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There are mountains of opinions about where Canada’s home prices are headed next. Let’s not add to the pile.
Rather, let’s examine a less-appreciated aspect of the debate – just how unusual Canada’s housing obsession is by international standards.
Whether you measure the housing boom in relation to fundamentals, or simply by our dedication to investing in bricks and mortar, Canada stands out against its global peers.
It’s easy to argue that our long national devotion to housing means home prices must take a nasty plunge at some point. That is certainly possible. On the other hand, it’s also possible there is something special about Canada, some force that keeps home prices levitating higher. But, if so, we should try to identify what it is, because much of our household wealth depends on it.
A recent report from the Bank for International Settlements, the Swiss-based organization for central banks, puts things in a global perspective. The BIS researchers – Emanuel Kohlscheen, Aaron Mehrotra and Dubravko Mihaljek – looked at residential investment and economic activity over the past half-century in 15 advanced economies. Their study is dense and academic, but many of its key findings can be summed up in the accompanying chart.
CANADA’S UNUSUAL
RESIDENTIAL OBSESSION
Percentage of GDP, in alphabetic order
1970-1990
1991-2007
2008-2016
0%
2
4
6
8
10
12
Period averages of quarterly data.
CARRIE COCKBURN/THE GLOBE AND MAIL,
SOURCE: BANK FOR INTERNATIONAL SETTLEMENTS
CANADA’S UNUSUAL RESIDENTIAL OBSESSION
Percentage of GDP, in alphabetic order
1970-1990
1991-2007
2008-2016
0%
2
4
6
8
10
12
Period averages of quarterly data.
CARRIE COCKBURN/THE GLOBE AND MAIL,
SOURCE: BANK FOR INTERNATIONAL SETTLEMENTS
CANADA’S UNUSUAL RESIDENTIAL OBSESSION
Percentage of GDP, in alphabetic order
1970-1990
1991-2007
2008-2016
0%
2
4
6
8
10
12
Period averages of quarterly data.
CARRIE COCKBURN/THE GLOBE AND MAIL, SOURCE: BANK FOR INTERNATIONAL SETTLEMENTS
It shows how much of a nation’s economic output, or gross domestic product, is linked to residential investment – that is, new-home construction as well as home renovations. The researchers calculated the residential-investment share of GDP for each country during three periods – from 1970 to 1990, from 1991 to 2007, and from 2008 to 2016. As you can see, there’s an obvious trend across the developed world. In most countries, the share of the national economy that hinges on housing has been in decline for nearly 50 years.
The only exceptions are Canada and Norway. In both countries, residential investment hasn’t declined, but has gone up since the financial crisis. In Norway, the rebound came off a fairly low pre-crisis base, so perhaps it’s not that exceptional. Canada’s performance, though, is remarkable.
Back in the 1970s and 1980s, residential investment accounted for no more or less of the Canadian economy than it did in most other developed countries. During the 1990s and early 2000s, we became slightly above average in terms of our reliance on housing. Since then, however, we’ve surged past everyone else. No other developed country depended so much on residential investment as we did from 2008 to 2016. We’re the glaring exception to the general downward drift across advanced economies.
What accounts for this? While the researchers don’t dissect the specifics of individual countries, they do find that, as a general rule, the share of residential investment in an economy goes up along with growth in real home prices. So perhaps Canada’s unusual reliance on residential investment simply reflects strong increases in home prices, a case of more and more money pouring into a hot sector.
But, of course, that raises another question: Why are Canada’s home prices rising? If it were because of a general shortage of housing, you would expect rents to be surging as well. However, they’re not – or at least, not anywhere near as fast as home prices are rising. The International Monetary Fund’s Global Housing Watch calculates that Canada’s level of house prices to rents is the second-highest in the world, lagging only Colombia’s. Once again, we are exceptional when measured against global peers.
HOUSE PRICE-TO-RENT RATIO GLOBALLY
House prices have grown faster than rents
in more than half the countries,3rd quarter, 2017,
or latest available index, 2010 = 100
146
Colombia
144
Canada
141
Sweden
139
New Zealand
134
Israel
132
Iceland
130
Turkey
128
Luxembourg
127
Mexico
123
Norway
120
Germany
119
Australia
119
Switzerland
117
Latvia
117
Slovakia
114
Austria
113
Britain
113
Japan
112
Hungary
111
U.S.
110
Czech Rep.
109
Chile
106
Belgium
106
Denmark
101
South Africa
98
Portugal
98
France
97
Ireland
94
S. Korea
91
Slovenia
87
Poland
87
Finland
86
Netherlands
83
Spain
82
Greece
80
Italy
79
Lithuania
77
Estonia
56
Russia
0
30
60
90
120
150
CARRIE COCKBURN/THE GLOBE AND MAIL,
SOURCE: IMF
HOUSE PRICE-TO-RENT RATIO GLOBALLY
House prices have grown faster than rents
in more than half the countries,
3rd quarter, 2017, or latest available index, 2010 = 100
146
Colombia
144
Canada
141
Sweden
139
New Zealand
134
Israel
132
Iceland
130
Turkey
128
Luxembourg
127
Mexico
123
Norway
120
Germany
119
Australia
119
Switzerland
117
Latvia
117
Slovakia
114
Austria
113
Britain
113
Japan
112
Hungary
111
U.S.
110
Czech Rep.
109
Chile
106
Belgium
106
Denmark
101
South Africa
98
Portugal
98
France
97
Ireland
94
S. Korea
91
Slovenia
87
Poland
87
Finland
86
Netherlands
83
Spain
82
Greece
80
Italy
79
Lithuania
77
Estonia
56
Russia
0
30
60
90
120
150
CARRIE COCKBURN/THE GLOBE AND MAIL, SOURCE: IMF
HOUSE PRICE-TO-RENT RATIO GLOBALLY
House prices have grown faster than rents in more than half the countries,
3rd quarter, 2017, or latest available index, 2010 = 100
146
Colombia
144
Canada
141
Sweden
139
New Zealand
134
Israel
132
Iceland
130
Turkey
128
Luxembourg
127
Mexico
123
Norway
120
Germany
119
Australia
119
Switzerland
117
Latvia
117
Slovakia
114
Austria
113
Britain
113
Japan
112
Hungary
111
U.S.
110
Czech Rep.
109
Chile
106
Belgium
106
Denmark
101
South Africa
98
Portugal
98
France
97
Ireland
94
S. Korea
91
Slovenia
87
Poland
87
Finland
86
Netherlands
83
Spain
82
Greece
80
Italy
79
Lithuania
77
Estonia
56
Russia
0
30
60
90
120
150
CARRIE COCKBURN/THE GLOBE AND MAIL, SOURCE: IMF
Could it be that Canada did better than most countries during the financial crisis, so rising home prices are simply a reflection of our rising affluence? That’s a tempting explanation, but doesn’t bear up well under examination. The IMF estimates that Canada’s home-prices-to-income ratio is the fourth highest among 33 countries. Home prices have expanded considerably faster in Canada than paycheques, and far more so than in most other countries.
Some other popular explanations for the housing boom also come up short. Low mortgage rates, for instance, have undoubtedly helped Canadian home buyers, but rates are low in most countries, not just here, so it’s difficult to see why Canadian home prices should receive an unusual lift from cheap borrowing costs.
Similarly, it’s tough to pin Canadian home prices on restrictive building regulations, given the unusually high share of the Canadian economy devoted to residential investment. If draconian zoning laws and excessive red tape were choking off construction and driving up prices, Canada’s housing sector should be smaller, not larger, than its peers.
The most robust rationales that remain are natural resources and immigration. Both Canada and Norway are oil producers, and perhaps that allowed them to navigate the financial crisis with less stress than many other countries, leading to more exuberant levels of residential investment. Another possibility is immigration. The BIS study found that high levels of immigration tend to go along with more residential investment and Canada’s level of immigration is elevated by international standards, so perhaps that’s the key.
But, whatever the reason, Canada’s housing fixation is exceptional. We should keep in mind another observation from the BIS report. The researchers concluded that downturns in residential investment were an unusually strong indicator of recessions ahead. We may not be entirely sure why Canada is so obsessed with housing, but we better hope the love affair continues.