Young and Frederick - ScotiaMcLeod Whitby

Canadian house prices are rich no matter how one looks at it, but they are likely to become richer yet 
before material risks emerge later next year and beyond. The implications for the Canadian economy, 
mortgage markets, and monetary policy must, however, take full consideration of profound microeconomic 
differences between the Canadian and US mortgage markets. We also argue that the implications of 
strong house price gains on the Bank of Canada’s conditional commitment to keep rates on hold until 
the end of 2010Q2 are exaggerated for seven key reasons.

1. The Current Performance of Canadian Housing Markets

a. Valuation Measures—Rich by Any Measure

There is no one single approach to gauging house valuations thatworks best. Like valuing any other
asset, multiple methodologies are required and then the focus becomes whether they yield comparable 
outcomes.

Our least favourite measure for current purposes is an affordability measure that compares payments
to income. That’s extremely useful in evaluating conditions for present home ownership, but evaluates 
the carrying cost of home purchases using variables like interest rates at a particular point in time without
strictly addressing the fair value of the asset itself. Affordability is often just an interest rate play.

Instead, comparing current and past house prices is one approach.  Chart 1 depicts the average resale
price using Canadian Real Estate Association data for homes sold through the Multiple Listing Service.
They’ve more than doubled this decade. Chart 1 also shows Statistics Canada’s new home price index
that has risen by about 50% this decade. Chart 2 depicts the Canadian equivalent to the U.S. S&P/Case
Shiller repeat sales measure of house prices that has gone up by 86% this decade and this data only
goes up to August before sales further accelerated. By comparison, the US S&P/Case Shiller repeat sales
measure had risen by 100% from the start of 2000 until its peak in mid-2006. Thus, all three Canadian
measures point to lofty valuations. If analysts were worried about Canadian house prices over 2007-08, it
would be inconsistent to suddenly no longer believe them to be in lofty territory today especially insofar as 
the outright resale segment is concerned.  But deflating these measures by economy-wide price levels in
order to compare house prices to broader economy-wide prices over time is another approach. Chart 3 provides
the elevated results for resales. The result is about a 70% rise so far this decade.

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