The Economist: Canadian Real Estate “Uncomfortably Overvalued”

An article from the latest issue of the The Economist details how 4 years after house prices peaked in much of the world, housing remains over-valued when compared to its long-run relationship with housing rents and income per person.

The article states:

Never before had house prices risen so fast, for so long, in so many countries. Yet the bust has been much less widespread than the boom. Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark.

But in most other countries they have dipped by less than 10%, as in Britain and Italy. In some countries, such as Australia, Canada and Sweden, prices wobbled but then surged to new highs. As a result, many property markets are still looking uncomfortably overvalued…

The Economist tracks 2 measures:

  • Price-to-income ratio
  • Price-to-rent ratio

If both of these measures are well above their long-term average, which they have calculated since 1975 for most countries, this could signal that property is overvalued.

Based on the average of the two measures, 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.

To read the entire article, click here

To compare global housing data over time with their interactive house-price tool, click here

Source: The Economist

3 responses to “The Economist: Canadian Real Estate “Uncomfortably Overvalued”

  1. I think rent controls in Canada have a lot to do with rent to price ratio being so high. There hasn’t been many purpose built rental units built in Canada for the last 20 years. Lucky people are buying and renting out all these new private condos these days, otherwise renters would be paying quite a bit more for any new purpose built rental stock. If there wasn’t all these private condos the big rental companies wouldn’t have the competition from all the wanna-be real estate investors that really have no idea what they are doing. Thank god for all the over building of condos these days.

    Price to income looks a slightly above average. Most likely caused by the Vancouver market skewing things for the rest of Canada.

  2. Some other viewpoints on the Economist article from Mortgage Broker News:

    Canadian Housing Bubble? Brokers Disagree With New Report

  3. Take out the over 1MM sales and look where the median price goes to these days. The true picture becomes apparent very fast. Sales plummeting, prices too, all while we watch interest rates at their lowest levels ever.

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