NOVEMBER 25, 2011
The Economist warns on Canadian house prices:
By now I assume many of my readers have seen this article over at The Economist. If not, it's well worth the read. Here are the key quotes:
"...Home prices are overvalued by about 25% or more in Australia, Belgium, Canada, France, New Zealand, Britain, the Netherlands, Spain and Sweden (see table). Indeed, in the first four of those countries housing looks more overvalued than it was in America at the peak of its bubble."
"Another concern is that Australia, Britain, Canada, the Netherlands, New Zealand, Spain and Sweden all have even higher household-debt burdens in relation to income than America did at the peak of its bubble. Overvalued prices and large debts leave households vulnerable to a rise in unemployment or higher mortgage rates. A credit crunch or recession could cause house prices to tumble in many more countries."
Yeah, but what does The Economist know. They don't get the intricacies of a real estate market that only goes up....forever....and is not bound by pesky fundamentals. Otherwise, the graph below might actually concern us.
The reality is that in most Canadian cities, the housing market is entirely detached from fundamentals. Rather, we have markets that require three things to sustain house prices at these elevated levels:
1) A stable supply of new buyers (might be a stretch going forward given that our ownership rate is at an unprecedented high)
2) Access to cheap and abundant credit (yet Canadian consumers are stretched pretty thin to begin with, and we have the growing chance of another credit crisis)
3) The willingness of buyers to pay these inflated prices (the mass psychology that drives bubbles must remain intact...."buy now or be priced out forever"...."renting is throwing money away"...."safe as houses"...
Interestingly, Canadian real estate is the most overvalued anywhere in the world when compared to rents. As I've noted before, rents are the primary determinant of the fundamental value of real estate.
RBC releases its (un)affordability index:
Readers may be interested in the latest RBC affordability index. It's always an interesting read, but I would again caution that you should take their index with a grain of salt for reasons I outlined before.