For all those the-housing-market-is-different-here-in-Canada folks this one’s for you, courtesy of the Bank of Canada. BoC made this working paper entitled “Housing Market Cycles and Duration Dependence in the United States and Canada” available in February 2007 to very little fanfare. If this is old news to some then I’m sorry for wasting your time, but since I frequent many Canadian RE websites I see nary a mention of it, and its findings are IMHO quite pertinent. So here are some of the highlights (bolding and comments within square parentheses are mine):
From the abstract:
- Using a panel of 137 cities, we examine the duration, size, and correlations of housing market cycles in North America. [Although mostly secondary, the research does go back as far as 1870.]
- We find that North American housing cycles are long, averaging five years of expansion and four years of contraction, and there is a fairly high degree of correlation in house price cycles between U.S. and Canadian cities. [Ahem, to those few Canuck RE bulls still in denial out there, please take note -- NEWS FLASH! WE'RE NOT DIFFERENT.]
- … to the best of our knowledge, this is the only study that tests specifically for duration dependence in housing market cycles.
From the summary:
- Housing cycles in the U.S. and Canada are quite similar overall, but Canadian housing market cycles are more volatile than those in the U.S. Most notably, Canadian housing market contractions are somewhat shorter and sharper than those in U.S. cities. [Sharper, as in we Canadians will see bigger housing price drops than what we're seeing in the U.S. which, three years later, is still in freefall.]
- In both countries, real house prices decline by 10% to 11% during an average contraction. [So since average prices in the U.S. have so far dropped by 20% with no sign of stopping we are obviously entering an abnormal price decline. How abnormal? Just keeping watching the Case-Shiller's U.S. home price index to get an idea of the minimum drop we're going to see here in Canada.]
- This price decline however, occurs more rapidly in Canada since the average contraction lasts only 3.5 years in Canadian cities compared to 4.4 years in the U.S. cities. [This should be good news for those young Canadians smart enough keep building their nest eggs and not succumb to realtor wiles. Since most analysts put the current U.S. housing top in summer of 2005, Canada seems to be a little bit behind schedule with a spring 2008 top. The paper’s data seems to suggest a bottom in the U.S. around Christmas of 2010 and for Canadians the end of 2012. Remember however, this is based on an average correction and so far the housing bloodbath going on down south is anything but normal.)
In the interests of brevity I’ve only highlighted the abstract and summary. However for the avid RE blog reader there is plenty of interesting tidbits in the 40+ pages in between. All in all a really interesting study, and I would like to thank the folks and the BoC for doing the work. (Thanking a central bank–ugh!–but credit where credit is due.) The BOC link to the working paper is here . Enjoy!
RSS - Posts