Is the Canadian Housing Market poised for a period of downturn? Part 1

Information on the bubbly nature of the Canadian housing market has reached frothy levels. I’d say that there is an information bubble occurring around media reports covering the housing bubble in Canada. Media articles and reports include splashy headliners like Hillard McBeth, Garth Turner and Kevin O’Leary to support the case of the housing bubble

At first glance, the media reports include information that I tend to agree with, however I have an uneasy feeling that I’ve based my opinions on a singular perspective and this has left me with some significant unanswered questions.

I’d like to analyze these questions one at a time and to start off I’ll take a look at the following.

  1. Is the Canadian Housing Market poised for a downturn?
    1. High level perspective answer: Yes absolutely. Further reading below indicates how I arrived at this conclusion.

Part 2 will delve into greater details. However the first step in my analysis was to look for trends in Canadian housing.

  • Valley: Period where housing prices have flattened from a peak.
  • Trend up: Period where housing prices are trending up towards a peak

Canadian Real House Price Index
http://www.macleans.ca/economy/realestateeconomy/a-canadian-housing-chart-that-puts-the-bubble-in-perspective/
Years considered 1980 – present

  • Valley 1982 – 1985 (V)
  • Trend up 1986 – 1994 (T)
  • Valley 1994 – 2002 (V)
  • Trend up 2002 – 2008 (T)
  • Valley 2008 – 2009 (V)
  • Trend up 2009 – 2016 (T)
  1. 80’s – 90’s
    • 3 Valley, 4 Trend up
  2. 90’s – 2000’s
    • 4 Trends up, 6 Valley
  3. 2000’s – 2010’s
    • 7 Trend up, 3 Valley
  4. 2010 to present
    • 6 Trend up, 0 Valley

4+4+7+6 = 21 trends
3+6+3+0= 12 valleys

12/40 = 30% occurrence of Valleys in 4 decades
21/40=52.5% occurrences of Trends up in 4 decades

Allot 5 years for valley and 5 years for trend up to create a baseline

Breakdown allowed per year
30/5 = 6% probability of a Valley each year
52.5/5 = 10.5% probability of a Trend up each year

  1. From 2010 to 2020
    • 2010 – 2016 trend is up
      • 10.5*6 = 63%. This exceeds the 10 year 52.5% occurrences of Trends up
  2. From 2016 to 2020
    25% probability that there is a housing valley in 2016 and for each of the next 4 years.

In future posts, I will gather and analyze factors in order to dial up/ dial down the 25% probability of a valley for 2016 and onward.

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