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Canadian House price continue to rise

Look at the dichotomy between Canada and the U.S.  Between 2007 and 2010, house price in the U.S. fell by, on average, 29%, in Canada they are up by 6%.  One massive difference is income, whereas average income has been stagnating (some would say even falling once you remove health care) it has been rising in Canada.



The impact of this on the economy is two fold:  First, Canadian banks – the primary lenders to the housing sector are seeing few problem mortgages, and even if there are problems sales prices are sufficiently high to minimize losses (moreover in Canada a loan is a personal liability, any shortfall from the disposal of the property remains as a liability of the mortgagee).  Secondly, is spurs the new home construction industry, since demand keep s on growing, a result of Canada’s different aging factors and the continued growth in household formation.  It is difficult to believe, but U.S. household formation has dropped, over the past 5 years, from 600,000 per annum to just slightly more than 200,000.  While in Canada (1/10 the size of the US) household formation has remained constant in the 175,000 to 210,000 range for the past 4 years.

One question is always, are house prices, on an income basis, higher in Canada than in the U.S., despite the recent 29% drop in the U.S. and the 6% rise in Canada, the reality is that if you look at house prices from 1987 to 2010, Canadian house price index is lower than in the U.S.  However, if you use average income, then Canadian house prices are  remaining reasonable.  Moreover the U.S. figure for household income doesn't take into consideration the annual increase in health care costs, which have been growing at a double digit rate.

Housing market is "fully priced" by all accounts.  There is no doubt that Canada could easily face a pricing correction, especially if the Canadian dollar continue on its current trend.  However, the level of over-valuation is hard to estimate, it could be in the range of 5% to 20% (the more gloomy forecasters)





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