Remax: Move Up Buyers Have Gained Loads of Equity; But They Don't Say It's Based On Debt Growth

Remax is out with a press release showing how prices have almost doubled in Canada in the last decade.  And even though there are some cities have experienced an almost of tripling house prices, there is no need to worry they say.

From the press release

The average Canadian home has escalated 93 per cent over the past decade; individual markets experienced increases ranging from 62 per cent in Saint John (4.96 per cent compounded annually) to 199 per cent in Regina (11.57 per cent compounded annually). 

Yet, despite the strong overall performances, five-year rates of return show no signs of being in bubble territory—and most definitely not in the often cited markets of Vancouver and Toronto.  While gains in Regina, Saskatoon and St. John’s have been exceptional, house prices are playing catch up, given a stronger economic status and following decades of steady, but modest growth.”
 

Who the heck uses a five year rate of return to prove or disprove a housing bubble?  Seems like only Remax, and that's because they are grasping for straws to use some obscure indicator to try and disprove a housing bubble.  And even with that, when that obscure indicator blows up in their face and shows a city like Regina which has experienced a 12.7% annual appreciation for an average house at at time when incomes have increased by about 3% per year, it only means that Regina is "catching up".  So no housing bubble, no worries, right? Right.


Why is Remax using some obscure 5 year rate of return stat and not something like, oh I don't know, how incomes have grown compared to house prices?  Well it's simple, if they charted average house price and average income growth they would see a graph that would not be favorable to their cause.  But luckily for them, I charted it for all to see.

From 2002 to 2012, we see that average income in Canada has increased by 31%, the average house price has increased 93%, while mortgage debt has increased a whopping 148%.  *(2011 and 2012 income number estimated with inflation growth from stats canada's 2010 income number)

And if we chart how much house prices have outgrown incomes in each select region from 2002 to 2012, we see this,

In the above graph, we see that Winnipeg leads the country in experiencing their average house price increasing almost 5 times higher than the increase in average incomes for that city.  Saint John is at the bottom, experiencing house prices increasing ONLY 1.5 times higher than the increase in average incomes.  Come on Saint John, get with the program!  Saint John, you need to "catch up". 

Phoenix:
The "Catch Up" Effect 2004- Much of the current appreciation we are seeing in the Phoenix metro area can be attributed to the lackluster performance during the 80s and 90s. During that period, home prices were relatively flat, so the current rise in prices can be seen as a "catch up" effect.

Las Vegas:
Las Vegas real estate at the beginning of 2003 was undervalued


United States Housing Market 2004
Bear Stearns economist David Malpass arguing that the housing market was healthy and that much of the rise in prices simply represented a "catch-up" because they had lagged behind the rise in equity prices since the mid-1990s.

Who cares that Phoenix and Las Vegas house prices and for that matter all of the US were undervalued in 2003 and 2004, but eventually busted when they "caught up."  Why did they bust?  Because the fundamentals of incomes and GDP growth were not the main driver to bid up house prices.  Household debt was the main driver.  But according to Remax, it's a good thing it's different here in Canada.