Canada’s housing market is more overvalued than the US’s market was at its peak, and Canadians are carrying a larger debt burden than Americans were before the crash, a report from The Economist states.
By comparing house prices to rental rate and income averages, the magazine found that Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden all have housing markets that are overvalued by at least 25 per cent.
Canada’s housing prices are overvalued by 29 per cent relative to income, and by 71 per cent relative to rental rates, the study found.
As The Economist notes, these numbers don’t necessarily mean that Canada is bound for a painful housing market crash, along with all the job losses that entails. “Adjustment could come through higher rents and wages,” the magazine reports.
However, there is little indication that rents and wages are catching up with house prices.
StatsCan’s latest report shows Canadians’ wages are actually falling, once adjusted for inflation. And rental rates in some of Canada’s largest markets -- such as Calgary, Ottawa and Toronto -- have fallen year-over-year, all of which suggests the gap between house prices and rent and income continues to grow.
Optimists say Canada's market remains resilient, and if homes are slightly overvalued, the market is in for a soft landing. Canada Mortgage and Housing Corp., which insures Canadians’ mortgages, expects house prices to increase next year, albeit at a more moderate pace than has recently been the case.
Yet others argue that Canada can sustain current price levels. They point to Switzerland -- which has seen enormous increases in house prices and has a median house approaching $900,000, nearly three times Canada’s $350,000 -- as proof that well-off countries can sustain expensive houses.
But The Economist’s research shows that, even with the massive price hikes, Switzerland’s real estate market is still undervalued, relative to income and rent, compared to its long-term average. (Yes, the Swiss are just that rich.)
Another concern is the influence of foreign investors on the market. By some counts, as many as one in five Vancouver homes are being bought by investors from abroad hoping to turn a profit on the red-hot housing market.
"If you eliminate this segment, you get a semi-normally functioning market," CIBC economist Benjamin Tal recently told QMI Agency. "If for some reason we see foreign investors in Vancouver or in Toronto exiting, then that definitely will be an issue."
The Economist also noted that Canadians are now carrying a larger debt burden, relative to income, than Americans were in 2007 when the housing collapse began.
“Overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates,” the magazine reported. “A credit crunch or recession could cause house prices to tumble in many more countries.”
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