Take away the credit and watch house prices fall.

Tonnes of talk about increased scrutiny of CMHC and tougher lending amidst "bubble talk" in regards to Canadian house prices.  But what would happen if credit demand plopped because of mortgage tightening, higher interest rates, consumer exhaustion or another 2008 financial craposis?

As we all know the long term house price growth fundamentals such as incomes, employment, wages, inflation, rents were not the main drivers of house price appreciation in Saskatoon during 2006-08 in which the average house price in Saskatoon grew almost 100% in less than 24 months.  If house prices had followed the long term growth fundamentals of employment, inflation and wages the average house price in May 2008 would have been near $175,000, not $310,000.

The main driver was the abundance of credit and emotions that launched house prices in that time period. And when the average house price fell 14% in 2008-2009, it was the lack of credit and confidence.  Let's take a quick peak the average house price in Saskatoon from June 2008 to May 2009.

This was the during the same time as the financial crisis.  But most people would be surprised to know that employment, inflation, wages, rents, and population growth all kept climbing in Saskatoon during this time period.  The economy here did relatively well when the rest of the world was burning in debt.

Employment

Between June 2008 and March 2009, employment grew from 137.2 thousand workers to 141.5 thousand workers while the average house price dropped 14%.  The unemployment rate in Saskatoon in June 2008 was 3.9% while in March 2009 it was 4.6%.


Average weekly wage.

The average weekly wage increased from $747 in June 2008 to $792 in March 2009, while the average house price dropped 14%.

Population
The population grew by about 5000 people from June 2008 to March 2009 while the average house price dropped over 14%.

Rents
While I do not have monthly stats on rents, I do have yearly stats and they show that rents increased by 8% from 2008 to 2009.

So what really happened at that time in respect to house prices?  Since the market is mostly fed because of credit and confidence, take a look at the national credit and confidence graph here.  Consumer confidence plunged and household debt decelerated.  Deceleration in debt is highly correlated with the drop in house prices in Canada.  And for that matter, Saskatoon.  As we can see here confidence and credit go hand and hand.

The next graph shows the growth in outstanding Saskatchewan mortgage credit held by chartered banks.

Since Saskatoon makes up about 40% of all mortgage debt in Saskatchewan, we can make an educated guess that when the acceleration of credit zoomed skyward in 2007 in Saskatchewan so did house prices in Saskatoon.  But when the deceleration of credit plunged from near 25% year over year growth to near 2% growth in 2008, we can see how that impacted the average Saskatoon house price.  Credit is the main driver of what buoys houses prices. Take it away and plop.


Now, I am not suggesting another 2008 financial crisis is around the corner, but if the foundation of house prices in this city is based on credit and not on the long term fundamentals, then there could be some sorry highly leveraged buyers down the road if outstanding mortgage credit growth decelerates from double digits in this province.