Three Stories of House Price Bubbles
Many authorities are raising red flags over house prices in Canada and waving them very energetically: The Economist shows that, compared to history, prices are very high relative to income (implying affordability issues) and very high relative to rents (implying that people are choosing to buy over the alternative). So, are people stupid to buy now?
We should start with some facts: when looking at individual cities, most people are concerned about “excessive prices” only in the Toronto and Vancouver markets and, even then, mostly in the condominium segment. Second, the standard comparisons noted above use history as a benchmark but that history involves a very different level of real and nominal interest rates.
Although some people try to draw attention to the most recent history, I would like to note some distinctions between price paths in three countries which are in the news frequently and often described as having unsustainable bubbles: Canada, United States (before 2007), and China.