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!