Housing bubble? Depends on whether you read the numbers or the market

No matter what RSS feed you read each morning, chances are there’s at least one story on Canada latest housing market statistics. Failing that, there’s always a story highlighting the precarious nature of Canada’s real estate market.

So, it’s more than a little surprising when a report, released today by Ben Myers, SVP for Fortress Real Developments, suggests that the analysis of the housing market requires a bit more context, and a lot less speculation.

OK, so Mr. Myers doesn’t actually state this, but his in-depth analysis of housing market statistics and media coverage definitely highlights how distorted those quarterly and annual statistics can become when not reported in the larger contextual arena.

For example, last week the CMHC released a report showing that housing starts were going to “ease from a range of 179,600 to 189,900 in 2014 to a range of 163,000 to 203,200 in 2015.” (Housing starts are the number of new housing units that were begun during a particular period. The statistics is used as a leading predictor of the country’s economic strength.)

Sounds bad, doesn’t it? Now, what if I were to tell you that current and projected housing starts are in line with 50-year averages and just a tad below the 10-year housing start average of 206,000? Doesn’t sound quite as bad, does it?

“It’s easy to look at year-over-year statistics, see big increases and decreases, and come to some glaring conclusions,” explained Myers during a phone interview yesterday. “The key is whether or not the housing market is veering off long-term trends.”

Accordingly, Myers analyzed both the current and the long-term housing market numbers and, as a result, he sees a much rosier picture for Canada’s housing market.

“The Canadian real estate market is relatively stable as a whole,” says Myers. “Supply and demand are balanced, demographics are favourable, and prices are not going down any time soon, even if interest rates were to rise.”

To support his assertion, Myers explores what other analysts have said over the last year or two regarding the Canadian housing market. According to BMO Capital Markets Senior Economist, Sal Guatieri, the above average pace of housing starts over the past decade is not because of overbuilding, but a response to underbuilding in the years prior to 2002. From 1995 to 2001, there was an average of 141,000 housing starts, compared to a demand of 189,000 housing starts. The “boom activity,” then, has more to do with pent up demand, says Myers, then overbuilding.

When it comes to demand, Myers turns to another BMO Capital Markets Senior Economist, Robert Kavcic, who analyzed the demographic market of Canada in relation to home buying and selling. Kavcic found that the echo-boom generation—the children of baby-boomers—came into their prime home buying years (ages 25 to 34) in 2002: the beginning of Canada’s housing bull market.  As a result, roughly 300,000 first time home buyers entered the Canadian market between 2009 and 2013, with about half between the age of 25 to 34. Myers points out: “Echo-boomers will continue to drive the housing market until the turn of the decade.”

Myers also examined the rationale behind the threat of a housing bubble, particularly in Canada’s major urban centres. He found that in July, Peter Andersen of Andersen Economic Research Inc., also examined this risk and found that “the bubble risk for house prices in Canada is highly exaggerated and that new housing is still very affordable in Canada.” Prior to 2002, 70% of the new builds were new single, family homes in Toronto, Vancouver and Calgary’s downtown core. After 2002, 65% of the new builds in these cities were still in the downtown core, but the shift was away from single, family homes to high-rise condo buildings. “New, undeveloped land is no longer available in these cities, but demand continues to grow,” said Myers. As a result builders switched from low-rise to high-rise residential construction and the lack of land started pushing the price of homes up. “The lack of availability is what drives price up,” said Myers.

When asked how he examines for a housing bubble, Myers states: “I have found the best way to understand the market is to examine the long-term trends and relationships that govern that market, and when those trends veer off course or relationships change drastically, look for all possible explanations for the deviation from the norm before drawing premature or impetuous conclusions.”

To read more from Mr. Myers, please check out his report, his videos and other blog posts.

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