Sorry, Hosers—Canada’s House Prices Are Way Too High

A female member of the Royal Canadian Mounted Police (RCMP) stands guard at Horse Guards Parade in central London, on May 23, 2012, as the RCMP take part in the Changing of the Guard ceremony.

Photo by Carl Court/AFP/Getty Images

Various Canadian sources weren’t happy with my Canada Day post, suggesting that the one chart I used is hardly conclusive evidence of a Canadian housing bubble. And I agree. Except that the bubble is real.

Let’s go through the whole thing. First off, in inflation-adjusted terms Canadian houses have gotten way more expensive:

And it’s not just objective scarcity-of-housing stock, the price of houses has gone up relative to rents:

At the same time, prices have gotten less affordable relative to Canadians’ incomes:

Some people told me that this should all be OK because Canada has a much better-regulating mortgage-lending market and hasn’t seen the proliferation of crazy credit products that happened in the United States. And perhaps that’s true. But with whatever credit products Canada does have, its citizens have been reacting to their increasing housing wealth by taking on more debt relative to income:

So the stage is set for prices to decline to come back in line with rents and incomes, leaving lots of household balance sheets suddenly underwater.

Important efficient markets hypothesis sanity check: If you’re so smart, how come you’re not getting rich off this insight? The key thing about housing markets in places like Canada and the United States is that it’s extremely difficult to exploit arbitrage opportunities. My personal advice to you if you own a nice condo in Toronto or somewhere is to sell it, invest the profits in something very diversified, and go rent yourself a nice apartment. But unless you happen to already own a Canadian house, it’s not obvious to me how you’d go about taking a short position in Canadian housing.

But I’m not a hater. I love Canada. I like Canadian bands, I had a Canadian girlfriend in college, I’m a fan of Canada’s majoritarian parliament and de facto unicameralism, I think single-payer health care is great, etc. I just think it’s in for a house price decline. The good news is that with appropriate central banking it should be possible for house prices to decline without causing an extended period of mass unemployment. The bad news is that as many countries have been discovering lately, appropriate central banking is not always around when you need it.