Canadian Housing: A Very Different Story than the USA

Stephen Groff's picture

We are U.S. housing bulls, however, we are increasingly concerned with what we see across parts of Canada. Attached are some charts and anecdotal points you may find interesting. We continue to seek out best ideas in Canada and abroad, while ensuring we avoid areas where we see potential risks.

While no single metric is perfect, or tells the whole story, one worth watching is the price / income ratio both in absolute terms and relative to history). Today for Toronto and Vancouver, this ratio stands at 5.9 / 9.5x respectively, which is considered by many to be severely unaffordable. This contrasts to Canada overall at 3.6x and a number far lower in the USA (3.0x is viewed as reasonable). A number of publications have also looked at prices to rent levels and other metrics. Below is a recent chart from the Economist comparing Canada relative to other countries.

If the rising home values were accompanied with rising income levels, it would not be an issue. Unfortunately, in Canada, price increases have likely been driven in large part by rising leverage, which is not sustainable over the long term. This pattern was witnessed in the USA prior to their correction.

Higher home prices naturally leads to an increase in supply. One just has to drive down the Gardiner to see the construction going on in response to higher prices.

Below are a couple of interesting charts highlighting the increasing levels of unoccupied units, particularly on the multi-unit side. Keep in mind, this excludes all those buildings you see that are under construction today.

The high level of construction has certainly boosted the Canadian economy both directly and indirectly.

Below is a chart highlighting the share housing investment now represents of the Canadian economy. While the USA is beginning to feel the tailwind from an improving housing market (from a very low base), over time I would expect Canada to face a headwind as this number backs off from unsustainably high levels.

The bidding wars we heard about before are becoming the exception, not the rule. Canadian home sales were down 16% year over year in February and access to financing has become increasingly tight. We have seen rising inventory / sales levels across the country. These are trends worth keeping an eye on.

Comments

Submitted by R Bouchard on

How would the Cambridge group look to benefit in an investment sense from this progressing situation? Also, what areas of the markets do you feel this adds significant risk and/or reduced return potential?

Stephen Groff's picture
Submitted by Stephen Groff on

It is a good question. Our goal is to not only build, but more importantly, protect wealth over time. The fastest way we can fail in our goal is to lose money and it is why we are so focused on absolute and not relative returns.

Part of this approach is to limit exposure to areas of risk. In Cambridge Canadian Equity, Cambridge Pure Canadian Equity and Cambridge Canadian Growth Companies funds, we have very limited exposure to Canadian discretionary retailers and do not own Canadian banks at all. While this is very rare among Canadian mutual funds, we have no problems being different than everyone else when we think it’s the right thing to do. Without attractive risk / return potential, we will hold cash. Period.

On a more positive note, there are select businesses within Canada with operations that would benefit from a slowing economy. Those businesses would also be likely to experience a positive multiple expansion, providing further upside if that scenario plays out.

 

 

Submitted by alan cameron on

Are there any companies you feel would be particularly at risk should we see a decline in housing similar to 1989?

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