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Canadian Housing-Bubble Chart Book





We continue to believe that Canadian real-estate is an<br /> asset class with an asymmetric risk profile. Simply put, the upside<br /> price potential to real estate is limited due to already extreme<br /> valuations yet the downside risks are significant from a number of<br /> factors including:







Navigating a Sea of Opportunity



Canadian Housing-Bubble Chart
Book



UPDATE: An
update of this report was published July 2012
(
click
here to view
)

In
response to feedback received from our October 24th, 2011
publication, “Enhanced Real Estate
Chart
Book“, we are providing this
update consisting of 34 charts and tables, including three new summaries, that
comprise an exhaustive look at
trends and valuations of Canadian real estate. This summary
has been
generated solely for educational purposes and we would like to thank
the
UBC Sauder School of Business – Center for Urban Economics and Real
Estate, Teranet and National Bank, Statistics Canada, Standard
&
Poors, and Google
for making numerous data elements and housing price indices available
for generating the following summaries. For definitions of the data
used in this summary please visit the following sites:

UBC Center for Urban
Economics and Real Estate
.

Teranet – National Bank Home
Price Index TM
.

Statistics Canada for access
to their Cansim database
.

S&P Case-Shiller Home
Price Indices
.

Google Trends.


 
We welcome feedback,  email realestate@pacificapartners.com
or tweet: @pacifica_prtnrs

Summary

Canadian Real Estate BubbleWe
continue to believe that Canadian real-estate is an asset class
with an asymmetric risk profile. Simply put, the upside price
potential to real estate is limited due to already extreme valuations
yet the downside
risks
are significant from a number of factors including:

  • Policy changes involving
    the tightening of credit availability to Canadian consumers.
  • Rising interest rates as the Bank
    of Canada ends its period of emergency rates implemented since the
    financial crisis.
  • Over-supplied housing inventories.
  • Reversion to the mean of long term
    fundamental economic relationships eg: price to rent ratios, price to
    income, present value of cash flows from rental properties, home price
    appreciation to income growth, home price appreciation to GDP growth,
    etc. 
  • Broad economic consumer woes
    resulting from stubbornly high
    unemployment, weak income growth, and higher-than-targeted inflation.

As stated earlier: Although
housing prices are impacted by a number of economic and
demographic factors, we believe that the prevailing themes stimulating
Canada’s housing market over the last decade have been twofold:
Firstly, the organic growth
of the Canadian economy in response to global demand for commodities
has resulted in wealth accumulation and economic growth which can
justify a component of house price appreciation. Secondly,
over
the
last decade, there has been a rapid increase in Canadian mortgage and
household debt which served to inflate housing prices through financial
leverage. Both of these two factors, one sustainable but subject to
contraction risks (GDP growth) and the other unsustainable for
the long term (enhanced leverage), have merged into the almost
unprecedented housing bull market.

Our
outlook on Canadian real-estate remains negative and we believe
Canadian
housing will begin an extended contraction phase resulting in a move of
home prices back towards long term sustainable valuations.

Chart
summaries are provided below and are divided into the following
six categories:

Section A
(table 1 and charts 1 & 2):NEW

Canadian
Real Estate Senitment
,  Wage Growth, and Housing
Supply and Demand

Section
B
(charts 3 through 10):
Canadian Real Estate Market Trends, Valuations, and Drivers of Home
Prices

Section
C
(charts 11 through 18):
Canadian Real Estate Unemployment, Vacancy Rates, and Home Price Growth
in Major Canadian Cities

Section
D
(charts 19 through 22):
Canadian and US Real Estate versus Stock Markets (TSX and S&P
500)

Section
E
(charts 23 through 26):
US Housing Price Performance vs. Major Canadian Cities

Section
F
(charts 27 through 33):
US Housing Price Performance vs. Major Canadian Cities
 


 

Section A (Table 1 and Charts 1
& 2):

Canadian Real Estate Sentiment, Wage Growth, and Housing Supply


 

Table 1) Housing Bubble Sentiment
Indicator – NEW

Canadian
Real Estate bulls have continued to cite the fact that real estate
valuations have appeared “expensive” for years, yet, the momentum
has continued to take prices higher. Real estate bears, on the other
hand, claim that home prices have been so stretched from fundamental
valuations that past price momentum is irrelevant.  As with
all asset classes, a change to investor sentiment regardless
of the
catalyst that triggers the change (eg. rising interest rates,
government policy, extreme valuations, etc.) will dictate future real
estate returns.

To attempt to monitor real estate sentiment analytically, we examine
the number of
Google searches for the term “housing
bubble
“, summarized by the originating city of the
searches.  The table below displays the top ten cities
globally in which the term “housing bubble” was searched in each year
from 2004 to 2012. The
highest number of city-sourced searches for
“housing bubble” arise from Canadian cities, namely Vancouver, Toronto,
Calgary and Edmonton.
 The progression of the
trend is ominous
as California cities dominated much of the top searches until 2009,
after which Canadian and Australian cities began to emerge.
 Currently, four of the five cities that
dominate global searches of “housing bubble” are Canadian,
specifically: Vancouver, Toronto, Calgary, and Edmonton.

Canadian Real Estate
Click Here to view a larger version of
this table
.

 


 

Chart 1) Provincial wage growth
versus home price appreciation:  Vancouver, Victoria, Calgary,
Edmonton, Regina, Winnipeg, Ottawa, Toronto, Montreal, and Halifax – NEW

Canadian
wage growth versus home price appreciation from 2001 to 2011 is
reported below.  Average weekly wage growth per home province
of each city is reported.  Also, only wages of full time
workers between the ages of 25 and 54 were examined in an attempt to
capture changes to the buying power potential of
first-time-homebuyers.

In all ten markets examined, home price appreciation far surpassed
average weekly wage growth.  The markets with the largest
difference between wage growth and home price appreciation in
descending
order are:  Regina, Winnipeg, and Vancouver.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Chart 2) Real Estate Supply and
Demand Growth: Vancouver,
Calgary, Edmonton, Winnipeg, Ottawa, Toronto,
Montreal, Halifax – NEW

In
all major Canadian housing markets, save Ottawa, housing capacity
growth has exceeded population increases between 2001 and 2011.
 Calgary, Edmonton, Montreal and Halifax are what we would
consider to be “severely over-built” with a population growth to
capacity growth of 70% or lower.  Housing capacity is defined
as the number of individuals that can be reasonably housed in new
housing units, whether or not a new housing unit sits unoccupied,
under-occupied, or over-occupied.  Assumptions made may be
more appropriate for some markets than others.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Section B
(charts 3 through 10):
Canadian Real Estate
Market Trends, Valuations, and Drivers of Home Prices


 

Chart 3) Canadian home prices over
discounted rent valuation: Vancouver,
Calgary, Edmonton, Toronto, and
Montreal

In
theory, residential real estate prices should equal the discounted
sum of future rental income. As a result, we have attempted to estimate
fair values for residential real estate in major cities by comparing
actual prices to theoretical discounted prices. In theory, this ratio
should equal one and deviations from this value should regress back to
the value one over time.
Note, discounted cash flow calculations are highly volatile
and dependent on underlying model assumptions. However based
off of this
methodology, Canadian real estate appears extremely expensive in most
major markets, with the exception of Toronto.

Canadian real
estate only appears somewhat reasonably priced if the assumption that
current
emergency low interest rates continue indefinitely into the
future. Any increase
in interest rates to even pre recession levels (which were also
historically low) causes Canadian real estate as a whole to appear
grossly overvalued.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Chart 4) Canadian misery index –
National,
Vancouver, Toronto, and Montreal

The
Canadian misery index (inflation + unemployment rate) has been
climbing since hitting a low at the end of the first quarter
2008. Toronto misery is at levels not seen since 1995. All three major
Canadian cities are at or above misery levels similar to those of the
early 2000s. Canadian interim misery index (not quarter end data)
indicates that national
misery is currently just below 10%, last seen at the end of the first
quarter
of 2003.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Chart 5) Canadian household credit
as a percentage of nominal GDP

Canadian
household credit, both consumer credit and residential
mortgage credit, has increased sharply over the last decade. Total
credit as a percentage of nominal GDP increased from under 60% during
the third quarter of 2001, to the current levels of 90%. The
surge in Canadian
household debt is predominantly comprised of residential mortgage
credit as can be observed from the chart below. Canadian consumer debt
accumulation appears to have been exhausted and is currently in a stall
state of approximately 90% of GDP.  Lack of debt accumulation
is a headwind for further real estate price appreciation.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Chart 6) Growth of Canadian home
prices in comparison to nominal GDP growth and mortgage credit


Appreciation in Canadian home prices (from January 2000 onward) has
more
closely reflected growth in mortgage credit rather than growth in
Canadian nominal GDP.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Chart 7) Canadian real (inflation
adjusted) rent index: Calgary,
Vancouver, Edmonton, Winnipeg, Montreal,
Halifax, Ottawa, Toronto

Canadian
residential rent increases have not historically kept pace with
inflation. While Canadian housing prices have surged higher, renting
has become relatively cheaper. This is evident from the chart below
indicating long term trend of real-rents (inflation adjusted) has been
downward in most Canadian cities.

This has implications for retirees expecting to utilize
rental income to finance long term retirement expenditures. As with non
inflation indexed bonds, cash flows from Canadian real estate may prove
to be ineffective to satisfy future increases in the cost of living.
 This is in addition to the fact that residential real estate
in Canada already possess low rental yields, or the net annual rental
income generated from a property dividend by the current market value
of the property.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Chart 8) Total employment as a
percentage of population in major Canadian cities: Vancouver, Calgary,
Edmonton, Winnipeg, Ottawa, Toronto, Montreal, Halifax

Total
employment as a percentage of population in Toronto, Calgary, and
Vancouver is similar to their respective mid 1990s levels. All major
Canadian cities have employment levels off from their highs with the
exception of Edmonton which has followed volatile multi-quarter cycles
since mid 2004. This
observation corresponds with the increase
in the overall Canadian unemployment. Note, individual cities will have
varying “natural” levels of employment based off of age demographics
and other factors that impact labour force participation.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Chart 9) Canadian real (inflation
adjusted) home price index: Vancouver,
Edmonton, Toronto, Calgary,
Regina, Montreal, Victoria, Winnipeg

Long
term real (inflation adjusted) annual home price returns have
exceeded 3% in Vancouver and Victoria BC, while exceeding 1.5% in
most other large Canadian cities. Edmonton is the only exception with a
compounded annual house price appreciation of 0.64% over the examined
period.
To put this into perspective, numerous examinations of long term real
US home price appreciation
indicate that they have only slightly exceeded inflation at an
approximate annual
compounded rate of 0.5% per year.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


 

Chart 10) Canadian home prices to
rents: Vancouver, Calgary,
Edmonton, Toronto, Montreal

Canadian
home prices are currently not inline with historic multiples
of residental rental prices. Most extended from historical norms are
Vancouver, Montreal, and Toronto. While Edmonton and Calgary, are
elevated from historic averages but below previous witnessed
highs.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 


  

Section C (charts
11 through 18):
Canadian Real Estate
Unemployment, Vacancy Rates,
and Home Price Growth in Major Canadian
Cities


 

The following charts display a time
series of unemployment, vacancy rates, and quarterly home price changes
for: Vancouver, Calgary, Edmonton, Winnipeg, Ottawa, Toronto, Montreal,
and Halifax.

 

Chart 11) Vancouver unemployment,
vacancy rates, and home price growth

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 12) Edmonton unemployment,
vacancy rates, and home price growth

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 13) Calgary unemployment,
vacancy rates, and home price growth

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 14) Winnipeg unemployment,
vacancy rates, and home price growth

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 15) Ottawa unemployment,
vacancy rates, and home price growth

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 16) Toronto unemployment,
vacancy rates, and home price growth


Canadian Real Estate

Click Here to view a larger version of
this chart
.

 

 

Chart 17) Montreal unemployment,
vacancy rates, and home price growth

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 18) Halifax unemployment,
vacancy rates, and home price growth

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Section D
(charts 19 through 22):
Canadian and US Real Estate versus Stock Markets (TSX and S&P
500)


 

Chart 19) From 1977 – Canadian real
estate
versus the TSX index

Displayed
in the chart below are Canadian home prices as a ratio of the
TSX index (Canadian stock market) from 1977. Seven cities are included:
Vancouver,
Victoria, Calgary, Edmonton, Regina, Toronto, and Montreal. Over the
long term, home prices in Canada have
lagged price appreciation of stocks. Note, the stock index below is a
“price index” and therefore, excludes payment of dividends.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 20) From 1998 – Canadian real
estate
versus the TSX index

Displayed
in the chart below are Canadian home prices as a ratio of the
TSX index (Canadian stock market) from 1998. Nine cities are included:
Vancouver,
Victoria, Calgary, Edmonton, Regina, Ottawa, Toronto, Montreal, and
Halifax. Over the medium term, home prices in Canada have
outperformed price appreciation of stocks. Note, the spike on the
charts observed at March 2009 represent the stock market bottom during
the financial crisis.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 21) From 1987 – US real
estate versus the S&P 500 index

For
comparison purposes the following two charts (Chart 20 and Chart
21) have also been
included which display US home prices as a multiple of the
S&P 500 (US stock market).
The chart immediately below displays US home prices as a ratio of the
S&P
500 index (US stock market) from 1987 onward. Fourteen US cities are
included in the chart below as well as a composite index of ten major
US Cities. Over the medium term, home prices in Canada have
outperformed price appreciation of stocks. Note, the spike on the
charts observed at March 2009 represent the stock market bottom during
the financial crisis.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 22) From 1998 – US Real
Estate versus the S&P 500 Index


For comparison purposes the following chart and the chart above have
been included which display US home prices as a multiple of the
S&P 500 (US stock market).
The chart below displays US home prices as a ratio of the S&P
500 index (US stock market) from 1987 onward. Fourteen US cities are
included in the chart below as well as a composite index of ten major
US Cities. Over the medium term, home prices in Canada have
outperformed price appreciation of stocks. Note, the spike on the
charts observed at March 2009 represent the stock market bottom during
the financial crisis.

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Section D (charts
23 through 26):
US Housing Price Performance vs. Major Canadian Cities


 

The following charts indicate relative
performance of US home prices
to Canadian home prices in four Canadian markets: Vancouver, Calgary,
Toronto, and Montreal. US home prices reflect Canadian dollars by
applying a timely CAD/USD exchange rate to the US home price index.

 

Chart 23) US Home Prices versus
Vancouver Home Prices

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 24) US Home Prices versus
Calgary Home Prices

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 25) US Home Prices versus
Toronto Home Prices

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 26) US Home Prices versus
Montreal Home Prices

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Section E
(charts 27 through 33):
US Housing Price Performance vs. Major Canadian Cities


 

The following charts indicate annual
changes in monthly home prices and “sales pair” volume. Data has been
generously made available by Teranet – National Bank for: Canada,
Vancouver, Calgary, Ottawa, Toronto, Montreal, and Halifax.
 Please visit http://www.housepriceindex.ca/
for the definitions and methodologies used
calculating their indices.

 

Chart 27) Canadian Home Price and
Sales Volume Change

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 28) Vancouver Home Price and
Sales Volume Change

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 29) Calgary Home Price and
Sales Volume Change

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 30) Ottawa Home Price and
Sales Volume Change

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 31) Toronto Home Price and
Sales Volume Change

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 32) Montreal Home Price and
Sales Volume Change

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

 

Chart 33) Halifax Home Price and
Sales Volume Change

Canadian Real Estate
Click Here to view a larger version of
this chart
.

 

Pacifica
Partners – Capital Management

Navigating
a Sea of Opportunity

Disclaimer:

This report is for information purposes only and is neither a
solicitation for the purchase of securities nor an offer of securities.
The information contained in this report has been compiled from sources
we believe to be reliable, however, we make no guarantee,
representation or warranty, expressed or implied, as to such
information’s accuracy or completeness. All opinions and estimates
contained in this report, whether or not our own, are based on
assumptions we believe to be reasonable as of the date of the report
and are subject to change without notice. Past performance is not
indicative of future performance. Please
note that, as at the date of this report, our firm may hold positions
in some of the companies mentioned.

Copyright (C) 2012 Pacifica Partners Inc. All rights reserved.


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