APRIL 04, 2011
Note to my readers: Due to some technical problems, I was not able to make any posts this weekend. My apologies.
In part 1 of this mini series, we examined house prices from BC east to Ontario. Today we will examine provinces east of Quebec. As mentioned before, Quebec resales data is not owned directly by CREA, so I've had to endeavor to obtain that data from the realtor association in Quebec. I'm hoping to have that data later this week to complete the series.
By and large, New Brunswick house prices look fairly valued on the basis of GDP per capita.
Not too much to be concerned about here. Housing has largely paced the level of economic expansion, perhaps even lagging slightly from the late 90s onwards.
Once again, nothing to be particularly alarmed by here. Housing may be marginally over extended, but certainly not meaningfully.
Prince Edward Island
PEI is an interesting case. Once again we see that the particular starting point has a significant impact on the overall trend. In this case, housing lost some 30% of its value in the three year period after 1981 (the start of the graph). Using 1981 as a starting point yields a graph that indicates serious undervaluation in real estate on the island.
This is rather curious. If we look at house prices divided by GDP per capita, we note that in 1981 at the start of the graph, housing on the island was 7 times GDP per capita, or roughly 75% above its long-term mean. The subsequent correction brought house prices back in line with underlying GDP.
Once again at the risk of being accused of data mining, I advanced the start date. If indeed PEI was correcting from a level of pre-existing overvaluation in 1981 as the above chart suggests, then it would make sense to advance the time line. What a difference three years makes...
Based on the metric of GDP per capita, house prices in PEI reflect fair valuation and perhaps an degree of undervaluation.
On the basis of per capita GDP, house prices in Newfoundland are by far the most reasonable in Canada. In fact, they appear to be significantly undervalued.
The fine folks in Newfoundland can sleep easy knowing that a nation wide housing bust will likely impact them marginally.
On the basis of per capita GDP, there seems to be a clear east/west divide between the 'overvalued' provinces and those that appear fairly valued by this metric. What may surprise some of my readers is that this line seems to lie east of Ontario, as most provinces from Ontario to BC exhibit significant levels of housing overvaluation.
Using the data from this post and the previous post in this series, we can arguably divide the provinces into two groups: The overvalued/bubble provinces and the undervalued/fairly valued provinces. The provinces seem to break down as follows:
BC, Alberta (arguable based on starting point), Manitoba, Ontario
Combined contribution to Canadian GDP: 70%
Saskatchewan, New Brunswick, Nova Scotia, PEI, Newfoundland
Combined contribution to Canadian GDP: 10%
Quebec (I'm working on getting house price data for Quebec), Northwest Territory, Yukon, Nunavut.
Combined contribution to GDP: 20%, of which Quebec accounts for nearly 19%.
The point here is that the provinces that we should be concerned about represent a whopping 70% of our GDP, and possibly as high as 90% depending on how fairly valued Quebec real estate is. This should concern us. As so often discussed on this blog, falling house prices are a catalyst for retrenching consumers, falling employment, and weak economic growth.
It is highly unlikely that any political party will have the political will power to address this issue. Indeed, if early election promises are any indication, all major parties will likely be all too willing to shovel more money at the house-owning electorate:
"Among the Liberals' new proposals was a green renovation tax credit worth $2,025 for expenses of up to $13,500 on new windows, doors and roofing."
Yet more fuel for Canada's HGTV addiction. The data continues to suggest that significant overvaluation exists on a nationwide basis. Regionally, most areas of the province seem to have engaged in some levels of irrational exuberance. I'm continuing to work with the data. Up next, another look at the role of mass psychology by examining new mortgage originations as a percentage of total population. Stay tuned!