In today's Break­fast with Dave, Rosie dis­cusses the Cana­dian hous­ing market:

It sure looks that way. At a time when per­sonal income is down around 1% in the last year, we have seen nation­wide aver­age home prices soar 21% and last month hit a record high, as did sales. In real terms, home price appre­ci­a­tion is back to where it was in 1989. Of course, back then, inter­est rates were far higher but then again, the econ­omy was in the late stages of a phe­nom­e­nal multi-year eco­nomic expan­sion, not mak­ing a tran­si­tion from deep reces­sion to nascent recovery.

While the Cana­dian econ­omy is recov­er­ing, over­all growth is still barely above zero as man­u­fac­tur­ers grap­pled with excess inven­to­ries, a strong cur­rency and a soft domes­tic demand pic­ture south of the bor­der. Employ­ment con­di­tions have improved, but are hardly that healthy, as we saw in the Novem­ber jobs report where wages and the work­week were both down despite a con­struc­tive head­line num­ber (half of which were in the edu­ca­tion sec­tor, an inher­ently dif­fi­cult area for sta­tis­ti­cians to ade­quately sea­son­ally adjust).

In answer to the ques­tion as to whether prices are in a bub­ble, all we will say is that when we ran some mod­els show­ing Cana­dian home prices nor­mal­ized by per­sonal income or by res­i­den­tial rent, what we found is that hous­ing val­ues are any­where between 15–35% above lev­els we would label as being con­sis­tent with the fun­da­men­tals. If being 15% to 35% over­val­ued isn't a bub­ble, then it's the next clos­est thing. We are talk­ing about 2–3 stan­dard devi­a­tion events here in terms of the par­a­bolic move in Cana­dian home prices from their lows. So if it walks like a duck ...

Source: Break­fast with Dave, Gluskin Sheff, Decem­ber 10, 2009

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