What is a housing bubble?
From Wikipedia :
"A real estate bubble or property bubble (or housing bubble for residential markets) is a type of economic bubble that occurs periodically in local or global real estate markets. It is characterized by rapid increases in valuations of real property such as housing until they reach unsustainable levels relative to incomes and other economic elements, followed by a reduction in price levels."
Some say that economic bubbles can not be identified until after the fact, while others say that bubbles can be defined by economic measurements. I believe economic bubbles can be identified.
How should house prices grow in the long term?
From The Great Housing Bubble: Why Did House Prices Fall? by Lawrence Roberts.
"Since 1890 houses have appreciated at 0.7% over the general rate of inflation. Over the long term house values are tied to incomes because most people buy houses with mortgages for which they must qualify based on their income. Inflation keeps pace with wage growth because people will bid up the prices of goods and services with their available income. Therefore, over the long term house prices, wages and inflation all move in concert. There are short-term fluctuations in this relationship due to variations in financing terms, migration patterns, employment, local limits on construction and irrational exuberance, but any such deviations from the mean will be corrected over time by market forces. As an investment, houses serve as a hedge against the corrosive effect of inflation, but over the long term appreciation much in excess of the general rate of inflation is not possible. In this regard, houses are little better than savings accounts as an asset class, and they are inferior to stocks or bonds in the long term."So inflation, wages and house prices should all move in concert for a long term sustainable housing market.
Let's use some of those economic measurements and find out if Regina has a housing bubble.
Regina Consumer Price Index
Average Regina House
From the National Post
From 2000 to 2010, the average value of a Canadian home doubled, rising to $339,030 from $163,951. Regina topped the list of surging housing prices. The average price of a home rose 173%, climbing to more than $258,000 from $94,518 in 10 years.For those keeping score, inflation in that time period increased by 27%.
The average price of a home went up to a new high of $284,744 last month ( Jan 2012). That's up 10 per cent from 2011.
The next two charts are from Royal Lepage. This one is from the third quarter of 2011 and it breaks down pricing for bungalows, two storeys and condos.
Regina experienced the the biggest increase in house prices across Canada in the ten year period of 2000 to 2010 at 173%, while the increase in inflation totaled 27%. From 2010 to Feb 2012, the average price has increased by another 10%.Based on the Regina markets examined, the average price for a detached bungalow marginally dipped to $109,000 (-0.9 %), while a standard two-storey home slightly increased to $111,500 (+1.4 %) and a standard condominium property increased to $86,000 (18.6 %), year-over-year.
New Home Price Index
What makes these graphs interesting is that Calgary experienced a boom in the new home price index about a year earlier. Check it out.
And as for the increase in house costs which includes wages and material costs, construction wages have increased more than average wages but not to the extent that justify the huge increase in house cost increases. What has happened here is that the profit margins for home builders have increased by quite a bit. Simply put, it has been a great time to be a home builder owner in the last few years. As for material costs, I will have a post up in the next couple of weeks that shows that much of the materials for a home except concrete have not risen much in the last half decade.
Median Family Income
In 2005, according to Stats Canada, median income for all households was $54,443 in Regina. While median income for all families in 2005 was near $70,000. That is a significant difference. In 2000, according to Stats Canada, median income for all households was $46,847. While median income for all families in 2000 was near $57,000. Most people mistaken believe that all family income is median household income, it isn't. Median household income was estimated to be $74,000 for Regina in 2011.
House Price to Income
While using median incomes and average house prices together is not optimum, we can still calculate how house prices and incomes have changed over the years. We will use Royal Lepage numbers of an average bungalow, (because that is what most families buy) and median family income.
- In 2001, a median family income of $59,000 and an average family bungalow of $109,000 gives us a ratio of 1.84.
- In 2006, a median family income of $68,000 and an average family bungalow of $150,375, gives us a ratio of 2.21.
- In 2011, a median family income of $83,000 and an average family bungalow of $316,500, gives us a ratio of 3.8.
Demographia does an affordability study every year for for English speaking countries around the world. In 2011, Regina had a median multiple of 3.3, which is deemed "moderately unaffordable". This came from a calculation of a median house price of $244,000 and a median household income of $74,200. This is down from a medium multiple high of 3.5 in 2010. But is significantly up from from 2006, when the median house price was $115,000 and the median household income was $57,500. The median multiple was 2.0.
Again, another measurement that is shows that Regina is a bit bubblicious.
House price to disposable income
Ben at the economic analyst has a great post on house prices and disposable incomes.
It should be abundantly clear that in order to sustain an increased mortgage burden while still saving for other life priorities, it requires a higher salary. Therefore, house price appreciation and income gains have historically been relatively tethered. Periods of over-performance in house prices are followed by periods of under-performance, and vice versa. The price-income ratio is a fundamental metric that usually exhibits stability over long periods of time. The price-income ratio is calculated by taking a house price measure and dividing it by a measure of income.
When I get a chance, ( hopefully in the next couple of days) I will take a look at rents, population growth housing starts and supply and demand. The left overs such as employment and labor force indicators will be in the third post. Then I will combine all three and make a major post for Regina that I will add to in the future.