Does Canada have an unsustainable housing bubble that might be about to burst? You would sure think so looking at the graph above, which compares monthly home prices in the US (measured by the Case-Shiller Composite-20 Index through November 2012) and home prices in Canada (measured by the Teranet National Bank House Price Index through December 2012) since 2000 (both indexes equal 100 in January 2000). US home prices doubled between 2000 and 2006, when the housing bubble started to burst, leading to a 30% correction in home prices by 2008. Home prices in Canada doubled between 2000 and 2010, and have increased by more than 10% over the last two years, and by 3% over the last year.
Megan McArdle offered some commentary several weeks ago on this issue:
So the mystery remains: why no bubble in Canada? Why no banking crisis? My best working theory was that their banking system was run by Canadians, who are a very sensible people. Yes, I admit that this theory is a little hard to test, but I can offer some supporting evidence: they also sat out the Great Depression, and the Panic of 1907.
Over the last year or so, however, another possibility has been emerging: they didn’t avoid the crisis. They’re just getting it on tape delay.
The Canadian media have started asking the same questions. People are now openly arguing over whether there’s a bubble, though that argument hasn’t attracted much notice on this side of the border. Last summer, the finance minister put new mortgage rules into place in an attempt to engineer a slowdown. Sure enough, house prices are falling.
But many observers expect the setback to be temporary. As long as interest rates are low, they say, Canadians will continue to load up on debt, and the things that get bought with debt.
How this shakes out will matter a lot. It will tell us a lot about the causes of housing bubbles: are they rooted in poor bank regulation, or other fundamentals? And also about how much bank regulation can do to stop them. If the tighter rules do engineer a soft landing, that’s evidence that prudent bank regulators can prevent crises. If, on the other hand, Canada gets its own housing crash, and banking woes, despite the finance minister’s best efforts, that will suggest that there are real limits to how much even the most prudent regulator can accomplish.
MP: So there’s a great experiment underway in Canada’s real estate market, and we’ll know in the next few years whether Canada’s housing bubble leads to a major price correction like in the US or whether a more moderate price correction will cool off Canada’s home price appreciation. As Megan points out, Canada’s sound and stable financial, mortgage, and banking systems were relatively unaffected by all of the major financial and banking crises over the last 100 years that devastated the US. While our historically fragile banking system lead to 9,000 bank failures during the Great Depression, about 3,000 bank failures during the S&L crisis, and 427 bank failures from 2008-2011 from the “Great Recession,” Canada experienced almost no bank failures during any of those financial and banking crises. Somehow Canada’s long history of surviving unscathed from America’s financial crises, despite the close integration of the two economies, makes me think that Canada once again will out-perform the US when it comes to the housing bubble and price correction. Look for a moderate home price correction in Canada over the next few years, but nothing close to the 30% home price crash in the US.