Is the Canadian Housing Market in some sort of Bubble?

Posted by David Rosenberg - Gluskin Sheff

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There are very few “mainstreet” people I take the time to listen to but ironically, two of them both had long careers at Merrill Lynch before moving on. One is economist David Rosenberg and the other is Technical Analyst Walter Murphy – Peter Grandich


Well, when price-to-rent and price-to-income ratios are between 15% and 35% overvalued, you know that something isn’t quite normal.  Not to mention the fact that mortgage debt relative to after-tax income and homeownership rates have hit all-time highs.  And even with extremely low interest rates, affordability is tied for its lowest level on record because of the fact that average home prices have exceeded wage growth by such a wide margin over the past year.

But until recently, most housing markets were tight in terms of sales-to-listing ratios and the like.  The catalyst to any bubble is usually the supply response, which is why the 5.9% bounce in Canadian housing starts in December, to 175k (annualized) units, was less “optimistic” than it seems on the surface — notwithstanding the boost to current GDP estimates.  Canadian housing starts are now up 47% from their 2009 lows and there is likely more construction in the pipeline because residential permits soared 9.7% alone in November and are up four months in a row — and up 72% from their 2009 lows.

As an aside, when central bank officials begin to dismiss the possibility there being at the least excesses in the real estate market (the word “bubble”, we can assure you from our previous life in the U.S.A., is extremely emotive), it conjures up the image of all the folks at the Fed who said the same thing back in 2004, 2005 and 2006.  Go back and read the speeches by the Fed officials during those years and you will probably end up chuckling.

Ed Note: other topics in Today’s Breakfast with Dave below or just read more HERE.

• While you were sleeping — equity markets overseas posting declines today in the aftermath of Alcoa’s miss; economic data globally were actually constructive

• Three major risks to the outlook — energy prices, mortgage rates and home prices

• Sentiment on the U.S. equity markets very bullish … from a contrarian standpoint, this is bearish

• Valuation estimates on the S&P 500 — a combination of valuations and technical factors imply that the level on the S&P 500 ranges from a low of 840 and a high of 1,350

… more HERE.