Saj Karsan | Feb 19, 2012 12:58AM ET
When the US underwent its housing bubble (and subsequent burst) a few years ago, there were a few signs of trouble. New home inventories were high, as expectations were through the roof (never a good sign). Home builders traded several times their book values, suggesting extreme optimism and over-building (to capitalize on unsustainably high profit margins). Price to rent and price to income ratios skyrocketed.
Today, many are saying similar residential real estate bubbles are occurring in China, Australia and Canada to name a few. As a home owner in Canada, I'm interested in studying this phenomenon so as to ensure I don't end up on the wrong side of it, much like many of my unfortunate American brethren.
Clearly, Canadian house prices to incomes have fallen out of line with their historic norms, as have Canadian price to rent ratios.
But another thing we learnt from the US housing bust is that not all regions froth to an equal degree. Las Vegas and Phoenix, for example, saw massive declines when the bubble finally burst, while other places escaped with barely a scratch. Canada is a particularly geographically diverse (in terms of natural resource availability, types of industry etc.) nation, and so it's conceivable that the stress of any Canadian housing bust will be felt to varying degrees depending on the region.
To that end, I've compiled several years' worth of new home inventory (source: CMHC ) levels for three large Canadian cities (and their surrounding suburbs), Vancouver (which is the most expensive city), Toronto (the largest city), and Calgary (which is somewhat reliant on the oil market for its level of prosperity):
From this chart, it hardly looks as if inventories are out of control, as they are well-within their range of the last decade. In fact, there may even appear to be a shortage of homes in Toronto.
However, switching to the condo market, one does start to see some potential over-optimism on the part of builders, resulting in very high inventories of as-yet unsold new multi-family units:
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