Right now, housing activity has grown to be over 20% of Canada's GDP. The most its ever been in two decades. That economic growth is not including the wealth effect that arises when house values rise which leads to more consumer spending. Once there is a slowdown in the housing cycle and there will be, the only question is how big is the bust? And how will that affect household finances? In the early 80', western Canadian cities experienced real income losses with the bust of housing and energy.
"However, real incomes in Alberta fell 2.5% in 1981, rose by 1% in 1982 and then fell by a catastrophic 11% in 1983 "
While the GTA was really the only area in Canada that had a true housing bubble in 1990, we can see the effects of what the recession had on real wages throughout Canada in 1991 in this graph. Wages in certain industries stagnated, while other industries saw wages fall with unemployment rising. Now just think if all the major centers in Canada have a housing bubble bursting in 2011 and 2012 and what that would do to real wages.
Family incomes look like a yoyo after a housing bust in Alberta in the 80's and Toronto in the 90's.
If we go back to 2006-2008 and just think of where the influx of capital came from to launch Saskatoon house prices 56% in 2007 and over 30% the next year.
Yes, there was some cash coming from Alberta and some cash that was already here but it was all mostly credit. Remember that housing, especially new buyers, is highly leveraged with credit. With the help of lax lending standards, credit is what was streamed into the housing market which found its way into the economy and pushed up wages for industries like construction. This was partly due to competition for workers. Construction wages have increased almost 40% since 2005. ( Construction will see the first decline in wages with a housing slowdown) And the wealth effect from rising assets has made Saskatoon among the nations leaders in retail spending growth over the last 5 years. But the foundation of wage growth in retail services is also mostly because of credit.
For every step of income growth, it is about 3 steps of credit growth. Once we hit peak credit, which is pretty darn close, credit growth will contract and with that contraction so will wages. Since this chart was made, Canadian household debt to income has hit 150%, surpassing US households as they trend lower at 146%. The US housing bubble burst just under 150% in 2007 before it cruised over 165% with incomes dropping and debt still climbing.
At the moment the average Saskatoon house price is about 310k and the average Saskatoon household income is about 85k putting the ratio of average house price to income at over 3.6. Studies have pointed out that industrialized countries with cities that have levels of 3 or less usually do not have housing bubbles. When most cities in a nation like Canada have levels over 3, it is only a matter of when the bubble bursts. With a correction in housing prices, and the unsustainable role that credit has played in the housing bubble and economy, we should not be surprised to see a fall in average household incomes as this has happened in previous Canadian housing busts and could definitely happen again. Once credit growth stops, the unemployment rate will rise leading to falling incomes. And Saskatoon is no different; a housing bust would lead to falling household incomes.