An in-depth report from the International Monetary Fund (IMF) finds their models showing that house prices in Canada are on average ten percent above the level consistent with current fundamentals.
IMF’s report states that “house prices are higher than the levels consistent with current fundamentals in a number of Canadian provinces and that a correction in house prices would have measurable effects on consumption and output through wealth effects.” While they believe authorities have appropriately taken macro-prudential measures to curb the growth of household debt, they “should remain vigilant to the developments affecting household balance sheets; further macro-prudential measures may be needed if the debt build-up continues.”
- House prices in Canada have more than doubled over the past decade, notwithstanding a 11% correction after the 2008 crisis.
- British Columbia has witnessed the highest increases, with prices higher by 163% relative to the second quarter of 2001. House prices have grown by around 41% after falling by 10% after its pre-crisis peak in Q1 2009
- Ontario house prices have grown by 29% since its crisis trough after falling 13% after their pre-crisis peaks in Q4 2008.
- Growth rates of house prices have outpaced those of incomes and rents, leading price-to-income and price-to-rent ratios to historic highs.
- Price-to-rent ratios are elevated in the largest metropolitan areas, particularly in Vancouver
The largest overvaluation is in BC, with with some signs of overvaluation also in Ontario, and to a lesser degree, in Quebec. By contrast, the estimated models suggest house prices to be “mildly undervalued” in Alberta.
For an explanation of the different models, see pg 8 of the report.
Read the entire report here