By GEORGE ATHANASSAKOS
The ratio of house prices to income has historically averaged about 3.5 in Canada. It now stands at about 5.5.
In recent years, the gap between house prices and income has been bridged through borrowing. The average Canadian family debt hit $100,000 in 2010. About 17,400 households are behind in their mortgage payments, an increase of nearly 50 per cent since the start of the last recession.
Average house prices have doubled in the last 10 years, while rents have risen by only about 30 per cent. The ratio of house prices to rent is higher in Canada than in any other developed country.
Residential housing investment as a percentage of GDP was 6.48 per cent in 2009, down slightly from 6.76 per cent in 2008, after peaking at 7.13 per cent in 2007. The previous peaks were at 7.26 per cent in 1976 and 7.18 per cent in 1989 - and we know what happened to Canada's housing market in the early 1980s and early 1990s. After residential housing investment as a percentage of GDP peaked in the previous two cycles, the housing market crashed within a few years.
By way of a comparison, this ratio peaked at about 6.1 per cent in the U.S. in the mid-2000s at the height of its housing bubble, and toward the end of the 1980s in Japan, when that country was nearing the end of its own property boom. Both countries experienced sharp declines in housing prices soon afterward. (The ratio stands at 6.0 per cent in China at the end of 2010 - no wonder there is talk of a housing bubble there.)
The ratio of residential investment to GDP has provided a powerful leading indicator of housing corrections around the world and in Canada in the past. would it not work this time around?