The Peak Price of Housing — Lessons from the Past

In the wake of the Global Financial Crisis, researchers investigated home pricing to understand if home prices had dropped because of an economic shock or if they had been overvalued.

In a time of unprecedented global economic shifts and evolving housing markets, understanding the dynamics of housing price fluctuations is paramount. "Housing Supply and Housing Bubbles," a working paper completed by Edward L. Glaeser, Joseph Gyourko & Albert Saiz in 2008, provides valuable insights into the cyclical nature of housing prices.

Are you a real estate nerd? Download “Housing Supply and Housing Bubbles”, by Edward L. Glaeser, Joseph Gyourko & Albert Saiz

The paper delves into the factors contributing to housing market booms and busts, shedding light on a phenomenon that continues to shape economies and societies worldwide.

As we explore these findings, we reflect on their relevance to the current Canadian housing market, where similar trends have taken hold.

A Glimpse into the Past: The Peak Price of Housing

The research aimed to uncover patterns of housing price volatility by analyzing historical trends in the United States housing market. Their study spans several decades, scrutinizing the dynamics of home prices, income levels, interest rates, and construction costs. The researchers uncover significant correlations between these variables and the inevitable peaks and troughs in the housing market by examining housing cycles.

One of the most striking revelations from the study is the cyclicality of housing prices. The researchers pinpoint a pattern of recurrent housing booms and busts, where prices surge to peak levels before inevitably plummeting.

These cycles, often driven by factors such as supply constraints, low-interest rates, excessive lending, and speculative investment, have significant implications for both homeowners and the broader economy. The study suggests that policymakers should be wary of the inevitable troughs that follow peaks and work toward implementing measures to reduce upside volatility to reduce the likelihood and magnitude of subsequent housing market corrections.

Insights from the Peak: Implications for Canadian Home Prices

As we draw parallels between the research findings and the current Canadian housing market, striking resemblances emerge. Canada has experienced its share of housing market fluctuations, with regions like Toronto, Vancouver, and Montreal witnessing remarkable price increases over the past decades. While the factors driving these price surges may differ, the cyclical nature of housing markets remains a common denominator.

Canadian homebuyers and investors grapple with similar challenges highlighted by the study. Low-interest rates increase demand and often precede housing market peaks. Policymakers and industry stakeholders must draw lessons from the past and adopt measures to prevent the escalation of housing bubbles during periods with low mortgage rates.

The researchers observed that markets where real estate developers faced the most red tape, complex regulations, fees, taxes, and complex approval processes had greater price volatility and elongated the market cycles.

Markets with the fewest construction and development constraints were better able to respond to higher demand by creating new housing, and as a result, they also had property market cycles with smaller peaks and valleys. Also, they were faster to self-correct, so peaks and valleys were shallower and closer together.

Markets with the highest barriers to new construction had longer market cycles with higher peaks and deeper corrections.

In a Canadian context, a study by the Canadian Home Builder’s Association (CHBC) ranked major Canadian cities on their municipal planning and charges. Edmonton, Calgary, and London were in the top 5 municipalities for ease of construction and development. Burnaby, Toronto, Pickering, and Markham were in the bottom five. Markham and Pickering are suburbs of Toronto, while Burnaby is a Vancouver suburb.

Download and read the full report: CHBA Municipal Bechnmarking Report

While bubbles are easier to identify in hindsight, and perhaps the Canadian housing market is not presently experiencing a bubble, it is likely approaching a peak.

Navigating Forward: Applying Lessons from the Past

The past holds valuable lessons for shaping future policies and safeguarding economies from devastating housing market collapses.

Canada's housing market, currently grappling with affordability issues and concerns about housing bubbles, can gain from these lessons. However, stabilizing policies might need to wait for the next correction. Implementing “stabilizing policies” near a peak could shake market confidence and trigger a correction, and no government wants to be blamed for a housing correction.

The study underscores the importance of monitoring interest rates, lending practices, and speculative investment, particularly in high-demand urban centres. By proactively addressing these factors, policymakers can help ensure the sustainable growth of the housing market and protect both homeowners and the broader economy from the repercussions of inflated housing prices.

Navigating the Peaks and Valleys of Housing Markets

In the ever-evolving landscape of housing markets, "Housing Supply and Housing Bubbles" serves as an invaluable compass, guiding us through the intricacies of housing price fluctuations.

The study's findings, spanning decades of housing market cycles, are likely a more reliable guide to what might happen in the future.

The study offers insights that resonate not only in the United States but also across borders, such as in Canada's housing market.

As Canadian policymakers and stakeholders grapple with the challenges posed by soaring home prices, the study reminds us of the importance of proactive measures and prudent policies.

In a rising price environment, they should avoid policies that add demand. Poor affordability is a sign that prices have outstripped economic fundamentals. Implementing programs, policies, and subsidies to help Canadians buy properties that would otherwise be unaffordable is inflationary and pushes prices higher. This delays the inevitable market correction that, ironically, would make housing more affordable.

By understanding the patterns of housing market peaks and troughs, informed decisions can be made to ensure that the dream of homeownership remains attainable for all while protecting against the devastating consequences of unchecked housing bubbles.