RCA Insights

Does Price Growth in Canada Correlate?

By on May 7th, 2018

Early in my career I worked on several projects putting Canadian investment trends into a broader global perspective. The rule of thumb from other professionals at the time was that whatever happened in the U.S. would simply happen in Canada six months later. There is some truth in the notion that there are similar patterns, but relying on a little bit of truth can get you into a lot of trouble.

As similar as Canada is to the U.S., there are a great number of differences. Sure, the U.S. and Canada mostly speak the same language, have extensive trading ties and we play the same sports. Canada is a big place, though, with unique economic drivers for each province and metropolitan area.

Calgary and Edmonton, for instance, are closely associated with the energy sector and there have been big swings in prices and investment activity based on investor concerns relative to energy. Vancouver and British Columbia tend to move more with the economies of the Pacific Rim and the property market there is being boosted tremendously by inflows of Chinese capital looking for safe harbor investments. Everything in the Golden Horseshoe in southern Ontario is more like the U.S. given the heavy trade linkages for the industrial sector; here too, prices are up.

With all this variation in regional performance, one can see differences between broader Canadian price trends and those seen in the U.S. Looking at the year-over-year growth rates in the RCA CPPI for the U.S. and Canada all property types, there is not always a constant pace of correlation.

1805 Costello Canada price MAIN-01

Since 2008, there is a 61% correlation in the year-over-year growth rates but most of the positive comes from the decline in the Global Financial Crisis. (Remove debt from the capital stack and you will see prices fall worldwide.) Canada saw a slower pace of price decline in that period, but the change was highly correlated with the U.S.: 86% from Q1’08 to Q4’10. In the following periods from Q1’11 to Q4’17, they are negatively correlated: -37%.

Fundamentally, Canada is a unique country with a set of monetary policies, capital inflows, debt costs, and structures of lending and ownership that vary from those seen in the U.S. All of those factors can matter more than the close patterns of trade and economic growth. Working from a rule of thumb can help in the short term but can be misleading over the longer term.

The next edition of the RCA CPPI Global Cities report will be published May 17. To learn more about the RCA CPPI and to sign up for reports visit rcanalytics.com. If you are an RCA client you can also conduct your own CPPI analysis on the RCA website.

Jim Costello

Jim Costello

Senior Vice President
jcostello@rcanalytics.com

Jim Costello has worked in the CRE space on issues of urban economics since 1990, including a 20-year stint at Torto Wheaton Research. Jim expanded the reach of the Torto Wheaton Research team developing forecasts of global market fundamentals. He also developed approaches to pair the forecast results with frameworks to answer investor questions on asset values and relative investment opportunities.

In the aftermath of the Global Financial Crisis, Jim provided advice to the Treasury Department and helped educate these professionals on commercial real estate performance. Jim is a member of the Commercial Board of Governors of the Mortgage Bankers Administration, where he helps policy makers understand the commercial real estate industry.

Jim is expanding the capabilities of the Real Capital Analytics team on issues of real estate market dynamics. Jim has a master’s degree in economics and is a member of the Counselors of Real Estate.