After years of teasing and poking Canada’s real estate market in its bloated and overvalued gut, British periodical – The Economist – has finally given us top honours, pegging Canada’s housing market as the most overvalued in the world compared to rental rates, at 89 per cent, and third when compared to incomes at 35 per cent.
All in, of the 26 markets examined by the magazine, seven had housing prices more than 25 per cent overvalued including Australia, France, Britain and Sweden. Belgium was the highest, with house prices 50 per cent overvalued when compared to income.
The catalyst of the “off kilter” housing market, is cheap borrowing meant to stimulate the economy and propel us out of the recession, which ultimately encouraged homebuyers to get into the market. Increased demand boosted prices, creating a bubble where prices outpaced incomes and rental costs.
The Economist joins a chorus of voices all harmonizing around overvaluation including the Deutsche Bank, which put the number at 63 per cent and the International Monetary Fund which picked a less offensive 20 per cent.
Bubble or no bubble? It depends
But the real head scratcher is whether or not we are indeed headed for this much-touted bursting of the Canadian housing bubble.
While the international community seems convinced, voices at home still seem to think everything’s coming up Milhouse – Bank of Canada governor Stephen Poloz, included.
Despite just saying in December that the housing market was around 30 per cent overvalued; the BoC continues to expect a soft landing for the market. Royal Bank of Canada, Canada’s largest bank, predicts a similar scenario.
Bob Dugan, chief economist at the Canada Mortgage and Housing Corporation, tells Yahoo Canada Finance he tends to agree with the soft landing part.
“We have modest overvaluation in Canada,” he says, placing it closer to three or four per cent. “We aren’t estimating the kind that would lead us to believe there’s a sharp correction in house prices on the horizon.”
He also cautions that overvaluation figures tossed by the IMF or The Economist or even, say, the CMHC, are all developed using different criteria, making it harder for consumers to glean useful advice on the housing market from them.
The Economist, for instance, uses the ratio of home prices-to-rent as part of their measurement – which some analysts say isn’t the most accurate way to track overvaluation. Even the CMHC, which builds 12 models using prices from the Multiple Listing Service, the Teranet property listing platform and StatsCan, sees variances between their different overvaluation estimates and has to find a way to compress them.
“I don’t know you can compare our 4 or 5 percent to the banks 10 to 20 per cent of the IMFs number or other people because we haven’t all had a phone call to say let’s adjust the variance of our estimates,” he says.
His best advice:Prospective homebuyers should do their own research and think local.
“If you live in Montreal, overvaluation there is much more important to the individual buyer than if there’s overvaluation in Canada or not,” says Dugan. “If I live in Vancouver that market behaves very differently then the market in Montreal or Halifax.”