Comparing Canadian and US House Prices

To compare Canadian and US house prices we can use the US-based Case-Shiller house price indexes overlaid with the Canadian-based Teranet house price indexes. The two share comparable methodologies, using same-sales pairs with extraneous discards. Since the house price indexes are referenced to a point in time, and not a specific valuation, we will need to re-scale the results to some value for an apples-apples measure. I produced these results about a year ago and have updated the values to the latest data. The incongruity between US and Canadian HPIs is evident:

The Case-Shiller  uses a baseline of January 2000 = 100, the Teranet is June 2005. If, for example, Canada was in the midst of a speculative bubble in 2005 and the US were more fairly-valued in 2000, it means the scaling factor for Canadian cities will under-report gains. One method to compensate for this is to re-scale the indexes and align the troughs:

This graph finds the minimum indexes in the 1990s and rescales those values to be 100. Then the data are time-shifted to align these minima. I have CPI-deflated the results. Based on this measure, for what it's worth, while Vancouver is currently more overvalued than any US city, index gains over the past year have vaulted cities like San Francisco and San Diego to be rather close to Vancouver. As a sidenote, Jim Sutherland, a local reporter, opined to me last Wednesday that some coastal US cities are showing valuations approaching those of Canadian cities, even Vancouver. This simple analysis would tend to support this view.

Betting on Vancouver's House Price Crash

A (thinly-traded) bet on prediction market Intrade is as follows: "Monthly House Price Index for Vancouver to be 121 or less before the end of 2013". The "House Price Index" is the Teranet HPI. The Vancouver Teranet HPI is currently 170, roughly at its all-time high. To hit 121 means a 30% drop in about 16 months for this bet to pay.

If Vancouver were to follow the US's trend the chart below showing HPI changes from peak gives some indication at how precipitously Vancouver's HPI could drop below 121. Note that the US cities did not experience house price crashes at the same time -- Seattle most notably was delayed by about a year or so -- but look at how closely the brunt of the price drops were aligned from peak, roughly 12-24 months after.

The graph below includes two measures for Vancouver, one with the peak at June of 2012, the other with a "shifted" de facto peak of August 2011. This was done because as one can see from the US cities the peaks were followed by about a year of mulling near or at peak prices before dropping significantly. If one assumes that the actual "peak" for Vancouver was August 2011 and the HPI is now at the advent of that "Wile-E-Coyote" moment, the pregnant pause before the big push downwards, one could think Vancouver has a fighting chance to hit the "121 or less" threshold before EOY2013 target.

Betting on the Intrade contract being true looks to be in effect arguing that Vancouver's "peak" was actually last year and that Vancouver is set for a US-style house price crash. Place your bets.

Comparing US Prices at peak to Canada Today

It's always refreshing to see new data to analyse but it's equally as refreshing to see existing data analysed in a different way. Over at vancouvercondo.info poster vibe performed some analysis comparing the price-income ratios in Canada today to the US in 2006, around the peak of their prices [jesse: I inserted an updated graph]:

"...there was some discussion about whether Canada is in a real estate bubble. Everyone pretty much agrees about Vancouver, but here are a couple of points that were made about the national scene:

1. It is reasonable to claim that there is not a housing bubble in Canada because only certain areas are over inflated.
2. Vancouver's very high prices skew the national average and cause Canada to look worse than it really is.

One thing I think we can all agree on is that the US did have a housing bubble. Well I put together a spreadsheet that I feel shows that affordability is about as bad across Canada as it was in the US at their peak. It also shows that Vancouver is not skewing our national data any more than the most overpriced cities in the US were skewing their data. In order to measure affordability I used house price to personal income ratios. I compared the 20 cities used in the Case Shiller Housing Index to the 6 cities used in the Teranet Housing Index. The US data is from 2006 while the Canadian data is from 2009.

I think the following graph most clearly illustrates my point:

Vancouver is the only Canadian city with a ratio over 9, while the US had 3: LA, San Fran and San Diego. Toronto is the only Canadian city with a ratio between 5 and 9, the US had 9 in this range. The under 5 range looks bigger for Canada but we have more population covered by our index than they do by theirs. The important thing is that the percentage of each nations population living in cities with elevated ratios is similar.

The distribution and average ratios for both countries are almost identical.

(Highlighting above is mine.)

Almost identical.

These data would be less of a concern if sales volume were low but, based on the volume of sales in the past several years, we know a not-insignificant portion of the population have bought at high prices. In addition we know the make-up of personal debt in Canada has been trending into the "unsustainable" territory, throwing into serious question the argument that future income gains justify high prices, even in part.

Gird yer loins!

Chart Extravaganza!!

Case Shiller and Teranet both released data for May 2009 last week and I have compiled / updated some charts to display this data.

The first chart shows the monthly percent price change in selected cities. What I would note here is the clear seasonal effect on price movement. Prices are more likely to increase in the spring and summer and more likely to decline in the fall and winter.



I recalculated the Teranet and Case Shiller Indices to show the same base date in 2000 so we can view the results of the boom and bust in the US and Canada in a comparable way. It is amazing to me how high prices got and how far they have fallen in some places - almost back to pre-boom levels.



The last chart is the now well known price decline from peak chart. I added Calgary upon request from some regular readers from Calgary. The smoothing (3 month moving average) that takes place in the Case Shiller and Teranet data really makes a big difference in how peaks and price changes are displayed.

Vancouver Benchmark versus Case Shiller Update

A quick update on GV benchmark compared to various US markets as tracked by the Case-Shiller HPI. I will show two graphs. One is the raw benchmark value the other is a 3 month moving average. The 3 month moving average (trailing -- this is not quite correct and I should be using balanced average as Thompson on RET pointed out but hey it is what it is) is probably a better comparison to Case-Shiller. But still, one can see the "spring bounce" is here. If you're buying on technicals, hey, throw in some moving averages to this graph and justify buying at today's values. Good luck with that. We'll have speaks in 2012.





Update

I have run the numbers comparing the Teranet HPI to the benchmark. In the short run, the Vancouver benchmark tracks Miami very well on the above graph, but even more surprising is that Toronto's HPI is falling faster than Vancouver's from peak, though Vancouver has fallen more in % terms. I will post the graphs in a subsequent post. We should not be surprised that the benchmark deviates from the HPI, though from what I have seen in the long run the two will eventually track each other reasonably well. It looks as if the benchmark has "overestimated" price drops but may now be "underestimating" them.

The Spring Bounce

We have been hearing reports about Vancouver house prices stabilising in recent months. Are we at bottom or is this a bear market rally, the so-called "spring bounce"? The Pope put up an interesting graph of Sacramento house prices, where there were two such spring bounces before a regression to more price drops. It appears there are other markets that have exhibited a temporary bounce up in sales before returning to falling prices. Below is a graph of some notable American markets' prices:


Cities with some semblance of a bounce include: Seattle, Portland, San Diego, and San Francisco. Cities that did not have a spring bounce include: Miami and Phoenix. Note Vancouver's bounce looks sharp because we are using the benchmark where the other cities use the Case-Shiller HPI, which averages 3 months' worth of data.

There is no credible evidence to make me believe we are NOT witnessing a "spring bounce". The fundamentals point to lower prices and, while Vancouver may not see as meteoric a fall as did Miami, I am expecting more price weakness in the second half of 2009.

Case Shiller House Price Index - October 2008 Data

The inspiration for the chart above (click to enlarge) comes from the Seattle Bubble Blog.. The chart shows the total decline in value from peak pricing in all of the 20 Case Shiller markets plus I've added Vancouver using the REBGV Benchmark House Price Index. I have started all the markets at 100 at their peak month so all the markets start out at the same spot.

Vancouver's real estate prices are falling faster than any US market 7 months into our correction and it sure seems like that won't be changing anytime soon with nearly 20 months of inventoryin the REBGV area as of December 31st, 2008.

Miami, Phoenix, Los Angeles, San Diego, San Francisco, Detroit and Las Vegas are the biggest decliners to date with total declines in the range of 35 - 40% off peak pricing 2 years into the correction. I am optimistic that we may see a bottom forming in some markets late in 2009 but more likely early 2010 in the US. Affordability has been restored in many places so it is realistic to suggest that we could see some stabalization.