Canada has one of the most overvalued housing markets in the world, according to a new global report, which adds to the ongoing debate about whether it’s a bubble set to burst.
The Organisation for Economic Co-operation and Development (OECD) says Canada, alongside Norway and New Zealand, are among the countries where houses “appear overvalued but prices are still rising.”
“Economies in this category are most vulnerable to the risk of a price correction – especially if borrowing costs were to rise or income growth were to slow,” says the report, which measures the profitability of owning a house (price-to-rent ratio) and the measure of affordability (price-to-income ratio).
The report says house prices are considered overvalued if the price-to-rent ratio and the price-to-income ratio are above their long-term averages.
Canada ranked second highest in the price-to-rent ratio category, behind Norway and just slightly ahead of Belgium, and third highest for price-to-income ratio, behind Belgium and France.
The housing markets in Japan and Germany were among the most undervalued, according to the OECD report, which also made note of the correction in the U.S. housing market, where prices are on the rebound.
Toronto home prices continue to rise
The report comes alongside a mixed picture for housing in Canada’s two largest cities, Toronto and Vancouver, which account for about one-quarter of the population.
In Toronto, Canada’s largest city, sales of existing homes fell 3.4 per cent in May, while prices continued to increase. The average selling price in May was $542,174, which is a 5.4 per cent from the same month last year.
“The sales picture in the GTA has improved markedly over the past two months,” said Toronto Real Estate Board President Ann Hannah. “While the number of transactions in April and May remained below last year’s levels, the rate of decline has been much smaller.”
In Vancouver, the country’s priciest housing market, sales grew 1 per cent in May compared to the same month last year, breathing some life in the depressed market.
May’s numbers were also a 10-per-cent increase from April, when sales were 19 per cent below the 10-year sales average, according to the Real Estate Board of Greater Vancouver (REBGV).
“We’ve seen some steadying trends over the last three months,” Sandra Wyant, REBGV president said. “The number of homes listed for sale has been keeping pace with the number of property sales, leading to a balanced sales-to-listings ratio. This is having a stabilizing influence on home price activity.”
Home prices in the Vancouver area fell 4.3 per cent to $598,400 compared to May 2012. However, that’s up 1.8 per cent from January of this year.
Most economists have been calling for a “soft landing” in Canada’s housing market, supported by stable interest rates – which aren’t expected to rise until 2015.
“A benign outlook for interest rates and income should support affordability this year, pointing to relatively steady sales and prices in most regions. Condos will remain affordable in all regions,” BMO Capital Markets senior economist Sal Guatieri said recently.
However, similar to the OECD report, he warned that changes to income levels or interest rates could change the view.
“High-priced Vancouver and Toronto … remain vulnerable to a material correction in the event of a shock to income or interest rates,” he noted.
Capital Economics has been more pessimistic on Canada’s housing market, pointing this week to the “ominous downward slope,” of home building that it says is “similar in many ways to what happened in the early stages of the slump in the US.”
“For this reason we think it is premature for policymakers to declare of soft landing,” noted economist David Madani.
“Unfortunately, now the hot air that once supported home sales has vanished, the oversupply issue has unsurprisingly thrust to the forefront of the housing debate. With housing demand unlikely to rebound this year, housing will remain a drag on economic growth.”