Winter never comes for the Canadian real-estate market.

Photographer: Brett Gundlock/Bloomberg

How Oily Is Canada's Housing Bubble?

Megan McArdle is a Bloomberg View columnist. She wrote for the Daily Beast, Newsweek, the Atlantic and the Economist and founded the blog Asymmetrical Information. She is the author of "“The Up Side of Down: Why Failing Well Is the Key to Success.”
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If you watch any amount of HGTV -- which is to say, if you are a middle-aged married person -- then you've probably noticed something funny: A lot of the people on shows such as "Property Brothers" seem to have Canadian accents. And you've probably noticed something else a bit funny: Those people are paying a heck of a lot for claustrophobic rowhouses on so-so streets.

Canada is one of the few Western nations that survived the financial crisis nearly unscathed. My working theory has long been that this is because the Canadian banking system is run by Canadians, a very sensible people. But it's reasonable to ask whether Canada's relative stability might not have something to do with the price of oil, because Canada is sitting on a large supply of "nontraditional" (read: "expensive to extract") petroleum, mostly in Alberta. And as David Parkinson, economics reporter at the Globe and Mail, has written, their economic growth has been substantially goosed by those deposits:

How much does Alberta matter? Well, as with any good native Albertan (full disclosure – born and raised), my knee-jerk tendency is to say “way more than the rest of you bastards combined.” But in the current Canadian economy, that’s alarmingly close to accurate. Alberta contributed one-third of Canada’s economic growth last year, and is by far the fastest-growing province in the country again this year. Since the beginning of 2013, nearly half the jobs created in the country were in Alberta. . . . 

The oil sector has not only been leading the way in Canada’s export recovery, it has also been the big driver in business capital investment in the country. That means the sector has been leading the way in the two key areas that the Bank of Canada has repeatedly identified as critical to sustaining Canada’s recovery. Lower prices could stifle energy’s contribution on both fronts; they are not only an automatic drag on the value of exports, they are also a notorious capital-spending killer.

Canadians have been worrying more and more about a housing bubble. In that context, it's worth examining whether the fall in oil prices will be what finally causes the bubble to burst.

If you look at the chart below, you can see why they're worried. These are two composite indexes that track house prices across the country: the U.S. and the Canadian. Don't look at the absolute level, because these two indexes have different start years; the U.S. index starts five years earlier, so naturally, it's higher. (Prices are reflected in terms of a multiple of the index year.) What you see in this chart is that U.S. home prices rose, and then corrected; Canada's, meanwhile, are still rising.

Of course, Canada is rich with all that oil money. But their price-to-rent ratio, which can be a good measure of how bubbly the market is, is higher than ours, and has been for several years:

(The OECD data only goes through the end of 2014, but as you can see from this interactive graphic from the Economist, their price-to-rent ratio remains elevated compared with ours.)

So how big is the risk? Is Canada due to get our home-price collapse, on tape delay?

Well, it's a little more complicated than that. First of all, when you look at the composite index of Canadian home prices, they don't seem to be all that tightly correlated with the price of oil.

Both did dip in 2008 -- but that was in the middle of the worst global recession in decades.

Of course, that's a composite index. What if you look at individual cities? And sure enough, the picture does change a bit.

Edmonton, in Alberta (Canada's western oil capital), does indeed seem to have its housing market pretty closely tied with the price of oil. (Calgary is also more closely tied to oil than the rest of the Canadian market.) Edmonton's housing market hasn't plummeted yet, but that may just be a natural lag as people adjust to the new normal -- or wait for the bottom in order to find out what the new normal actually is.

On the other hand, some experts say that prices in Toronto will actually benefit, as lower oil prices boost U.S. GDP, and economic activity shifts eastward.

Housing markets are always, first and foremost, local. Even during the housing crisis, some markets were hit much harder than others; Miami and Las Vegas were crippled, even as Washington had an unpleasant, but fairly temporary and mild, correction.

So although we can certainly expect Canadian home prices to moderate as oil falls, especially in oil country, don't necessarily expect to see the sort of correction we faced -- at least, not yet.  The Canadian central bank just cut its bank lending rate, which many worry will actually cause the froth to rise even higher, as Canadian levels of household indebtedness, already at record levels, rise even higher. For the moment, Canadian exceptionalism still seems to be ... exceptional. Of course, so did American exceptionalism, right up until the time we crashed.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Megan McArdle at mmcardle3@bloomberg.net

To contact the editor on this story:
James Gibney at jgibney5@bloomberg.net