How Overheated are the Real Estate Markets of Canada, Australia, and New Zealand?

Just how overheated are the real estate markets of Canada, Australia, and New Zealand? This famous chart from The Economist shows that real estate gains in all three countries plus Britain have substantially outpaced the gains in the United States which has experienced both a housing boom, bust, and recovery within the last two decades.

According to the International House Price Database maintained by the Dallas Fed, the growth real house prices in all three countries began to surpass the growth in real incomes sometime in 2005 and have never really looked back, despite the advent of the Financial Crisis in 2008.  After 2008, house prices in New Zealand dipped below income growth but have gone parabolic since 2014. 

In terms or House Price to Income Ratios as of year-end 2016, all three countries are two standard deviations above their historical averages since 1975 - a 41 year period.

Anyone who remembers their college statistics knows that this happens only 2.5% of the time. Ninety-five percent of the time, the ratio is within two standard deviations of the mean and 2.5% of the time, the ratio is two standard deviations under the mean.

At no point in this 41-year cycle (1975 to 2016) have the ratios gone outside the +/- two standard deviation range. It was only in 2016, when the ratios in all three countries went above this range.

The probability of this occurring is much lower than 2.5%. According to this calculator, the probabilities are around 1% for Australia and around 1/4 of 1% for both Canada and New Zealand.

Country	RHPI/RPDI Ratio 2016Q4	Mean	Standard Deviation	Standard Deviations from Mean	Probability
Canada	138.09%	92.30%	15.99%	2.86	0.21%
Australia	125.81%	79.05%	20.23%	2.31	1.04%
New Zealand	129.79%	74.54%	19.29%	2.86	0.25%

So, without a doubt, this is not a normal real estate market in all three countries. The question is, when will it all crash?

Source:

Mack, A., and E. Martínez-García. 2011. "A Cross-Country Quarterly Database of Real House Prices: A Methodological Note." Globalization and Monetary Policy Institute Working Paper No. 99, Federal Reserve Bank of Dallas.

Related Post: Looks like Australia's Housing Market is about to go Bust!

Great Depression vs. Great Recession GDP Growth Rates - Updated As of the First Quarter of 2017

In March 2015, two illustrious economists, both Former Fed Chairman Ben Bernanke and Former Treasury Secretary Larry Summers have been duking it out on the blogosphere about secular stagnation.  In layman's terms, both are attempting to describe why the US Recovery from the Great Recession feel so sluggish.

Ten years into the start of the Great Recession and the economy is no where near take-off speed. Instead, we seem to be decelerating. The first quarter growth for 2017 was an anemic 0.7% annualized. To be fair, the economy does seem to get the "winter blues" in the first quarter of each year, sometimes dipping into negative territory.

At this point in the Great Depression, the US economy was roaring back into recovery at an 8.08% annual growth rate, something that economists today can only dream of. Despite five years of deeply negative economic growth (1930 to 1933 and 1938), the US economy managed to grow at an average growth rate of 1.31% per year. Our current average? Only 1.25% per annum, despite having a relatively shallow dips of -2.70% in 2008 and -0.20% in 2009.  Our economic growth rate never went past 2.70% (in 2013) this entire time. The economy has truly stagnated with no end in sight.