Is there a housing bubble in Edmonton? Yesterday we posted some charts on the blog, showing the huge increase in home values this year over last, and suggested that a 50% increase in prices in one year is an indicator that "bubble conditions" might exist. We also promised further investigation into the topic so here goes...

First, thanks to "Bearclaw" once again for your insightful comments. I've done a little research on what constitutes a bubble and found a great explanation on Wikipedia:

A housing bubble is characterized by rapid increases in the valuations of real property such as housing until unsustainable levels are reached relative to incomes, price-to-rent ratios, and other economic indicators of affordability. This in turn is followed by decreases in home prices that can result in many owners holding negative equity, a mortgage debt higher than the value of the property.

So lets compare this information to Edmonton. Here is our real estate bubble checklist:

1. Rapid price increases...check.
   
2. Prices reach unsustainable levels relative to incomes...nope
   
3. Price to rent ratios...nope - prices have increased faster than rents, however, the vacancy rate is at an all time low and rents are increasing quickly.
   
4. Prices are too high to be affordable...nope - see this article on how real estate is now more affordable than it was in the 80's. Mortgages are still easy to get, and although you can't buy the big house on the hill in Edmonton for the bargain basement prices of a few years ago, housing in all price ranges is still selling and selling quickly.
   
5. Homeowners with negative home equity...big nope - this is what is currently facing homeowners in the US. The majority of first time buyers took out "exotic" mortgages (aka 0% down, 40 year amortizations etc.) giving them no equity in their homes, and when prices did fall a few percentage points they ended up with negative equity. These mortgages do exist in Canada, but only make up a small percentage of the mortgages being taken out these days. The other reason so many Americans have negative equity was a huge surge in re-financing, which spurred consumer spending boosting the economy further which all fell apart when housing prices slipped only a few points. Again, the picture here in Canada is much rosier.

In the big picture, you can only definitively identify a housing bubble after it happens. The above information is meant to show that we here in Edmonton are not in the same position as homeowners in the US. Yes, we've had huge price increases this year, but we've also had a phenomenal economy (the best in the G8), huge migration into the province, tons of employment available, and historically low housing prices compared to the rest of the country. I am inclined to say that we have finally caught up.