure since it levels the playing field in terms of differential tax rates across the country.
Stats Canada defines personal disposable income as:
“the amount left over after payment of personal direct taxes, including income taxes, contributions to social insurance plans (such as the Canada Pension Plan contributions and Employment Insurance premiums) and other fees. It is a measure of the funds available for personal expenditure on goods and services and personal saving for investments as well as personal transfers to other sectors of the economy.”
As such, I am quite pleased to present the latest on house prices and incomes in Canada. Similar to the house price and GDP series, there are a couple notes about the data:
- The data set for Quebec is from the Fédération des chambres immobilières du Québec. In 2002, they switched to a weighted average, meaning data before and after the switch are technically not comparable. I've done it anyway as I believe the difference is negligible.
- In the early 80s, there was a significant house price correction in the prairie provinces which heavily skewed the charts showing the cumulative growth in house prices and incomes. I instead chose to begin these data sets where the house price/personal disposable income ratio again reached its long-term norm. The data purists may contend that I have manipulated these data sets since the start date is advanced by a couple years. I'll take my chances.
Here's the data. Discussion to follow...
Apologies to my east-coast readers. I'll try to tackle your data later this week.
Certainly we can see that house prices have outpaced income growth over the last decade in all provinces. The ratio of house prices to personal disposable income is also at all time highs in all provinces except Alberta. I'll go ahead and predict exactly what the detractors will say: "You have to adjust for purchasing power as interest rates have fallen."
Fair enough. I don't at all dismiss the notion that interest rates have been a major driver of house price appreciation. The general relationship is quite obvious.
But I do think they take a back seat to the general availability of credit and the willingness of Canadian home buyers to take on said credit. I maintain that this is the real driver of house prices in Canada over the past decade:
But for those who insist that it is entirely interest rate-driven, perhaps they could explain how we had a positive correlation between interest rates and house prices for a four-year period during the past decade. I'd love to hear that explanation.
While falling interest rates have enabled people to carry larger mortgages and have kept affordability seemingly within its long-term range, I would heavily caution against relying on such affordability measures as a barometer of housing market health.
Finally, the impact that BC is having on the national average can certainly be seen in the following chart depicting the price/personal disposable income ratio of all provinces:
Note that Ontario is right on the Canadian average, BC is way above it, and all other provinces fall below it. This is not to say that there is not some froth and unsustainable house price increases in other provinces, rather it should highlight just how far BC prices will fall.
For those interested, I will be providing historic price/personal disposable income data for the following cities:
Victoria, Edmonton, Regina, Saskatoon, Winnipeg, Hamilton-Burlington, Kingston, Kitchener-Waterloo, London, Ottawa, St. Catharines, Thunder Bay, Durham region, Windsor-Essex, Saint John, and Halifax.
Watch for that later this weekend.