A Canadian real estate report released this week from Euro Pacific Canada, the Toronto-based branch of the global brokerage headed by Peter Schiff, took a look at housing prices in relation to rental costs.
The report stated:
It could be expected that when house prices rise significantly beyond the cost of renting an equivalent dwelling, people would choose to rent rather than own – but that is not always the case.
The drop in demand would put a downward price pressure on real estate, maintaining an equilibrium between growth in rents and growth in house prices. Home prices are typically tethered to growth in rents when analyzing trends across most of Canada and over long time periods.
When examining the growth in house prices and rents in cities across Canada this is no longer clearly seen. Using a rental index created from CMHC rental data it is possible to see how closely rents and prices track each other in most cities. However since the early 2000`s this relation has disappeared. This can be seen clearly in the regions of Vancouver, Calgary, Toronto and Montreal when comparing the CMHC rental index to CREA house prices.
Dan Simon, an investment consultant for Euro Pacific Canada, says, “I definitely feel that there will be a correction in the Canadian housing market.” Simon predicts that average prices could drop by between 20-30% — pointing to the disconnect between house prices and rents in major Canadian cities as a prime indicator of this coming crash.
But not all economists agree with him. From the HuffingtonPost:
Aron Gampel, deputy chief economist for Scotiabank says regulators are taking strides to avoid a significant correction in housing prices, which could not occur without a significant “trigger,” such as a rapid rise in interest rates, an unlikely scenario.
“The U.S. correction, and ones we’ve seen in other countries occurred during a recession. It was triggered by a financial crisis when the market was already in correction mode,” he said.
“We still have fairly vibrant housing markets here, because the economy is still moving ahead, and we’re still adding jobs, we’re still generating income gains. So I don’t see signs here to expect a significant correction of that magnitude.”
Gampel predicts that prices will come off by about 10 per cent over the next few years, driven by the erosion in affordability in markets like Vancouver and Toronto.
To read the summary or to download the entire report, click here