7 May 2018
Q&A - US and Canadian housing markets
This Q&A discusses the current state of the US and Canada’s residential property market a decade on from the Global Financial Crisis
We’re coming up to 10 years since the US housing market crash and the credit crunch. What’s the current state of the US housing market?
The US housing market reached an important milestone recently: based on the Case-Shiller 20-city composite index, the US housing market finally recouped the losses it suffered during the market crash. In nominal terms, house prices in key US bellwether markets moved past their pre-crisis peak in January of this year. From the peak of the market in April 2006 to the bottom in March 2012, US house prices fell by around a third. Since then, house prices have risen by just over 50%. In inflation-adjusted terms, though, house prices remain about 20% below their pre-crisis peak.
Has this been a broad based recovery, or have different areas recovered at different speeds?
The recovery in the US housing market has not been enjoyed evenly across the country. Indeed, there is a clear regional clustering of areas that have recovered as much or more than they lost during the downturn, and areas that still see house prices below their pre-crisis levels. Tech-centered US cities – San Francisco, Seattle, Denver, Austin – and adjacent markets have done well since the crisis, as have a variety of Midwestern cities. Cities in New England, Florida, and South Western US have generally not recovered to their pre-crisis level.
Digging a bit deeper, it turns out that the markets that saw the largest run-up in prices during the mid-2000s house price boom experienced the slowest recoveries following the market crash. Data on the 100 largest US metros from the U.S. Federal Housing Finance Agency show a high negative correlation (-0.54) between house price increases between 2000 and pre-crisis peak, and the recovery to date from the bottom of the market. Still, in 63 of the 100 sample metros house prices currently sit above their pre-crisis peak, pulling the overall US housing market above the pre-crisis peak.
How do US housing dynamics compare with those in Canada?
The US famously suffered steep declines in house prices leading up to and during the Great Financial Crisis, but Canada emerged from the same period unscathed. Whereas US house prices fell by about a third peak to trough during the crisis, Canadian house prices rose by 39% over the same period. Much of this has to do with household leverage. US household debt peaked at the end of 2007 at 97.9% of GDP, compared with only 78.7% of GDP in Canada. As of September 2017, US household debt had fallen to 78.5% of GDP, representing a 19 percentage point decline from the pre-crisis peak. In Canada, on the other hand, household debt ballooned to 100.4% of GDP by September 2017, a higher household leverage ratio than the US has ever seen. But while Canadian household leverage is high, it has remained constant since mid-2016. And since mid-2017, overall Canadian house prices have not grown. This pause in Canadian household leverage growth alongside specific policy measures designed to cool some of Canada’s priciest housing markets, such as Toronto and Vancouver, are starting to weigh on Canadian residential prices.