Hamilton's E-Wave Analysis

Housing, again

The Toronto Star carried an article about housing from Capital Economics, precisely along the same lines as I have talked about before. I am sure they will not mind my using one or two of their charts.

On the left a comparison is made of house prices in relationship to family income. (it is not clear always what that is, his & hers; before or after tax etc.) .Typically since thee stone ages that ratio runs at about 3x, according to the chart 3.5 on average. We are at 5.5 x, almost 60% higher then the norm. To get back to the norm they argue that our market needs to drop 25%, but to get back to the average (regression to the mean) a drop of 40% is needed and that does not take into account the usual overshoot.

Country properties, hobby farms and other such properties can be hurt a lot more. From 1989 to say 1996 some properties North of Highway 7 (the edge of the Earth for Torontonians then), dropped 50–60% easily and some commercial properties 70-80%.

According to the Toronto Board chart (the annotations are mine) prices rose pretty evenly (staying in narrow channel) but also quite rapidly over the past 10 years. Roughly from $200,000 to $400,000 which equates to an annual compounded return of 15%. Notice the throw-over in late 2009. That may just be it for a while. None of this, of course,we are told by the central Banks, has anything to do with variable mortgage rates close to 2%!