Canadian Real Estate - Bubble Ready to Bust or Do Trees Really Grow To The Sky?

This is a little off my normal topics, but I'd like to talk a bit about real estate prices today.

Many realtors like to claim that real estate prices in Canda are "just fine" and on par with 4x annual income (which is the affordability multiplier they like to throw around for house prices). First of all, I have a real problem with that figure given the fact that - in the last 20 years - more households than ever are two income earning families, coupled with the fact that many household income stats also contain income from anyone in the house 15 years old and up. In Canada: "The census family includes parent(s) and children living at the same address and persons not in census families." This seriously inflates the median household income over what it was 20 or 30 years ago (for example; approximately 70% of women in the US are workforce participants vs 40% 30 years ago. A similar figure likely exists in Canada).

Ok but what does this all have to do with house prices?

Well, in 2006, the median household income in British Columbia was $62,600 (stats can) and in 2009 the average house price in British Columbia was $495,303 (CREA stats). Even if we assume a generous income increase of 20% in BC over the 2006-2009 period (stats can hasn't released 2009 income stats yet) to $75,480 (how many of you got a 20% raise during the recession?) we still have a 6.5X annual income multiplier for house prices which is an astounding increase from the 4X that realtors like to throw around. Similar discrepancies exist in other markets. Another figure to consider is that the median individual income is closer to $25,000 which tells us that families either have more than two people working or the median income of the individuals working (if there is only two) must be much higher than the average.

Of course, the average house price doesn't tell us how much people are actually borrowing. Many people will have existing equity in their homes, downpayments or other mechanisms to offset the amount that is mortgaged.

However, in 1970 the median income was approximately $8-9,000 and the median home price was somewhere around $25,000 which is a multiplier of around 3X annual income to house price. Which, when compared to today's 6X-7X multiplier looks pretty disparate.

What's likely keeping homes "affordable" is the incredibly low prime borrowing rate right now. However, no one really believes this rate is sustainable (it's never stayed low for very long). Few people likely realize how much their payments will balloon once interest rates rise again. As an example, if you have a 35 year amortization period mortgage at a 3% rate on 250K you're looking at about $960/month. If that interest rate creeps up to 6% (a more "normal" interest rate) that payment balloons to over $1400 a month (over 40% increase).

All of these statistics are of course pretty poorly researched and poorly correlated. However, with house prices in Canada *increasing* by $55,000 from 2008-2009 during one of the worst recessions in history, it doesn't take a rocket scientist to see something is out of kilter there.