U.S. Canadian Housing Mashup!

A chart has been making its way around the econo-blogesphere recently (hat tip TMTGM, Paul Kedrosky and Simple Financial Analysis) that matches up the trend in Canadian versus US home prices that, at first glance, provokes a sense that Canada is steadily moving closer to a bubble crescendo much like that of the US.

The original plot shows the S&P/Case-Shiller Composite-20 and the Teranet/National Bank of Canada Composite-6 indices re-based to a value of 100 at January 2000 with the latest value seeing the Canadian index within a stone’s throw of the peak level reached by the S&P/Case Shiller in 2006.

While this provides a pretty stark comparison, I think it would be more appropriate to compare the Teranet/NBC Composite-6 index to the S&P/CSI Composite-10 not the Composite-20 as had been done in the original plot.

The S&P/Composite-20 is likely too broad for this type of “apples-apples” comparison and both the Teranet/NBC Composite-6 and S&P/CSI Composite-10 share the purpose of narrowly including just the top largest metros for their respective country.

Looking at the chart (click for full-screen dynamic version) you can see that while the Teranet/NBC index is currently showing a pretty exceptional rebound with annual percentage increases of nearly 13%, it still has a ways to go in order to match the pre-bust US levels.

Further, it’s important to note that while the US housing market saw long periods of annual appreciation that topped 15% and sometimes even over 20%, the Canadian trends, though solid, have been quite a bit slower with typical annual appreciation at just about half that of the US.

That being said, it will be interesting to see how long this trend can run in Canada since as we now know very well here in the US, home prices can’t appreciate exceptionally forever.

Browse the full catalog of Canadian home price indices provided by Teranet/National Bank of Canada.

Also it’s important to note that Teranet/NBC produces their home prices indices using the same repeat sale methodology as the S&P/Case-Shiller. Read more about their methodology here.

The Boom and Bust in Euro-U.S Home Prices

During the majority of the last decade European and U.S. home prices followed similar trends booming when credit was easy and the housing mania ran hot and crashing hard once the party was over.

This relationship should have provided pretty solid evidence that an epic bubble was shaping up back in the early aughts but instead property prices simultaneously booming across nearly all industrialized nations was largely attributed to supposedly rational supply and demand factors.

Today, we can see that while property trends in the U.S. and continental Europe are still tracking fairly similarly, the primary function driving both markets is likely credit availability and the willingness on the part of home buyers to take on debt in a weak economic climate.

How this relationship shapes up for the future will be particularly interesting as Europe has now clearly taken a turn for the worse economically.

Although the leading and lagging trend of price discovery is a bit of a judgment call, the European data is currently signaling that prices slumped pretty notably during the last month.