Real estate bubbles and contagion: new empirical evidence from Canada

Abstract

This paper investigates the presence of bubbles in the new housing market and resale housing market of four Canadian census metropolitan areas (CMAs): Vancouver, Toronto, Victoria and Hamilton, and whether the bubbles are contagious. The GSADF test developed by Phillips, Shi, and Yu (2015) is applied on a monthly price-to-rent ratio from January 1988 to December 2018 to date-stamp episodes of bubbles in these markets. Our results suggest that among the four CMAs, only the resale housing market of Victoria was exuberant, while for the new housing market, both Victoria and Vancouver experienced exuberance. Subsequently, using a non-parametric model with time-varying coefficients performed by Greenaway-McGrevy and Phillips (2016), we find the evidence of bubbles migration from the new housing and resale housing markets within and between these CMAs.

Keywords:

• Resale housing
• new housing
• bubble
• contagion
• Canada

Acknowledgments

We are grateful to Greenaway-McGrevy from the University of Auckland for the MATLAB code. We are also grateful to Landry Kuate Fotue from the University of Ottawa, the two anonymous referees and the journal editors for their insightful comments on earlier versions of this paper. All remaining errors are our own. The views expressed in this paper are those of the authors and do not necessarily reflect the official policy or position of the Quebec Ministry of Finance.

Disclosure statement

No potential conflict of interest was reported by the author(s).

Notes

1 The CMHC Housing Market Assessment evaluated ‘the extent to which there is evidence of problematic housing market conditions in 15 census metropolitan areas (CMAs). Results are updated on a quarterly basis’. The CMHC relies on four criteria to detect imbalances in real estate markets: the level of overheating (when demand outpaces supply), acceleration in the growth of house prices, overvaluation of house prices in comparison to levels that can be supported by housing market fundamentals, and overbuilding when the inventory of available housing units is elevated.

2 A technical report of the Bank of Canada by Bilyk and teNyenhuis (2018) indicates that Toronto and Vancouver account for close to half of the housing transactions in main cities in Canada. Bilyk and teNyenhuis (2018) also show that real estate prices increased by 40% and 55% in Toronto and Vancouver, respectively from 2016 to 2018. In addition, Duprey et al. (2018) find that the housing markets in Toronto, Vancouver and their surrounding areas have the highest price-to-income ratios in the country.

3 In 2018, the new house market represented 32.2% of the Canadian real estate market, while the resale house market represented 67.8%.

4 A real estate bubble is defined as a sustained rise in housing prices that is not fuelled by the fundamentals of the economy (Case & Shiller, 2003; Flood & Hodrick, 1990; Garber, 1990; Shiller, 2015). Hu and Oxley (2017) use the term ‘exuberance’ to describe this type of explosive behaviour in asset prices.

5 Deng et al. (2017) notation.

6 In Canada, boosting housing supply has been consistently suggested as a solution to address price increases (Canadian Mortgage Housing Corporation, 2018a; Urban Development Institute, 2019)

7 According to a new survey from Royal LePage (2019), one of the largest real estate brokers in Canada, 46% of Canadian newcomers choose Ontario (specifically Toronto), while 13% of them chose British Columbia (Vancouver).

8 For example,

“to improve monitoring of real estate purchases and ensure that information is shared in a timely manner, Budget 2019 proposes to provide Statistics Canada with up to $1 million over two years starting in 2019–20 to conduct a comprehensive federal data needs assessment. The assessment would seek to facilitate further streamlining of data sharing between federal and provincial governments to inform enforcement efforts on tax compliance and anti-money laundering” (Federal Government Budget 2019).