I was browsing CMHC’s website looking for more details about their newest poll (which stated that the vast majority of Canadians are not only comfortable with their level of debt, but 2/3 think they will pay their loans off sooner than required) when I stumbled upon a page entitled, the State of Canada’s Housing Market.
Interested, I read on:
Some analysts and commentators have expressed the view that a “house price bubble” is forming in Canada. It is not clear that this perspective is supported by the facts.
The following facts are then presented in support:
The International Monetary Fund (IMF) has reported that Canada’s housing market is not overvalued. In fact, an IMF study published in April 2008 determined that house prices were undervalued in only two of 17 countries analysed: Canada and Austria.
Skimming through 303 pages of the April 2008 IMF report, I found the figure they were referencing (Box 3.1, page 114)
Source: IMF
That IMF report states:
The first figure shows the percent increase in house prices during the period 1997 to 2007 that is not accounted for by the fundamental drivers of house prices…Clearly, although a significant house price gap might be expected to be corrected over time, a decline in nominal house prices is only one way for this adjustment to occur.
Moderate inflation and support from the fundamental variables driving real house prices may also help close the gap over time. At the same time, negative changes in some of these fundamentals could increase the gap and require an even larger adjustment of house prices. In particular, downward revisions to income expectations and tighter credit conditions may put additional downward pressure on house prices.
Let’s ignore that it includes data only until 2007. Since then we’ve seen amortization lengths decrease from 40 years and 0% downpayments done away with. We’ve seen the end of assumable mortgages (with no qualifying!) here in Alberta. Now 20% downpayment is required for non-occupied properties, current qualifying rate at over 6%, etc. Obviously, lending conditions are much tighter than before, not to mention that the “income expectations” of thousands of Canadians decreased as they were laid off.
CMHC continues:
A more recent IMF report published in October 2009 confirms that, overall, Canadian house prices are essentially at long-term equilibrium values
That report on IMF’s website has the following disclaimer:
This Working Paper should not be reported as representing the views of the IMF. The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate.
Regardless, let’s just take the report at face value. Here’s what it states:
Results reveal that at the peak of the housing boom, house prices were significantly overvalued in the west. However, following the recent steep decline in prices, the overvaluation has decreased significantly; we find that house prices in Alberta and British Columbia remain slightly overvalued as of end-2009Q2 (at around 8 percent according to the model estimation), while at the peak of the housing boom, their overvaluation was estimated at double-digit levels. In contrast, house prices in the eastern provinces of Ontario and Quebec, and the western province of Saskatchewan are now close to equilibrium, even though the latter has also experienced significant overvaluation during the housing boom.
After prices declined during the recession, parts of Canada reached equilibrium while provinces such Alberta and BC remained about 8% overvalued.
Notice this was what the state of Canadian real estate was around mid-2009. According to CREA’s latest figures, in March 2009 the average price in Canada was $289,881. This March, the average price was up to $340,920. That’s a 17.6% increase.
Alberta increased 10.2% during that time, while BC increased 21.4%.
Source: CREA
Remember, we are only referencing works that CMHC quoted and according to the working paper it means that Alberta/BC were already 8% overvalued and then prices increased another 10% and 21% respectively. At what point is it considered a “bubble”?
Source: CREA.CA
For a more precise figure, we should wait until the end of the 2QTR 2010 and then check the YoY % change.
Until then, I can only wonder what perspective they were viewing the reports from and why they were even referenced.
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